UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to_________.
STATE BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2846511
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
699 HILLSIDE AVENUE, NEW HYDE PARK, NEW YORK 11040
(Address of principal executive offices) (Zip Code)
(516) 437-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No _____
As of November 7, 2003, there were 8,534,507 shares of registrant's Common
Stock outstanding.
STATE BANCORP, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 (Unaudited) 1.
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002 2.
(Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) 3.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Nine Months Ended 4.
September 30, 2003 and 2002 (Unaudited)
Notes to Unaudited Consolidated Financial Statements 5.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10.
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20.
Item 4. Controls and Procedures 22.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22.
Item 2. Changes in Securities - None N/A
Item 3. Defaults upon Senior Securities - None N/A
Item 4. Submission of Matters to a Vote of Security Holders - None N/A
Item 5. Other Information - None N/A
Item 6. Exhibits and Reports on Form 8-K 23.
SIGNATURES 24.
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ITEM 1 - FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
2003 2002
---- ----
ASSETS:
- -------
CASH AND DUE FROM BANKS $33,920,729 $50,586,855
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - 48,000,000
---------- ----------
TOTAL CASH AND CASH EQUIVALENTS 33,920,729 98,586,855
SECURITIES HELD TO MATURITY (ESTIMATED FAIR VALUE -
$70,208,084 IN 2003 AND $26,713,300 IN 2002) 70,079,400 26,711,314
SECURITIES AVAILABLE FOR SALE - AT ESTIMATED FAIR VALUE 480,661,807 582,899,187
----------- -----------
TOTAL SECURITIES 550,741,207 609,610,501
LOANS (NET OF ALLOWANCE FOR PROBABLE LOAN LOSSES
OF $10,596,799 IN 2003 AND $10,045,516 IN 2002) 669,025,003 610,338,357
BANK PREMISES AND EQUIPMENT - NET 7,289,249 7,879,767
NET RECEIVABLE - SECURITIES SALES - 14,173,044
OTHER ASSETS 18,683,584 21,693,660
---------- ----------
TOTAL ASSETS $1,279,659,772 $1,362,282,184
============== ==============
LIABILITIES:
- ------------
DEPOSITS:
DEMAND $254,840,416 $215,876,137
SAVINGS 552,582,048 498,767,318
TIME 260,769,288 432,383,053
----------- -----------
TOTAL DEPOSITS 1,068,191,752 1,147,026,508
FEDERAL FUNDS PURCHASED 23,000,000 4,800,000
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 25,815,000 49,983,000
OTHER BORROWINGS 51,151,761 52,665,644
NET PAYABLE - SECURITIES PURCHASES 1,006,391 2,009,000
ACCRUED EXPENSES, TAXES AND OTHER LIABILITIES 9,009,992 8,115,401
--------- ---------
TOTAL LIABILITIES 1,178,174,896 1,264,599,553
------------- -------------
GUARANTEED PREFERRED BENEFICIAL INTEREST
IN SUBORDINATED DEBT 10,000,000 10,000,000
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
- ---------------------
PREFERRED STOCK, $.01 PAR VALUE, AUTHORIZED
250,000 SHARES; 0 SHARES ISSUED - -
COMMON STOCK, $5.00 PAR VALUE, AUTHORIZED
20,000,000 SHARES; ISSUED 9,338,766 SHARES IN 2003
AND 9,201,863 SHARES IN 2002; OUTSTANDING 8,514,835
SHARES IN 2003 AND 8,378,855 SHARES IN 2002 46,693,830 43,818,395
SURPLUS 53,088,704 45,714,829
RETAINED EARNINGS 3,972,974 5,419,517
TREASURY STOCK (823,931 SHARES IN 2003
AND 783,817 SHARES IN 2002) (13,189,678) (12,444,116)
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF TAXES 919,046 5,218,101
UNEARNED COMPENSATION - (44,095)
------- ---------
TOTAL STOCKHOLDERS' EQUITY 91,484,876 87,682,631
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,279,659,772 $1,362,282,184
============== ==============
See accompanying notes to unaudited consolidated financial statements.
