UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________.
STATE BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2846511
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
699 HILLSIDE AVENUE, NEW HYDE PARK, NEW YORK 11040
(Address of principal executive offices) (Zip Code)
(516) 437-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No _____
As of May 4, 2005, there were 9,161,291 shares of registrant's Common Stock
outstanding.
STATE BANCORP, INC.
FORM 10-Q
INDEX
Page
PART I
Item 1. Condensed Consolidated Financial Statements 1
Condensed Consolidated Balance Sheets - March 31, 2005 and December 31, 2004 (Unaudited) 1
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 2
(Unaudited)
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 3
2004 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for 4
the Three Months Ended March 31, 2005 and 2004 (Unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 28
Item 4. Controls and Procedures 31
PART II
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 32
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 32
SIGNATURES 34
PART I
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004 (UNAUDITED)
MARCH 31, 2005 DECEMBER 31, 2004
-------------------- ---------------------
ASSETS:
CASH AND DUE FROM BANKS $44,277,997 $32,934,976
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 20,000,000 41,000,000
-------------------- ---------------------
TOTAL CASH AND CASH EQUIVALENTS 64,277,997 73,934,976
SECURITIES HELD TO MATURITY (ESTIMATED FAIR VALUE -
$19,940,000 IN 2005 AND $29,949,000 IN 2004) 19,992,979 29,990,384
SECURITIES AVAILABLE FOR SALE - AT ESTIMATED FAIR VALUE 552,368,199 512,699,498
-------------------- ---------------------
TOTAL SECURITIES 572,361,178 542,689,882
LOANS (NET OF ALLOWANCE FOR PROBABLE LOAN LOSSES
OF $12,904,577 IN 2005 AND $12,020,443 IN 2004) 782,454,712 766,170,785
BANK PREMISES AND EQUIPMENT - NET 6,290,183 6,491,365
BANK OWNED LIFE INSURANCE 26,135,495 25,879,180
RECEIVABLE - SECURITIES SALES 4,063,034 -
OTHER ASSETS 22,841,073 22,124,779
-------------------- ---------------------
TOTAL ASSETS $1,478,423,672 $1,437,290,967
==================== =====================
LIABILITIES:
DEPOSITS:
DEMAND $308,169,360 $294,912,979
SAVINGS 659,937,822 657,315,486
TIME 210,556,859 317,405,613
-------------------- ---------------------
TOTAL DEPOSITS 1,178,664,041 1,269,634,078
FEDERAL FUNDS PURCHASED 6,500,000 -
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 43,307,000 -
OTHER BORROWINGS 87,220,230 32,266,489
JUNIOR SUBORDINATED DEBENTURES 20,620,000 20,620,000
PAYABLE - SECURITIES PURCHASES 31,648,119 -
ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 10,870,369 13,720,558
-------------------- ---------------------
TOTAL LIABILITIES 1,378,829,759 1,336,241,125
-------------------- ---------------------
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 10,054,259 SHARES IN 2005
AND 9,994,822 SHARES IN 2004; OUTSTANDING 9,128,264
SHARES IN 2005 AND 9,068,827 SHARES IN 2004 50,271,295 49,974,110
SURPLUS 63,797,731 63,014,247
RETAINED EARNINGS 5,289,584 4,008,970
TREASURY STOCK (925,995 SHARES IN 2005 AND 925,995 SHARES IN 2004) (15,468,528) (15,468,528)
ACCUMULATED OTHER COMPREHENSIVE LOSS
(NET OF TAXES OF ($2,452,434) IN 2005 AND ($323,915) IN 2004) (4,296,169) (478,957)
-------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 99,593,913 101,049,842
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,478,423,672 $1,437,290,967
==================== =====================
See accompanying notes to unaudited consolidated financial statements.
1
STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
THREE MONTHS
----------------------------------
2005 2004
------------- -------------
INTEREST INCOME:
INTEREST AND FEES ON LOANS $13,654,253 $11,630,095
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL 466,667 179,926
SECURITIES HELD TO MATURITY:
TAXABLE 167,639 417,419
TAX-EXEMPT - 832
SECURITIES AVAILABLE FOR SALE:
TAXABLE 4,562,474 3,188,665
TAX-EXEMPT 555,260 576,958
DIVIDENDS 50,238 107,260
----------------- -----------------
TOTAL INTEREST INCOME 19,456,531 16,101,155
----------------- -----------------
INTEREST EXPENSE:
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE 1,131,807 528,151
OTHER DEPOSITS AND TEMPORARY BORROWINGS 3,264,670 2,096,038
JUNIOR SUBORDINATED DEBENTURES 316,034 247,031
----------------- -----------------
TOTAL INTEREST EXPENSE 4,712,511 2,871,220
----------------- -----------------
NET INTEREST INCOME 14,744,020 13,229,935
PROVISION FOR PROBABLE LOAN LOSSES 1,227,000 1,077,000
----------------- -----------------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 13,517,020 12,152,935
----------------- -----------------
NONINTEREST INCOME:
SERVICE CHARGES ON DEPOSIT ACCOUNTS 496,934 559,100
NET SECURITY GAINS 102,554 2,621,571
INCOME FROM BANK OWNED LIFE INSURANCE 256,315 133,019
OTHER OPERATING INCOME 359,193 389,556
----------------- -----------------
TOTAL NONINTEREST INCOME 1,214,996 3,703,246
----------------- -----------------
INCOME BEFORE OPERATING EXPENSES 14,732,016 15,856,181
----------------- -----------------
OPERATING EXPENSES:
SALARIES AND OTHER EMPLOYEE BENEFITS 6,496,085 5,980,866
OCCUPANCY 1,262,572 985,762
EQUIPMENT 327,535 368,954
LEGAL 924,572 845,852
MARKETING AND ADVERTISING 273,572 218,085
CREDIT AND COLLECTION 164,760 275,048
AUDIT AND ASSESSMENT 387,784 194,125
OTHER OPERATING EXPENSES 1,371,804 1,417,245
----------------- -----------------
TOTAL OPERATING EXPENSES 11,208,684 10,285,937
----------------- -----------------
INCOME BEFORE INCOME TAXES 3,523,332 5,570,244
PROVISION FOR INCOME TAXES 874,168 1,675,218
----------------- -----------------
NET INCOME $2,649,164 $3,895,026
================= =================
BASIC EARNINGS PER COMMON SHARE $0.29 $0.43
DILUTED EARNINGS PER COMMON SHARE $0.28 $0.42
CASH DIVIDENDS PAID PER COMMON SHARE $0.15 $0.13
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 9,114,447 9,011,859
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 9,460,341 9,338,148
See accompanying notes to unaudited consolidated financial statements.