(1)
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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- --------------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
------------ -----------
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME:
- ----------------
LOANS $11,168,508 $11,110,665 $33,016,544 $32,547,243
FEDERAL FUNDS SOLD AND SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL 57,299 71,835 381,683 470,122
SECURITIES HELD TO MATURITY AND
SECURITIES AVAILABLE FOR SALE:
STATES AND POLITICAL SUBDIVISIONS 668,218 968,110 2,347,038 2,683,041
MORTGAGE-BACKED SECURITIES 1,859,422 2,756,274 6,225,287 8,738,558
GOVERNMENT AGENCY SECURITIES 1,245,441 1,877,788 5,815,217 4,516,344
OTHER SECURITIES 382,459 331,951 1,111,752 759,867
------- ------- --------- -------
TOTAL INTEREST INCOME 15,381,347 17,116,623 48,897,521 49,715,175
---------- ---------- ---------- ----------
INTEREST EXPENSE:
- -----------------
TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE 490,778 1,347,686 2,009,372 4,158,380
OTHER DEPOSITS AND TEMPORARY BORROWINGS 1,726,926 2,668,473 6,627,366 7,372,643
GUARANTEED PREFERRED BENEFICIAL INTEREST
IN SUBORDINATED DEBT 135,639 - 414,539 -
------- ------- ------- -------
TOTAL INTEREST EXPENSE 2,353,343 4,016,159 9,051,277 11,531,023
--------- --------- --------- ----------
NET INTEREST INCOME 13,028,004 13,100,464 39,846,244 38,184,152
PROVISION FOR PROBABLE LOAN LOSSES 983,751 816,000 2,951,253 2,738,000
------- ------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 12,044,253 12,284,464 36,894,991 35,446,152
---------- ---------- ---------- ----------
NONINTEREST INCOME:
- -------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS 401,475 376,723 1,158,545 1,115,063
NET SECURITY GAINS 2,281,855 34,643 5,863,405 1,455,153
OTHER OPERATING INCOME 412,177 336,329 1,273,048 989,105
------- ------- --------- -------
TOTAL NONINTEREST INCOME 3,095,507 747,695 8,294,998 3,559,321
--------- ------- --------- ---------
INCOME BEFORE OPERATING EXPENSES 15,139,760 13,032,159 45,189,989 39,005,473
---------- ---------- ---------- ----------
OPERATING EXPENSES:
- -------------------
SALARIES AND OTHER EMPLOYEE BENEFITS 5,574,126 5,125,584 16,693,754 15,029,254
OCCUPANCY 964,189 879,269 2,860,573 2,422,550
EQUIPMENT 418,875 334,442 1,211,071 996,173
LEGAL 830,283 814,663 3,982,833 2,727,017
MARKETING AND ADVERTISING 349,806 538,220 958,557 1,376,526
OTHER OPERATING EXPENSES 1,964,674 1,849,324 5,685,805 5,441,275
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 10,101,953 9,541,502 31,392,593 27,992,795
---------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES 5,037,807 3,490,657 13,797,396 11,012,678
PROVISION FOR INCOME TAXES 1,614,031 883,392 4,195,228 2,810,576
--------- ------- --------- ---------
NET INCOME $3,423,776 $2,607,265 $9,602,168 $8,202,102
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $0.41 $0.31 $1.14 $0.96
------ ------ ------ -----
DILUTED EARNINGS PER COMMON SHARE $0.39 $0.31 $1.11 $0.95
------ ------ ------ -----
AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,501,127 8,496,434 8,454,937 8,527,967
See accompanying notes to unaudited consolidated financial statements.