2
STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2005 2004
-------------- ---------------
OPERATING ACTIVITIES:
NET INCOME $2,649,164 $3,895,026
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR PROBABLE LOAN LOSSES 1,227,000 1,077,000
DEPRECIATION AND AMORTIZATION OF BANK PREMISES AND EQUIPMENT 366,000 377,749
AMORTIZATION OF INTANGIBLES 9,034 9,034
AMORTIZATION OF NET PREMIUM ON SECURITIES 706,297 1,724,489
NET SECURITY GAINS (102,554) (2,621,571)
INCOME FROM BANK OWNED LIFE INSURANCE (256,315) (133,019)
DECREASE (INCREASE) IN OTHER ASSETS 659,752 (621,799)
(DECREASE) INCREASE IN ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES (2,858,441) 407,470
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,399,937 4,114,379
-------------- ---------------
INVESTING ACTIVITIES:
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 14,997,544 15,051,400
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 14,972,081 63,295,381
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 52,378,720 56,284,192
PURCHASES OF SECURITIES HELD TO MATURITY (5,000,000) -
PURCHASES OF SECURITIES AVAILABLE FOR SALE (85,240,591) (184,382,757)
INCREASE IN LOANS - NET (17,510,927) (72,070)
PURCHASES OF BANK PREMISES AND EQUIPMENT - NET (164,819) (146,618)
INCREASE IN BANK OWNED LIFE INSURANCE - (25,000,000)
-------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (25,567,992) (74,970,472)
-------------- ---------------
FINANCING ACTIVITIES:
INCREASE (DECREASE) IN DEMAND AND SAVINGS DEPOSITS 15,878,717 (77,425,916)
(DECREASE) INCREASE IN TIME DEPOSITS (106,848,754) 8,631,110
INCREASE (DECREASE) IN FEDERAL FUNDS PURCHASED 6,500,000 (10,000,000)
INCREASE IN SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 43,307,000 68,903,853
INCREASE (DECREASE) IN OTHER BORROWINGS 54,953,741 (13,253,436)
CASH DIVIDENDS PAID (1,360,298) (1,196,071)
PROCEEDS FROM SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN 823,346 556,318
PROCEEDS FROM STOCK OPTIONS EXERCISED 257,324 329,872
PURCHASES OF TREASURY STOCK - (630,013)
-------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 13,511,076 (24,084,283)
-------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,656,979) (94,940,376)
CASH AND CASH EQUIVALENTS - JANUARY 1 73,934,976 147,762,269
-------------- ---------------
CASH AND CASH EQUIVALENTS - MARCH 31 $64,277,997 $52,821,893
============== ===============
SUPPLEMENTAL DATA:
INTEREST PAID $4,832,412 $2,706,462
INCOME TAXES PAID $608,205 $44,334
ADJUSTMENT TO UNREALIZED NET GAIN OR LOSS ON SECURITIES
AVAILABLE FOR SALE ($5,202,290) ($99,841)
DIVIDENDS DECLARED BUT NOT PAID AS OF QUARTER-END $1,368,550 $1,203,655
See accompanying notes to unaudited consolidated financial statements.
3
STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
ACCUMULATED
OTHER TOTAL COMPRE-
COMPRE- STOCK- HENSIVE
COMMON RETAINED TREASURY HENSIVE HOLDERS' INCOME
STOCK SURPLUS EARNINGS STOCK INCOME (LOSS) EQUITY (LOSS)
----------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2005 $49,974,110 $63,014,247 $4,008,970 ($15,468,528) ($478,957)$101,049,842
COMPREHENSIVE LOSS:
NET INCOME - - 2,649,164 - - 2,649,164 $2,649,164
-------------
OTHER COMPREHENSIVE LOSS,
NET OF TAX:
UNREALIZED HOLDING LOSSES
ARISING DURING THE PERIOD (1) - - - - - (3,028,266)
RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME (2) - - - - - (67,380)
CASH FLOW HEDGES (3) - - - - - (721,566)
-------------
TOTAL OTHER
COMPREHENSIVE LOSS - - - - (3,817,212) (3,817,212) (3,817,212)
-------------
TOTAL COMPREHENSIVE
LOSS - - - - - ($1,168,048)
=============
CASH DIVIDEND
($0.15 PER SHARE) - - (1,368,550) - - (1,368,550)
SHARES ISSUED UNDER THE
DIVIDEND REINVESTMENT
PLAN (31,925 SHARES AT
95% OF MARKET VALUE) 159,625 663,720 - - - 823,345
STOCK OPTIONS EXERCISED 137,560 119,764 - - - 257,324
---------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005 $50,271,295 $63,797,731 $5,289,584 ($15,468,528) ($4,296,169) $99,593,913
=================================================================================
BALANCE, JANUARY 1, 2004 $46,889,775 $53,544,877 $5,189,907 ($13,481,356) $2,568,319 $94,711,522
COMPREHENSIVE INCOME:
NET INCOME - - 3,895,026 - - 3,895,026 $3,895,026
-------------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED HOLDING GAINS
ARISING DURING THE PERIOD (1) - - - - - 1,433,953
RECLASSIFICATION
ADJUSTMENT FOR GAINS
INCLUDED IN NET INCOME (2) - - - - - (1,704,907)
CASH FLOW HEDGES (3) - - - - - 639,378
-------------
TOTAL OTHER
COMPREHENSIVE INCOME - - - - 368,424 368,424 368,424
-------------
TOTAL COMPREHENSIVE
INCOME - - - - - $4,263,450
=============
CASH DIVIDEND
($0.13 PER SHARE) - - (1,203,655) - - (1,203,655)
SHARES ISSUED UNDER THE
DIVIDEND REINVESTMENT
PLAN (24,251 SHARES AT
95% OF MARKET VALUE) 121,255 435,063 - - - 556,318
STOCK OPTIONS EXERCISED 187,230 142,642 - - - 329,872
TREASURY STOCK PURCHASED - - - (630,013) - (630,013)
---------------------------------------------------------------------------------
BALANCE, MARCH 31, 2004 $47,198,260 $54,122,582 $7,881,278 ($14,111,369) $2,936,743 $98,027,494
=================================================================================
(1) Net of taxes of ($1,972,191) and $1,249,082 in 2005 and 2004, respectively.
(2) Net of taxes of $35,174 and $906,607 in 2005 and 2004, respectively.
(3) Net of taxes of ($480,243) and $425,542 in 2005 and 2004, respectively.
See accompanying notes to unaudited consolidated financial statements.
4
NOTES TO UNAUDITED CONDENSED 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
subsidiary, State Bank of Long Island and subsidiaries (the "Bank"), a New York
state-chartered commercial bank founded in 1966, and its unconsolidated wholly
owned subsidiaries, 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
condensed consolidated financial statements contain all adjustments, consisting
of normal accruals, necessary for a fair presentation of its condensed
consolidated balance sheets as of March 31, 2005 and December 31, 2004, its
condensed consolidated statements of income for the three months ended March 31,
2005 and 2004, its condensed consolidated statements of cash flows for the three
months ended March 31, 2005 and 2004 and its condensed consolidated statements
of stockholders' equity and comprehensive income (loss) for the three months
ended March 31, 2005 and 2004, in accordance with accounting principles
generally accepted in the United States of America. The results of operations
for the three months ended March 31, 2005 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 2004 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.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." This
Statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and its related implementation
guidance. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
On April 14, 2005, the Securities and Exchange Commission announced the adoption
of a rule that defers the required effective date of this Statement to the
beginning of the first fiscal year beginning after June 15, 2005, instead of at
the beginning of the first quarter after June 15, 2005 (as prescribed originally
by the Statement). The Company's management is in the process of evaluating the
impact of applying SFAS No. 123(R) on the Company's financial statements.
5
The estimated fair value of options granted during 2005 and 2004 was $7.62 and
$5.95 per share, respectively. The Company applies APB Opinion 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, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
For the Three Months Ended March 31, 2005 2004
- ------------------------------------ ---- ----
Net income, as reported $2,649,164 $3,895,026
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (129,713) (95,383)
---------- ----------
Pro forma net income $2,519,451 $3,799,643
========== ==========
Earnings per share:
Basic - as reported $0.29 $0.43
Basic - pro forma $0.28 $0.42
Diluted - as reported $0.28 $0.42
Diluted - pro forma $0.27 $0.41
The fair value of options granted under the Company's incentive stock option
plans during 2005 and 2004 were estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions used:
2005 2004
---- ----
Dividend yield 2.4% 2.5%
Expected volatility 28.3% 25.5%
Risk-free interest rate 3.88% 3.55%
Expected life of options 7.3 years 7.3 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 would be reclassified to earnings should
the hedge become ineffective. 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
6
for contracts entered into or modified after June 30, 2003, and should be
applied prospectively. Implementation issues that had been effective for fiscal
quarters that began prior to June 15, 2003 are to be applied in accordance with
their respective effective dates. The Company's adoption of SFAS No. 149 as of
July 1, 2003, did not have a material impact on the Company's financial
statements.