(2)
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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- --------------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES: 2003 2002
- --------------------- ---- ----
NET INCOME $9,602,168 $8,202,102
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
PROVISION FOR PROBABLE LOAN LOSSES 2,951,253 2,738,000
DEPRECIATION AND AMORTIZATION OF BANK PREMISES AND EQUIPMENT 1,239,469 915,049
AMORTIZATION OF INTANGIBLES 27,103 27,103
AMORTIZATION OF NET PREMIUM ON SECURITIES 6,010,916 2,739,665
AMORTIZATION OF UNEARNED COMPENSATION 82,601 168,541
NET SECURITY GAINS (5,863,405) (1,455,153)
DECREASE IN OTHER ASSETS, NET 8,801,099 1,608,547
INCREASE (DECREASE) IN ACCRUED EXPENSES, TAXES
AND OTHER LIABILITIES 816,722 (925,273)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,667,926 14,018,581
---------- ----------
INVESTING ACTIVITIES:
- ---------------------
PROCEEDS FROM MATURITIES OF SECURITIES HELD TO MATURITY 26,680,886 51,400
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 701,757,205 487,501,802
PROCEEDS FROM MATURITIES OF SECURITIES AVAILABLE FOR SALE 292,274,281 120,117,431
PURCHASES OF SECURITIES HELD TO MATURITY (70,000,000) (3,283,100)
PURCHASES OF SECURITIES AVAILABLE FOR SALE (886,287,333) (885,808,796)
INCREASE IN LOANS - NET (64,287,899) (48,137,174)
PURCHASES OF BANK PREMISES AND EQUIPMENT - NET (648,951) (2,475,236)
------- ---------
NET CASH USED IN INVESTING ACTIVITIES (511,811) (332,033,673)
------- -----------
FINANCING ACTIVITIES:
- ---------------------
INCREASE IN DEMAND AND SAVINGS DEPOSITS 92,779,009 92,935,113
(DECREASE) INCREASE IN TIME DEPOSITS (171,613,765) 15,043,528
INCREASE IN FEDERAL FUNDS PURCHASED 18,200,000 24,300,000
(DECREASE) INCREASE IN SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE (24,168,000) 62,750,000
(DECREASE) INCREASE IN OTHER BORROWINGS (1,513,883) 34,286,509
CASH DIVIDENDS PAID (3,373,459) (3,253,726)
PROCEEDS FROM SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN 2,267,846 1,421,699
PROCEEDS FROM STOCK OPTIONS EXERCISED 328,347 146,118
PROCEEDS FROM SHARES ISSUED UNDER DIRECTORS' STOCK PLAN 17,226 -
PURCHASES OF TREASURY STOCK (745,562) (2,692,301)
------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (87,822,241) 224,936,940
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (64,666,126) (93,078,152)
CASH AND CASH EQUIVALENTS - JANUARY 1 98,586,855 138,110,091
---------- -----------
CASH AND CASH EQUIVALENTS - SEPTEMBER 30 $33,920,729 $45,031,939
=========== ===========
SUPPLEMENTAL DATA:
- ------------------
INTEREST PAID $9,361,538 $11,538,851
INCOME TAXES PAID $3,828,273 $2,631,200
ADJUSTMENT TO UNREALIZED NET GAIN OR LOSS ON SECURITIES
AVAILABLE FOR SALE ($7,467,179) $13,524,725
DIVIDENDS DECLARED BUT NOT PAID AS OF QUARTER END $1,191,815 $1,131,102
TRANSFER FROM LOANS TO OTHER REAL ESTATE OWNED $2,650,000 -
See accompanying notes to unaudited consolidated financial statements.
(3)
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL COMPRE-
COMPRE- UNEARNED STOCK- HENSIVE
COMMON RETAINED TREASURY HENSIVE COMPEN- HOLDERS' INCOME
STOCK SURPLUS EARNINGS STOCK INCOME (LOSS) SATION EQUITY (LOSS)
--------- --------- -------- --------- ---------- ------ ------ ------
BALANCE, JANUARY 1, 2003 $43,818,395 $45,714,829 $5,419,517 ($12,444,116) $5,218,101 ($44,095) $87,682,631
COMPREHENSIVE INCOME:
NET INCOME 9,602,168 9,602,168 $9,602,168
OTHER COMPREHENSIVE LOSS,
NET OF TAX:
UNREALIZED HOLDING LOSSES ARISING
DURING THE PERIOD (969,044)
RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME (3,744,928)
CASH FLOW HEDGES 414,917
-------
TOTAL OTHER COMPREHENSIVE LOSS (4,299,055) (4,299,055)(4,299,055)
---------
TOTAL COMPREHENSIVE INCOME $5,303,113
==========
CASH DIVIDEND
($0.41 PER SHARE) (3,451,326) (3,451,326)
5% STOCK DIVIDEND (401,978 SHARES
AT MARKET VALUE) 2,009,890 5,587,495 (7,597,385) -
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (130,036 SHARES
AT 95% OF MARKET VALUE) 650,180 1,617,666 2,267,846
STOCK OPTIONS EXERCISED 210,580 117,767 328,347
STOCK ISSUED UNDER
DIRECTORS' STOCK PLAN 4,785 12,441 17,226
TREASURY STOCK PURCHASED (745,562) (745,562)
AMORTIZATION OF UNEARNED
COMPENSATION 38,506 44,095 82,601
--------- --------- -------- --------- ---------- ------ ------
BALANCE, SEPTEMBER 30, 2003 $46,693,830 $53,088,704 $3,972,974 ($13,189,678) $919,046 $ - $91,484,876
=========== =========== ========== ============= ======== ===== ===========
BALANCE, JANUARY 1, 2002 $41,170,595 $39,202,494 $5,588,315 ($7,071,149)($2,427,503)($174,323) $76,288,429
COMPREHENSIVE INCOME:
NET INCOME 8,202,102 8,202,102 $8,202,102
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED HOLDING GAINS ARISING
DURING THE PERIOD 9,665,447
RECLASSIFICATION ADJUSTMENT
FOR GAINS INCLUDED IN NET INCOME (966,402)
-------
TOTAL OTHER COMPREHENSIVE INCOME 8,699,045 8,699,045 8,699,045