At March 31, 2005 and December 31, 2004, the Bank was party to two swap
agreements with terms expiring in September 2007 that economically hedge a
portion of the interest rate variability in its portfolio of prime rate loans.
The agreements effectively require the Bank to pay prime interest rate and
receive a fixed rate of 6.01% from the counterparty on $50 million of loan
assets. The fair value of the swap agreements was ($1,193,239) and ($440,423),
inclusive of accrued interest of $8,569 and $17,944, at March 31, 2005 and
December 31, 2004, respectively, and is contained within other assets in the
consolidated balance sheets. For the three months ended March 31, 2005 and 2004,
the Company recognized interest income of $71,562 and $254,042, respectively,
under the agreements.
Effective April 20, 2005, the Bank terminated its two existing prime-based
interest rate swap agreements because its interest rate sensitivity position is
now closer to neutral and the Bank no longer has the same interest rate exposure
as it did when the swaps were entered into in September 2003. The cost to unwind
the swap agreements totaled $899,000. This amount, net of taxes of $359,241, to
be included in Accumulated Other Comprehensive Income (Loss), will be
reclassified as a reduction in interest income using the straight-line method
over the remaining original term (to September 2007) of the interest rate swaps
in accordance with SFAS No. 133.
Accounting for Bank Owned Life Insurance
- ----------------------------------------
In February 2004, the Bank purchased $25 million in Bank Owned Life Insurance as
a mechanism for funding current and future employee benefit costs. The Bank is
the beneficiary of this policy that insures the lives of certain officers of the
Bank and 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.
2. STOCKHOLDERS' EQUITY
- ------------------------
The Company has 250,000 shares of preferred stock authorized. No shares were
issued as of March 31, 2005.
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. The Company did not repurchase any common shares during the first
quarter of 2005.
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.
7
For the Three Months Ended March 31, 2005 2004
- ------------------------------------ ---- ----
Net income $2,649,164 $3,895,026
Average dilutive stock options outstanding 812,580 885,289
Average exercise price per share $13.07 $14.86
Average market price $26.59 $23.53
Weighted average common shares outstanding 9,114,447 9,011,859
Increase in shares due to exercise of options - diluted basis 345,894 326,289
------- -------
Adjusted common shares outstanding - diluted 9,460,341 9,338,148
========= =========
Net income per share - basic $0.29 $0.43
===== =====
Net income per share - diluted $0.28 $0.42
===== =====
4. SECURITIES HELD TO MATURITY AND 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) in 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.
The amortized cost, gross unrealized gains and losses and estimated fair value
of securities held to maturity and securities available for sale at March 31,
2005 and December 31, 2004 are as follows:
8
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 2005
Securities held to maturity:
Government Agency securities $19,992,979 - ($52,979) $19,940,000
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Obligations of states and political
subdivisions 88,388,460 458,453 (539,483) 88,307,430
Government Agency securities 200,376,402 - (1,783,323) 198,593,079
Corporate securities 25,816,383 10 (115,730) 25,700,663
Mortgage-backed securities and
collateralized mortgage obligations 243,333,748 339,491 (3,906,212) 239,767,027
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 557,914,993 797,954 (6,344,748) 552,368,199
- ---------------------------------------------------------------------------------------------------------------------------
Total securities $577,907,972 $797,954 ($6,397,727) $572,308,199
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2004
Securities held to maturity:
Government Agency securities $29,990,384 - ($41,384) $29,949,000
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Obligations of states and political
subdivisions 53,247,451 644,097 (311,301) 53,580,247
Government Agency securities 162,313,981 165,974 (481,537) 161,998,418
Corporate securities 38,321,076 25,000 (142,733) 38,203,343
Mortgage-backed securities and
collateralized mortgage obligations 259,161,494 1,108,459 (1,352,463) 258,917,490
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 513,044,002 1,943,530 (2,288,034) 512,699,498
- ---------------------------------------------------------------------------------------------------------------------------
Total securities $543,034,386 $1,943,530 ($2,329,418) $542,648,498
- ---------------------------------------------------------------------------------------------------------------------------
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.
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
9
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 March 31, 2005, there were no other-than-temporary
impairments of the Company's investment securities.
Information pertaining to securities with gross unrealized losses at March 31,
2005, 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 ($52,979) $14,940,000 - - ($52,979) $14,940,000
- ----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Obligations of states and political
subdivisions (539,483) 72,787,405 - - (539,483) 72,787,405
Government Agency securities (1,667,698) 157,810,585 (115,625) 9,134,375 (1,783,323) 166,944,960
Corporate securities (115,730) 17,263,000 - - (115,730) 17,263,000
Mortgage-backed securities and
collateralized mortgage obligations (2,708,851) 177,667,169 (1,197,361) 40,255,767 (3,906,212) 217,922,936
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale (5,031,762) 425,528,159 (1,312,986) 49,390,142 (6,344,748) 474,918,301
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities ($5,084,741) $440,468,159 ($1,312,986) $49,390,142 ($6,397,727) $489,858,301
==================================================================================================================================
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 $17,492,820, (2) Fixed rate mortgage-backed
securities totaling $22,762,947 or (3) Callable fixed income securities with a
fixed stated coupon totaling $9,134,375.
The market value, and therefore the loss position, for each type of bond respond
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 also to changes in the amount of cash flow as determined by
prepayments. When interest rates fall, mortgage holders are induced to refinance
their 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
10
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 securities. 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, those classified as "available for sale" could be
sold, regardless of their market value, should business conditions warrant such
sale.
5. LOANS
- ---------
The recorded investment in loans that are considered to be impaired, for the
quarter ended March 31, 2005 and for the year ended December 31, 2004, is
summarized below.
For the Quarter Ended For the Year Ended
March 31, 2005 December 31, 2004
--------------------- ------------------
Amount measured using the present value of expected future
cash flows, discounted at each loan's effective interest rate - -
Impaired collateral-dependent loans $3,275,403 $3,275.403
---------- ----------
Total amount evaluated as impaired $3,275,403 $3,275,403
========== ==========
Average impaired loan balance $3,305,480 $4,579,424
========== ==========
As a result of the Company's evaluation of impaired loans, an allowance for
probable loan losses of approximately $1,492,000 was established for the total
amount of impaired loans at both March 31, 2005 and December 31, 2004. While no
interest income was recognized on the impaired loans for the three months ended
March 31, 2005, interest income of $20,134 was recognized on impaired loans for
the three months ended March 31, 2004.
Activity in the allowance for probable loan losses for the three months ended
March 31, 2005 and 2004 is as follows:
11
2005 2004
---- ----
Balance, January 1 $12,020,443 $10,732,078
Provision charged to income 1,227,000 1,077,000
Charge-offs, net of recoveries of $287,801 in 2005 and $36,056 in 2004 (132,544) (575,792)
Reclassification of reserve for off-balance sheet commitments (1) (210,322) -
------------------ --------------------
Balance, March 31 $12,904,577 $11,233,286
================== ====================
(1) At March 31, 2005, the allowance for off-balance sheet instruments, i.e.
loan commitments, was reported as a component of other liabilities.
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 March 31, 2005 or
December 31, 2004.
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 continue to 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.
7. INCOME TAX MATTERS
- ----------------------
The Company has received the findings of a New York State Department of Taxation
and Finance (the "Department") field audit with respect to New York income tax
for the years ended December 31, 1999, 2000 and 2001. As per these findings, the
Department contends that the Company's tax liability should be increased by
$4,500,000 (including almost $1,400,000 in penalties and interest, and such
penalties and interest continue to accrue) for the years under examination. The
basis for this increase appears to be the Department's assertion that SB
Financial Services Corp. and SB Portfolio Management Corp., wholly owned
subsidiaries of the Bank that are organized and operate entirely in the State of
Delaware, should be included in the Company's New York State consolidated
franchise tax return.
The Company has replied in writing to the Department, stating that the Company
disagrees with and disputes the Department's findings. The Company intends to
vigorously contest any assessment based upon these findings through appropriate
administrative procedures and, if necessary, court proceedings. No assurance can
be given as to whether or to what extent the Company will be required to pay the
amount of the tax liability asserted by the Department or whether tax will be
assessed for years subsequent to December 31, 2001, the last year under the
Department's field audit. At this time, management cannot estimate the
likelihood of success on the merits on such assertions by the Department.
Accordingly, no liability or reserve has been recognized in the consolidated
balance sheets at March 31, 2005 or December 31, 2004 with respect to the
outcome of this audit.
12
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 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 as shown in the following table.
Management believes that, as of March 31, 2005, the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of March 31, 2005, 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 March 31, 2005:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company $121,325 8.04% $60,361 4.00% N/A N/A
The Bank $121,028 8.03% $60,288 4.00% $75,360 5.00%
Tier I Capital to Risk-Weighted Assets:
The Company $121,325 12.54% $38,700 4.00% N/A N/A
The Bank $121,028 12.52% $38,667 4.00% $58,001 6.00%
Total Capital to Risk-Weighted Assets:
The Company $133,433 13.79% $77,409 8.00% N/A N/A
The Bank $133,124 13.77% $77,341 8.00% $96,677 10.00%
- ----------------------------------------------------------------------------------------------------------------------------
As of March 31, 2004:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company $112,489 7.85% $57,319 4.00% N/A N/A
The Bank $111,732 7.80% $57,298 4.00% $71,623 5.00%
Tier I Capital to Risk-Weighted Assets:
The Company $112,489 12.33% $36,493 4.00% N/A N/A
The Bank $111,732 12.25% $36,484 4.00% $54,726 6.00%
Total Capital to Risk-Weighted Assets:
The Company $123,722 13.56% $72,992 8.00% N/A N/A
The Bank $122,965 13.48% $72,976 8.00% $91,220 10.00%
- ----------------------------------------------------------------------------------------------------------------------------
13
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
subsidiary, State Bank of Long Island and subsidiaries (the "Bank"), a New York
state-chartered commercial bank founded in 1966, and its unconsolidated wholly
owned subsidiaries, 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 three months ended March 31, 2005 2004 2004
- ----------------------------------------------------------------------------------------------
Revenue (1) $15,959 $16,933 (6)%
Operating expenses 11,209 10,286 9
Provision for probable loan losses 1,227 1,077 14
Net income 2,649 3,895 (32)
Net income per share - diluted (2) 0.28 0.42 (33)
Dividend payout ratio 51.7% 30.9% 2080 bp
Return on average total stockholders' equity 10.50% 16.12% (562)
- ----------------------------------------------------------------------------------------------
Tier I leverage ratio 8.04% 7.85% 19 bp
Tier I capital ratio 12.54% 12.33% 21
Total capital ratio 13.79% 13.56% 23
- ----------------------------------------------------------------------------------------------
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 March 31, 2005, the Company, on a consolidated basis, had total assets of
approximately $1.5 billion, total deposits of approximately $1.2 billion and
stockholders' equity of approximately $99.6 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, New York. 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. 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 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 institutions operating in its market areas, it has demonstrated the
ability to compete profitably with them.
14
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.
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.
In 2004 the Bank entered into a joint venture with an established title agent
and formed a title abstract agency, State Title Agency, LLC. This agency,
majority owned by the Bank, provides an opportunity for the Bank to offer title
insurance for commercial transactions. The agency is not significant in terms of
either assets or contributions to the Company's results of operations.
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 2004.
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 346 full-time and part-time
officers and employees as of March 31, 2005.
The Company's Internet address is www.statebankofli.com. The Company makes
available on its 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.
Opportunities, Risks and Threats - Certain statements contained in this
discussion are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on management's current expectations regarding a range of issues that
could potentially impact the Company's performance in future periods.
Forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those discussed herein. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identified by the use
of the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
"is confident that" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors that could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, changes in:
market interest rates, general economic conditions, legislative/regulatory
environment, monetary and fiscal policies of the U.S. Government, the quality
and composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Company's
primary trade area, accounting principles and guidelines and other economic,
competitive, governmental, regulatory and technological factors affecting the
Company's operations, pricing and services.
15
Intense competition in the Company's tri-county trade area continues unabated
from a variety of new competitors through both de novo branching and
acquisition. Management expects that the Company will continue to focus on
careful expansion of the loan and lease portfolios, significant expense
reduction initiatives and strategies to improve noninterest income generation.
Management has announced that State Bank of Long Island expects to open its
sixteenth branch facility in Westbury, Long Island later this year. This
location is projected to provide excellent retail and commercial deposit
potential and is also expected to assist in the growth of the commercial loan
portfolio based upon its strategic location contiguous to an industrial park.
During 2004, the Company expanded its staff of professional bankers in the areas
of cash management sales, professional services deposit generation and
commercial lending. Recent industry consolidation has provided the Company with
the opportunity to add these experienced, relationship-oriented bankers to staff
to support future growth and market penetration. Technology upgrades and new
products will continue to be developed to support branch deposit growth and
improve cross-selling efforts.
By following its long-standing philosophy of Measured, Orderly Growth,
maintaining a "Customer First" attitude and adhering to the ideals contained in
its mission statement that are continually reinforced by the Board of Directors
and executive management team, the Company is hopeful that its application of a
consistent standard of excellence will lead to productive results throughout
2005.
Critical Accounting Policies, Judgments And Estimates - The discussion and
analysis of the financial condition and results of operations of the Company are
based on the Consolidated Financial Statements, which are prepared in conformity
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses. Management evaluates those estimates and assumptions on
an ongoing basis, including those related to the allowance for probable loan
losses and income taxes. Management bases its estimates on historical experience
and various other factors and assumptions that are believed to be reasonable
under the circumstances. These form the bases for making judgments on the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from those estimates under different
assumptions or conditions.
Allowance for Probable Loan Losses - In management's opinion, the most critical
accounting policy impacting the Company's financial statements is the evaluation
of the allowance for probable loan losses. Management carefully monitors the
credit quality of the loan portfolio 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.
16
[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
- --------------------------------------------------------------------------------
12/31/01 $551,598 1.68%
12/31/02 $620,384 1.62%
12/31/03 $711,216 1.51%
12/31/04 $778,191 1.54%
3/31/05 $795,359 1.62%
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, and the resulting
possibility of increased losses inherent in that growth, 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.
The Company has received the findings of a New York State Department of Taxation
and Finance (the "Department") field audit with respect to New York income tax
for the years ended December 31, 1999, 2000 and 2001. As per these findings, the
Department contends that the Company's tax liability should be increased by
$4,500,000 (including almost $1,400,000 in penalties and interest, and such
penalties and interest continue to accrue) for the years under examination. The
basis for this increase appears to be the Department's assertion that SB
Financial Services Corp. and SB Portfolio Management Corp., wholly owned
subsidiaries of the Bank that are organized and operate entirely in the State of
Delaware, should be included in the Company's New York State consolidated
franchise tax return.
17
The Company has replied in writing to the Department, stating that the Company
disagrees with and disputes the Department's findings. The Company intends to
vigorously contest any assessment based upon these findings through appropriate
administrative procedures and, if necessary, court proceedings. No assurance can
be given as to whether or to what extent the Company will be required to pay the
amount of the tax liability asserted by the Department or whether tax will be
assessed for years subsequent to December 31, 2001, the last year under the
Department's field audit. At this time, management cannot estimate the
likelihood of success on the merits on such assertions by the Department.
Accordingly, no liability or reserve has been recognized in the consolidated
balance sheets at March 31, 2005 or December 31, 2004 with respect to the
outcome of this audit.