---------
TOTAL COMPREHENSIVE INCOME $16,901,147
===========
CASH DIVIDEND
($0.39 PER SHARE) (3,300,432) (3,300,432)
5% STOCK DIVIDEND (389,246 SHARES
AT MARKET VALUE) 1,946,230 5,110,800 (7,057,030) -
SHARES ISSUED UNDER THE DIVIDEND
REINVESTMENT PLAN (89,724 SHARES
AT 95% OF MARKET VALUE) 448,620 973,079 1,421,699
STOCK OPTIONS EXERCISED 96,090 50,028 146,118
TREASURY STOCK PURCHASED (2,692,301) (2,692,301)
AMORTIZATION OF UNEARNED
COMPENSATION 70,865 97,676 168,541
--------- --------- -------- --------- ---------- ------ ------
BALANCE, SEPTEMBER 30, 2002 $43,661,535 $45,407,266 $3,432,955 ($9,763,450) $6,271,542 ($76,647) $88,933,201
=========== =========== ========== ============= ======== ===== ===========
See accompanying notes to unaudited consolidated financial statements.
(4)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- -- --------------------------------------------------------------------
In the opinion of the management of State Bancorp, Inc. (the "Company"), the
preceding unaudited consolidated financial statements contain all adjustments,
consisting of normal accruals, necessary for a fair presentation of its
consolidated balance sheets as of September 30, 2003 and December 31, 2002, its
consolidated statements of income for the three and nine months ended September
30, 2003 and 2002, its consolidated statements of cash flows for the nine months
ended September 30, 2003 and 2002 and its consolidated statements of
stockholders' equity and comprehensive income (loss) for the nine months ended
September 30, 2003 and 2002. The results of operations for the three and nine
months ended September 30, 2003 are not necessarily indicative of the results of
operations to be expected for the remainder of the year. For further
information, please refer to the consolidated financial statements and footnotes
thereto included in the Company's 2002 annual report on Form 10-K. Certain
amounts have been reclassified to conform to the current year's presentation.
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 SFAS No.
148 as of December 31, 2002, and the impact of such adoption did not have a
material impact on the Company's financial statements.
The estimated fair value of options granted during 2003 and 2002 was $4.40 and
$3.10 per share, respectively. The Company applies Accounting Principles Board
Opinion ("APB") No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its incentive stock
option plans. Had compensation cost for the Company's four plans been determined
at the fair value on the grant dates for awards under those plans, consistent
with the method in SFAS No. 123, "Accounting for Stock-based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
(5)
For the Nine Months Ended September 30, 2003 2002
- --------------------------------------- ---- ----
Net income, as reported $9,602,168 $8,202,102
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (208,644) (172,829)
------- -------
Pro forma net income $9,393,524 $8,029,273
========== ==========
Earnings per share:
Basic - as reported $1.14 $0.96
Basic - pro forma $1.11 $0.94
Diluted - as reported $1.11 $0.95
Diluted - pro forma $1.08 $0.93
The fair value of options granted under the Company's incentive stock option
plans during 2003 and 2002 were estimated on the date of grant using the
Black-Scholes Single Option Pricing Model with the following weighted-average
assumptions used:
2003 2002
---- ----
Dividend yield 3.1% 3.4%
Expected volatility 28.4% 17.7%
Risk-free interest rate 3.38% 4.77%
Expected life of options 7.4 years 7.3 years
Accounting for Derivative Financial Instruments
- -----------------------------------------------
The Company uses interest rate swap agreements to manage its exposure to
fluctuations in interest rates on a portion of its variable rate commercial loan
portfolio. The agreements qualify as cash flow hedges. Gains and losses in the
fair value of a cash flow hedge are recorded to other comprehensive income for
the effective portion of the hedge and reclassified to earnings at a time when a
forecasted transaction affects earnings. Amounts to be received under the swap
agreement are recognized as an addition to interest income in the Company's
consolidated statements of income during the period in which they accrue. The
Company does not hold any derivative financial instruments for trading purposes.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," resulting in more consistent reporting of contracts as
either derivatives or hybrid instruments. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and should be applied
prospectively. Implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 should continue to be applied in
accordance with their respective effective dates. The Company's adoption of SFAS
No. 149 as of July 1, 2003, did not have a material impact on the Company's
financial statements.