Material Changes in Financial Condition - Total assets of the Company were $1.5
billion at March 31, 2005. When compared to December 31, 2004, total assets
increased by $41 million or 3%. The increase was primarily attributable to
growth in both the investment and loan portfolios, cash and due from banks and
the receivable for sales of securities of $30 million, $16 million, $11 million
and $4 million, respectively. These were partially offset by a decline in
overnight securities purchased under agreements to resell of $21 million. The
growth in the investment portfolio resulted primarily from increases in U.S.
Government Agency and short-term tax-exempt municipal securities, while the
primary factors contributing to the growth in the loan portfolio were increases
in commercial loans and commercial mortgages.
At March 31, 2005, total deposits were $1.2 billion, a decrease of $91 million
or 7% when compared to December 31, 2004. This decline was largely attributable
to a fall in time deposits of $107 million, with time certificates of deposit of
$100,000 or more, brokered time deposits and other time deposits decreasing $68
million, $34 million and $5 million, respectively, as the Company utilized
lower-cost short-term borrowings for funding purposes. Partially offsetting the
decline in time deposits were increases in demand and savings deposits of $13
million and $3 million, respectively. Growth in the money fund and regular
savings components of total savings of $38 million and $5 million, respectively,
were offset by a $40 million decline in Super NOW deposits. Core deposit
balances, consisting of demand, savings, money fund and Super NOW deposits,
represented approximately 82% of total deposits at March 31, 2005 compared to
75% at year-end 2004. 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, were $137 million, an
increase of $105 million from December 31, 2004.
Average interest-earning assets for the first quarter of 2005 were up by $66
million or 5% to $1.4 billion from the comparable 2004 period. This was largely
the result of a $76 million or 11% increase in average loans, primarily
commercial loans and commercial mortgages, partially offset by a $15 million or
3% decrease in average investment securities. Declines in mortgage-backed and
short-term tax-exempt municipal securities of $35 million and $14 million,
respectively, were offset by an increase in U.S. Government Agency securities of
$42 million. In addition, average money market instruments rose by $5 million.
Funding the first quarter growth in average interest-earning assets was an
increase in average core deposits. Average core deposits increased $72 million
or 8% during the first quarter of 2005 as compared to the same period in 2004,
reflecting increases in average demand deposits and savings deposits of 14% and
5%, respectively. Average short-term borrowed funds fell $10 million during the
first quarter of 2005 as compared to the same period in the prior year primarily
attributable to decreases in securities sold under agreements to repurchase and
Federal funds purchased.
These activities resulted in a first quarter fully taxable equivalent ("FTE")
net interest margin of 4.29%, up from 4.02% one year ago. This improvement was
the result of a 76 basis point increase in the Company's FTE yield on
interest-earning assets to 5.64%, somewhat offset by a 49 basis point increase
in the Company's cost of funds to a weighted average rate of 1.34%. The higher
cost of funds reflects the impact of short-term interest rate increases.
18
Capital - The Company's capacity to grow its assets and earnings stems, in part,
from the significance of its capital strength. The Company strives to maintain
an optimal level of capital, commensurate with its risk profile, on which an
attractive rate of return to stockholders will be realized over both the short
and long term, while serving the needs of depositors, creditors and regulators.
In determining an optimal capital level, the Company also considers the capital
levels of its peers and the evaluations of its primary regulators. At March 31,
2005, the Company's and the Bank's capital ratios are in excess of those
necessary for classification as a "well-capitalized" institution pursuant to the
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA).
Throughout the year, the Company's capital grows 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 $100 million at March 31, 2005, representing a $1 million (1%)
decrease and a $2 million (2%) increase, respectively, from December 31 and
March 31, 2004. The Company has no plans or commitments for capital utilization
or expenditures that would affect its current capital position or would impact
its future financial performance. Table 2-1 summarizes the Company's capital
ratios as of March 31, 2005 and compares them to current regulatory guidelines
and December 31 and March 31, 2004 actual results.
TABLE 2-1
Tier I Capital/ Total Capital/
Tier I Risk-Weighted Risk-Weighted
Leverage Assets Assets
-------------------- ----------------------- ----------------------
Regulatory Minimum 3.00%-4.00% 4.00% 8.00%
Ratios as of:
March 31, 2005 8.04% 12.54% 13.79%
December 31, 2004 7.82% 12.46% 13.71%
March 31, 2004 7.85% 12.33% 13.56%
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 2004, the Company's Board of Directors (the
"Board") paid a 5% stock dividend, the 35th consecutive year that it has paid a
stock dividend. In addition, for the first three months of 2005, the Board
declared a $0.15 per share cash dividend on the Company's common stock.
19
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
CASH DIVIDENDS AND DIVIDEND PAYOUT RATIOS
For the Period Ended Dividends Payout ratio
- --------------------------------------------------------------------------------
12/31/01 $4,197,162 38.79%
12/31/02 $4,414,379 39.06%
12/31/03 $4,647,399 38.68%
12/31/04 $5,214,318 38.98%
3/31/05 $1,368,550 51.66%
The Company did not repurchase any common shares during the first quarter of
2005. Since 1998, a total of 925,995 shares of Company stock have been
repurchased at an average cost of $16.70 per share. Under the Board's existing
authorization, an additional 574,005 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 2002 and 2003, the Company enhanced its Tier I capital position through
the issuance of a total of $20 million in trust preferred securities through
pooled offering structures. The trust preferred securities, which currently
qualify as Tier I capital for regulatory capital purposes, were issued by newly
established subsidiaries. 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. During the first quarter of
2005, the weighted-average rate on all trust preferred securities was 5.74%.
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 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.
20
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral required varies, but may include
accounts receivable, inventory, equipment, real estate and income-producing
commercial properties. At March 31, 2005 and 2004, commitments to originate
loans and commitments under unused lines of credit for which the Bank is
obligated amounted to approximately $276 million and $236 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 March 31, 2005
and 2004, the Bank had letters of credit outstanding of approximately $13
million and $15 million, respectively. At March 31, 2005, the uncollateralized
portion was approximately $3 million.
The Bank's use of derivative financial instruments, i.e. interest rate swaps,
exposes it to credit risk. This credit exposure relates to possible losses that
would be recognized if the counterparties fail to perform their obligations
under the contracts. To mitigate this credit exposure, the Bank deals only with
counterparties of good credit standing and requires the exchange of collateral
over a certain credit threshold. At March 31, 2005 and 2004, 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. Effective April
20, 2005, the Bank terminated its two existing prime-based interest rate swap
agreements because its interest rate sensitivity position is now closer to
neutral and the Bank no longer has the same interest rate exposure as it did
when the swaps were entered into in September 2003. The cost to unwind the swap
agreements totaled $899,000. This amount, net of taxes of $359,241, to be
included in Accumulated Other Comprehensive Income (Loss), will be reclassified
as a reduction in interest income using the straight-line method over the
remaining original term (to September 2007) of the interest rate swaps in
accordance with SFAS No. 133.
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 2005, $1.9 million; in 2006, $2.1 million; in 2007,
$2.1 million; in 2008, $2.1 million; in 2009, $1.9 million; and the remainder to
2014, $3.9 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 first quarter
of 2005, the Company's liquidity position remained stable and well within
acceptable industry standards. During the first quarter of 2005, the level of
core deposits, calls of U.S. Government Agency securities and paydowns on
mortgage-backed securities provided a source of readily available funds to meet
general liquidity needs. In addition, at March 31, 2005, 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 March 31, 2005, 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 $87 million and $7 million were drawn
under the Company's lines of credit with FHLB and correspondent banks,
respectively, at March 31, 2005.
21
Contractual Obligations - Shown below are the amounts of payments due under
specified contractual obligations, aggregated by category of contractual
obligation, for specified time periods. All information is as of March 31, 2005.
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 $14,032 $1,936 $4,202 $3,951 $3,943
Federal funds purchased 6,500 6,500 - - -
Securities sold under agreements to
repurchase 43,307 43,307 - - -
Federal Home Loan Bank of New York
overnight and term borrowings 87,000 87,000 - - -
Obligations under equipment lease financing 220 124 96 - -
Junior subordinated debentures 20,620 - - - 20,620
------------- ----------------- ----------------- ----------------- ------------------
$171,679 $138,867 $4,298 $3,951 $24,563
------------- ----------------- ----------------- ----------------- ------------------
Material Changes in Results of Operations for the Three Months Ended March 31,
2005 versus 2004 - Net income for the three months ended March 31, 2005 was $2.6
million, a decrease of $1.2 million or 32.0%, when compared to the same 2004
period, principally as a result of lower net security gains. The $2.5 million
decline in net security gains reflects sales of long-term municipal notes during
the first quarter of 2004, undertaken as a result of the fall in interest rates.
In addition to the decline in net security gains, the Company also reported
decreases in service charges on deposit accounts and other operating income,
along with increases in the provision for probable loan losses and total
operating expenses. These were partially offset by an improvement in net
interest income (up $1.5 million), an increase in income from bank owned life
insurance and a reduction in the provision for income taxes. Diluted earnings
per common share were $0.28 in 2005 and $0.42 in 2004. The Company's returns on
average assets and stockholders' equity were 0.71% and 10.50% in 2005 and 1.09%
and 16.12% in 2004, respectively.
As shown in Table 2-2 following this discussion, net interest income increased
by 11.4% to $14.7 million as the result of a 5% or $66 million increase in
average interest-earning assets. The increase in average interest-earning assets
was largely the result of an 11% increase in average loans, primarily commercial
loans and commercial mortgages, partially offset by a $15 million or 3% decrease
in average investment securities. Declines in mortgage-backed and short-term
tax-exempt municipal securities of $35 million and $14 million, respectively,
were partially offset by an increase in U.S. Government Agency securities of $42
million.
Growth in commercial loans, commercial mortgages and leases resulted in a $76
million increase in average loans outstanding during 2005. The newer branch
locations in both Nassau and Queens Counties continue to provide opportunities
22
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 Bank's 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.
Funding the growth in average interest-earning assets during the first three
months of 2005, as compared to the same 2004 period, was a higher level of
average core deposits. The lower-cost core deposit balances, comprised of
demand, savings, money fund and Super NOW accounts, increased $72 million or 8%
during 2005 and provided funding at an average cost of 97 basis points. This has
enabled the Company to reduce its dependence on higher-cost borrowed funds and
time deposits, including brokered deposits.
These activities resulted in a first quarter fully taxable equivalent ("FTE")
net interest margin of 4.29%, up from 4.02% one year ago. This improvement was
the result of a 76 basis point increase in the Company's FTE yield on
interest-earning assets to 5.64%, somewhat offset by a 49 basis point increase
in the Company's cost of funds to a weighted average rate of 1.34%. The higher
cost of funds reflects the impact of short-term interest rate increases.
Total noninterest income declined $2.5 million or 67.2% for the first three
months of 2005 as compared to 2004, principally due to lower net security gains.
The $2.5 million decline in net security gains reflects sales of long-term
municipal notes during the first quarter of 2004, undertaken as a result of that
period's fall in interest rates. In addition to the decline in net security
gains, there were also decreases in service charges on deposit accounts (down
11.1%) due to improved management of balances by corporate customers and other
operating income (down 7.8%) as the result of reductions in letter of credit and
foreign exchange fees. These were partially offset by an increase in income from
bank owned life insurance due to the timing of this asset purchase during the
middle of 2004's first quarter.
Revenue of State Bancorp, Inc. Over/
(dollars in thousands) (under)
For the three months ended March 31, 2005 2004 2004
- ------------------------------------------------------------------------------------------
Net interest income $14,744 $13,230 11 %
Service charges on deposit accounts 497 559 (11)
Net security gains 103 2,622 (96)
Income from bank owned life insurance 256 133 92
Other operating income 359 389 (8)
- ------------------------------------------------------------------------------------------
Total revenue $15,959 $16,933 (6)%
- ------------------------------------------------------------------------------------------
The 9.0% rise in total operating expenses during the first three months of 2005
as compared to 2004 was primarily due to increases in salaries and other
employee benefits, occupancy, legal, marketing and advertising and audit and
assessment. Salaries and other employee benefits (up 8.6%) rose as the result of
growth in staff coupled with higher medical and pension costs. The increase in
staff resulted primarily from the establishment of a Professional Services Group
("PSG") in May 2004 and the addition of several lending officers in early 2005.
Occupancy costs increased by 28.1% to $1.3 million as the result of several
factors: most notably additional office space in our County Seat location and in
New York City, primarily for PSG; higher utility costs; and increased
maintenance costs related to snow removal in 2005. Legal expenses increased
during 2005 as the result of an increase in costs at the Bank's leasing
subsidiary. Legal expenses associated with ongoing litigation previously
disclosed in the Company's filings with the Securities and Exchange Commission
and as discussed in detail in Part II, Item 1 herein related to a former deposit
customer, Island Mortgage Network and its affiliates ("IMN"), for the first
quarter of 2005 were comparable to those incurred during the first quarter of
2004. The Company will continue to incur costs related to the IMN litigation.
23
Marketing and advertising expenses increased by 25.4% due to higher costs
associated with various Bank product promotions. Audit and assessment expenses
increased significantly (up 99.8%) due solely to costs required to comply with
the Sarbanes-Oxley Act of 2002. Somewhat offsetting the foregoing cost increases
were improvements in several expense categories. Equipment expenses declined
11.2% as the result of lower depreciation and equipment maintenance costs.
Credit and collection fees declined 40.1% due to the continued reduction in the
number and amount of nonperforming assets in 2005. Other operating expenses
decreased by 3.2% during 2005 to $1.4 million as the result of the final
amortization of costs associated with previously opened branches during the
fourth quarter of 2004.
Operating expenses of State Bancorp, Inc. Over/
(dollars in thousands) (under)
For the three months ended March 31, 2005 2004 2004
- ----------------------------------------------------------------------------------------
Salaries and other employee benefits $6,496 $5,981 9 %
Occupancy 1,262 986 28
Equipment 327 369 (11)
Legal 925 846 9
Marketing and advertising 274 218 26
Credit and collection 165 275 (40)
Audit and assessment 388 194 100
Other operating expenses 1,372 1,417 (3)
- ----------------------------------------------------------------------------------------
Total operating expenses $11,209 $10,286 9 %
- ----------------------------------------------------------------------------------------
The above factors resulted in a modestly improved operating efficiency ratio
(total operating expenses divided by the sum of fully taxable equivalent net
interest income and noninterest income, excluding net securities gains) of 68.9%
for the first three months of 2005 as compared to 70.3% in 2004. The Company's
other measure of expense control, the ratio of total operating expenses to
average total assets, increased during the first three months of 2005 to 3.01%
from a level of 2.87% in 2004.
Income tax expense declined $801 thousand for the first three months of 2005 as
compared to 2004. The Company's effective tax rate declined to 24.8% from 30.1%
a year ago.
Asset Quality - Nonperforming assets (defined by the Company as nonaccrual loans
and other real estate owned) totaled $8 million at March 31, 2005 and December
31, 2004 and represented a $2 million decrease from March 31, 2004. The
reduction in nonperforming assets compared to March 31, 2004 was primarily the
result of aggressive workout, collection and charge-off efforts. The Company
held one commercial property as other real estate owned totaling $3 million at
March 31, 2005, December 31, 2004 and March 31, 2004. Management of the Company
anticipates that this property will be sold with no material impact on the
Company's financial statements. At March 31, 2005, December 31, 2004 and March
31, 2004, there were no restructured accruing loans. Loans 90 days or more past
due and still accruing interest totaled $66 thousand at March 31, 2005,
reflecting decreases of $23 thousand and $30 thousand, respectively, when
compared to year-end 2004 and March 31, 2004.
The allowance for probable loan losses amounted to $13 million or 1.6% of total
loans at March 31, 2005 versus $12 million and 1.6%, respectively, at the
comparable 2004 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 259% at March 31, 2005 from 224% at December 31, 2004 and from 157%
one year ago.
24
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
TOTAL NONPERFORMING ASSETS AND THE ALLOWANCE
FOR PROBABLE LOAN LOSSES
Total nonperforming assets Allowance as a % of
For the Period Ended (in thousands) total nonperforming assets
- -------------------- -------------------------- --------------------------
12/31/01 $8,920 103.76%
12/31/02 $6,317 159.03%
12/31/03 $11,316 94.84%
12/31/04 $7,924 151.69%
3/31/05 $7,571 170.45%
The Company's loan portfolio is concentrated in commercial and industrial loans
and commercial mortgages, the majority of which are fully secured by collateral
with market values in excess of the carrying value of the underlying loans. The
provision for probable loan losses for the first three months of 2005 and 2004
was $1.2 million and $1.1 million, respectively. Net loan charge-offs during the
same periods were approximately $133 thousand and $576 thousand, respectively.
The provision for probable loan losses is continually evaluated relative to
portfolio risk and regulatory guidelines considering all economic factors that
affect the loan loss reserve, such as fluctuations in the Long Island real
estate market and interest rates, economic slowdowns in industries and other
uncertainties. It will continue to be closely reviewed during the remainder of
2005. Due to the uncertain nature of the factors cited above, management
anticipates further loan charge-offs during the rest of 2005. A further review
of the Company's nonperforming assets may be found in Table 2-3 following this
analysis.
25
TABLE 2 - 2
NET INTEREST INCOME ANALYSIS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(DOLLARS IN THOUSANDS)
2005 2004
----------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------- ---------------------------------
ASSETS:
Interest-earning assets:
Securities (1) $546,363 $5,555 4.12 % $561,281 $4,564 3.27 %
Federal funds sold - - - 1,000 2 0.80
Securities purchased under agreements to
resell 83,278 467 2.27 75,935 178 0.94
Interest-bearing deposits 4,791 25 2.12 6,415 6 0.38
Loans (2) 785,874 13,697 7.07 710,078 11,677 6.61
----------------------------------- ---------------------------------
Total interest-earning assets 1,420,306 19,744 5.64 1,354,709 16,427 4.88
----------------------------------- ---------------------------------
Non-interest-earning assets 89,083 84,537
------------ ------------
Total Assets $1,509,389 $1,439,246
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $706,335 2,413 1.39 $672,240 1,160 0.69
Time deposits 281,898 1,470 2.11 279,285 1,202 1.73
----------------------------------- ---------------------------------
Total savings and time deposits 988,233 3,883 1.59 951,525 2,362 1.00
----------------------------------- ---------------------------------
Federal funds purchased 7,288 47 2.62 8,902 25 1.13
Securities sold under agreements to
repurchase 6,797 48 2.86 15,717 44 1.13
Other borrowed funds 61,524 419 2.76 61,151 193 1.27
Junior subordinated debentures 20,620 316 6.22 20,000 247 4.97
----------------------------------- ---------------------------------
Total interest-bearing liabilities 1,084,462 4,713 1.76 1,057,295 2,871 1.09
----------------------------------- ---------------------------------
Demand deposits 305,528 268,053
Other liabilities 17,037 16,718
------------ ------------
Total Liabilities 1,407,027 1,342,066
Stockholders' Equity 102,362 97,180
------------ ------------
Total Liabilities and Stockholders' Equity $1,509,389 $1,439,246
============ ============
Net interest income/rate - tax-equivalent basis 15,031 4.29 % 13,556 4.02 %
=========== ===========
Less tax-equivalent basis adjustment (287) (326)
------------ ----------
Net interest income $14,744 $13,230
============ ==========
(1) Interest on securities includes the effects of tax-equivalent basis
adjustments, using a 34% tax rate. Tax-equivalent basis adjustments were $244
and $279 in 2005 and 2004, respectively.
(2) Interest on loans includes the effects of tax-equivalent basis adjustments,
using a 34% tax rate. Tax-equivalent basis adjustments were $43 and $47 in 2005
and 2004, respectively.
26
TABLE 2 - 3
ANALYSIS OF NONPERFORMING ASSETS
AND THE ALLOWANCE FOR PROBABLE LOAN LOSSES
MARCH 31, 2005 VERSUS DECEMBER 31, 2004 AND MARCH 31, 2004
(DOLLARS IN THOUSANDS)
NONPERFORMING ASSETS BY TYPE: PERIOD ENDED:
- ----------------------------- ---------------------------------------------------
3/31/2005 12/31/2004 3/31/2004
---------- ----------- ----------
Nonaccrual Loans $4,921 $5,274 $7,064
Other Real Estate Owned 2,650 2,650 2,650
---------- ---------- ----------
Total Nonperforming Assets $7,571 $7,924 $9,714
========== ========== ==========
Loans 90 Days or More Past Due
and Still Accruing $66 $89 $96
Gross Loans Outstanding $795,359 $778,191 $710,712
Total Stockholders' Equity $99,594 $101,050 $98,027
ANALYSIS OF THE ALLOWANCE FOR
PROBABLE LOAN LOSSES: QUARTER ENDED:
- --------------------- ---------------------------------------------------
3/31/2005 12/31/2004 3/31/2004
---------- ---------- ----------
Beginning Balance $12,020 $11,831 $10,732
Provision 1,227 1,191 1,077
Net Charge-Offs (133) (1,002) (576)
Reclassification of reserve for off-balance sheet commitments (2) (210) - -
---------- ---------- ----------
Ending Balance $12,904 $12,020 $11,233
========== ========== ==========
KEY RATIOS: PERIOD ENDED:
- ------------ ---------------------------------------------------
3/31/2005 12/31/2004 3/31/2004
---------- ---------- ----------
Allowance as a % of Total Loans 1.6% 1.5% 1.6%
Nonaccrual Loans as a % of Total Loans 0.6% 0.7% 1.0%
Nonperforming Assets (1) as a % of Total
Loans and Other Real Estate Owned 0.9% 1.0% 1.4%
Allowance for Probable Loan Losses as
a % of Nonaccrual Loans 262.2% 227.9% 159.0%
Allowance for Probable Loan Losses as a %
of Nonaccrual Loans and Loans 90 days or
More Past Due and Still Accruing 258.8% 224.1% 156.9%
(1) Excludes loans 90 days or more past due and still accruing interest.
(2) At March 31, 2005, the allowance for off-balance sheet instruments, i.e.
loan commitments, was reported as a component of other liabilities.
27
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
December 31, 2004 in the Company's Annual Report on Form 10-K. There have been
no material changes in the Company's market risk at March 31, 2005 compared to
December 31, 2004. 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 of up to two years. These simulations are
used to determine whether corrective action may be warranted or required in
order to adjust the overall interest rate risk profile of the Company. Asset and
liability management strategies may involve the use of various instruments such
as interest rate swaps to hedge interest rate risk.
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 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.
28
When modeling MVPE at risk, management recognizes the high degree of
subjectivity when projecting long-term cash flows and reinvestment rates, and
therefore uses MPVE at risk as a relative indicator of interest rate risk.
Simulation and scenario techniques in asset/liability modeling are influenced by
a number of estimates and assumptions with regard to embedded options,
prepayment behaviors, pricing strategies and cash flows. Such assumptions and
estimates are inherently uncertain and, as a consequence, simulation and
scenario output will neither precisely estimate the level of, or the changes in,
net interest income and MVPE, respectively.
To mitigate the impact of changes in interest rates, as a general rule, the
balance sheet should be structured so that repricing opportunities exist for
both assets and liabilities in approximately equivalent amounts at basically the
same time intervals.
In managing interest rate risk, imbalances in these repricing opportunities at
any point in time constitute an interest-sensitivity gap, which is the
difference between interest-sensitive assets and interest-sensitive liabilities.
When monitoring its interest-sensitivity gap position, management recognizes
that these static measurements do not reflect the results of any projected
activity and are best utilized as early indicators of potential interest rate
exposures.
The accompanying Table 3-1 sets forth the amounts of assets and liabilities
outstanding as of March 31, 2005 which, based upon certain assumptions, are
expected to reprice or mature in each of the time frames shown. Except as
stated, the amount of assets and liabilities shown to reprice or mature within a
particular time frame was determined in accordance with the earlier of the term
to repricing or the contractual terms of the asset or liability.
An asset-sensitive gap indicates an excess of interest-sensitive assets over
interest-sensitive liabilities, whereas a liability-sensitive gap indicates the
opposite. At March 31, 2005, the Company had a one-year cumulative
asset-sensitivity gap of $151 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.
29
TABLE 3 - 1
LIQUIDITY AND INTEREST RATE SENSITIVITY
MARCH 31, 2005
(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) $435,315 $29,032 $238,127 $87,964 $4,921 $795,359
Securities Purchased Under Agreements to Resell 20,000 - - - - 20,000
Interest-Bearing Deposits 3,773 - - - - 3,773
Securities Held to Maturity 5,000 - 14,993 - - 19,993
Securities Available for Sale (3) 40,426 83,017 303,001 125,054 6,417 557,915
-------------------------------------------------------------------------------
Total Interest-Earning Assets 504,514 112,049 556,121 213,018 11,338 1,397,040
Unrealized Net Loss on Securities Available for Sale (5,547) - - - - (5,547)
Receivable - Securities Sales 4,063 - - - - 4,063
Noninterest-Bearing Cash and Due from Banks 40,505 - - - - 40,505
All Other Assets (7) 7,029 9,068 19,739 - 6,527 42,363
-------------------------------------------------------------------------------
Total Assets 550,564 121,117 575,860 213,018 17,865 1,478,424
-------------------------------------------------------------------------------
INTEREST - SENSITIVE LIABILITIES:
Savings Accounts (4) 18,533 18,533 148,267 111,200 - 296,533
Money Fund and NOW Accounts (5) 45,268 30,268 242,295 45,574 - 363,405
Time Deposits (6) 152,010 28,511 29,394 642 - 210,557
-------------------------------------------------------------------------------
Total Interest-Bearing Deposits 215,811 77,312 419,956 157,416 - 870,495
Federal Funds Purchased, Securities Sold Under
Agreements to Repurchase and Other Borrowings 136,881 50 96 - - 137,027
Junior Subordinated Debentures 20,620 - - - - 20,620
-------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 373,312 77,362 420,052 157,416 - 1,028,142
Payable - Securities Purchases 31,648 - - - - 31,648
All Other Liabilities, Equity and Demand
Deposits (7) 22,280 16,403 112,195 167,952 99,804 418,634
-------------------------------------------------------------------------------
Total Liabilities and Equity 427,240 93,765 532,247 325,368 99,804 1,478,424
-------------------------------------------------------------------------------
Cumulative Interest-Sensitivity Gap (8) $123,324 $150,676 $194,289 $81,939 $ -
=================================================================
Cumulative Interest-Sensitivity Ratio (9) 128.9 % 128.9 % 118.4 % 105.9 % 100.0 %
Cumulative Interest-Sensitivity Gap as
a % of Total Assets 8.3 % 10.2 % 13.1 % 5.5 % - %
(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 accounts of individuals, partnerships and corporations and NOW
accounts 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
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.
30
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, State Bank of Long Island (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 April 29, 2005 are as follows:
Broward Title Co. v. Alan Jacobs, et al., Adv. Proc. No. 01-8181, Bankruptcy
Court for the Eastern District of New York. On or about July 9, 2002, Broward's
motion to sever its claims against the Bank (and certain other defendants) was
granted, allowing Broward to conduct a nonjury trial of its claims against the
remaining defendants in the bankruptcy court. Broward's claims against the Bank
and those other, severed defendants were referred to the United States District
Court for the Eastern District of New York on or about August 6, 2002. Since
that time, Broward has not made any affirmative attempts to prosecute its case
against the Bank in the district court, although it may attempt to 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. On or about June 4, 2002, plaintiffs commenced this adversary proceeding
with respect to the Bank. The Complaint alleges that plaintiffs extended lines
of credit to, and entered into mortgage purchase agreements with, defendant
Island Mortgage. According to the Complaint, millions of dollars of funds that
plaintiffs deposited into the Bank accounts maintained by Island Mortgage and
its related entities to fund mortgages were misappropriated as the result of
Island Mortgage's alleged scheme to defraud plaintiffs and unjustly enrich
defendants. Plaintiffs claim the following with respect to the Bank: 1) the Bank
aided and abetted the allegedly fraudulent scheme perpetrated by Island
Mortgage; 2) the Bank aided and abetted in a breach of the fiduciary duties an
Island Mortgage affiliate allegedly owed to plaintiffs; and, 3) the Bank was
negligent in failing to recognize and act on signs that Island Mortgage was
allegedly misappropriating the funds plaintiffs advanced to Island Mortgage.
Plaintiffs claim they are entitled to not less than $52 million, plus interest
and punitive damages.
On January 31, 2005, the bankruptcy court ruled on the Bank's motion for summary
judgment. The plaintiffs' claims for negligence and aiding and abetting a breach
of fiduciary duty were dismissed. The claim for aiding and abetting fraud was
not dismissed, although the court ruled that one of the plaintiffs (Matrix)
could not seek damages for the period after June 6, 2000. It is unknown at this
time whether any of the plaintiffs will seek reconsideration of the summary
judgment decision by the bankruptcy court or will seek to appeal the summary
judgment decision to the district court.
31
Moritz, et al. v. National Settlement Services Corp., et al., Civil Action No.
3:00 CV 426 MU, Western District of North Carolina. The case has now been
dismissed with prejudice.
The Bank is defending these lawsuits vigorously, and management believes that
the Bank has substantial defenses to the claims that have been asserted.
However, the ultimate outcome of these lawsuits cannot be predicted with
certainty. It also remains possible that other parties may pursue additional
claims against the Bank related to the Bank's dealings with IMN and its
affiliates. The Bank's legal fees and expenses will continue to 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.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company did not repurchase any of its common stock during the quarter.
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 January 21, 2005, the Company issued the earnings release for the period
ended December 31, 2004.
On February 7, 2005, the Bank announced it had signed a lease on property
located in Westbury, New York to house its sixteenth branch. The branch,
currently under renovation, is due to open mid-year 2005.
On February 15, 2005, the Board of Directors of the Bank approved the
recommendations of the Compensation Committee with respect to the base salary
for 2005 (effective April 1, 2005) and the payment of cash bonuses to the Chief
Executive Officer and to each of the four most highly compensated executive
32
officers of the Company or the Bank in accordance with the Bank's Incentive
Award Plan. On February 14, 2005 the Company's Stock Option Committee granted to
those individuals stock options pursuant to the Company's 1999 Incentive Stock
Option Plan and/or the Company's Stock Option Plan (2002).
On March 22, 2005, the Board of Directors of the Bank established the financial
performance targets used in establishing awards under the Bank's Incentive Award
Plan (the "Plan") for fiscal year 2005. The criteria are applicable to all
participants under the Plan, including the chief executive officer ("CEO") and
four other most highly compensated executive officers (the "named executive
officers" or "NEOs") of the Company and 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.
5/10/05 s/Daniel T. Rowe
- -------- -------------------------
Date Daniel T. Rowe, President
5/10/05 s/Brian K. Finneran
- -------- --------------------------------------
Date Brian K. Finneran, Secretary/Treasurer
(Principal Financial Officer)
34