At September 30, 2003, the Company is party to two swap agreements with terms
expiring in September 2007.
(6)
The agreements effectively require the Company 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 $874,818, inclusive of accrued
interest of $61,417, at September 30, 2003. For the nine months ended September
30, 2003, the Company recognized interest income of $61,417 under the
agreements.
Recent Accounting Developments
- ------------------------------
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness
of Others," which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company's adoption of this
Interpretation as of December 31, 2002 did not have a material impact on the
Company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company has participated in the issue of trust preferred
securities through a trust established for such purpose. Currently, the Company
classifies such securities after total liabilities and before stockholders'
equity on the Consolidated Balance Sheet. The Company is currently assessing the
trust preferred securities structure and the continued consolidation of the
related trust pursuant to FIN No. 46. Management does not believe the results of
such assessment will result in a material impact on the Company's financial
statements upon the deferred adoption of FIN No. 46 in the fourth quarter of
2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," resulting in
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and should be applied prospectively. Implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003
should continue to be applied in accordance with their respective effective
dates. The Company's adoption of SFAS No. 149 as of July 1, 2003, did not have a
material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the balance sheet. The
Company currently classifies its trust preferred securities after total
liabilities and before stockholders' equity on the Consolidated Balance Sheet.
Under the provisions of SFAS No. 150, these securities would be reclassified as
borrowed funds. The effective date of SFAS No. 150 has been indefinitely
deferred by the FASB when certain criteria are met. As the structure of the
Company's trust preferred securities meets such criteria, the Company
(7)
qualifies for this limited deferral. Therefore, the Company will assess the
classification of the trust preferred securities in conjunction with adoption of
FIN No. 46 in the fourth quarter of 2003, as noted above.
2. STOCKHOLDERS' EQUITY
- -- --------------------
The Company has 250,000 shares of preferred stock authorized. No shares were
issued as of September 30, 2003.
Stock held in treasury by the Company is accounted for using the cost method,
which treats stock held in treasury as a reduction to total stockholders'
equity. During the quarter, the Company repurchased 5,004 common shares at an
average price of $20.53 per share.
In connection with the rights offering in July 1996, the Bank's Employee Stock
Option Plan (the "ESOP") borrowed $1,200,000 from the Company to purchase
166,981 (adjusted for stock dividends) of the Company's shares. As such, the
Company recognizes a deduction from stockholders' equity to reflect the unearned
compensation for the shares. The unearned ESOP shares, pledged as collateral for
the ESOP loan, are held in a suspense account and legally released for
allocation among the participants as principal and interest on the loan is
repaid annually. Shares are committed to be released monthly from the suspense
account, and the Company recognizes compensation expense equal to the current
market price of the common shares. As of September 30, 2003, all shares have
been released from the suspense account and are considered outstanding for
earnings per share computations.
3. EARNINGS PER SHARE
- -- ------------------
Basic earnings per common share is computed based on the weighted average number
of shares outstanding. Diluted earnings per share is computed based on the
weighted average number of shares outstanding, increased by the number of common
shares that are assumed to have been purchased with the proceeds from the
exercise of stock options (treasury stock method). These purchases were assumed
to have been made at the average market price of the common stock. The average
market price is based on the average closing price for the common stock.
Retroactive recognition has been given for stock dividends.
For the Nine Months Ended September 30, 2003 2002
- --------------------------------------- ---- ----
Net income $9,602,168 $8,202,102
Average dilutive stock options outstanding 765,547 621,007
Average exercise price per share $13.75 $12.17
Average market price - diluted basis $18.97 $15.89
Average common shares outstanding 8,454,937 8,527,967
Increase in shares due to exercise of options - diluted basis 210,579 145,333
------- -------
Adjusted common shares outstanding - diluted 8,665,516 8,673,300
--------- ---------
Net income per share - basic $1.14 $0.96
----- -----
Net income per share - diluted $1.11 $0.95
----- -----
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4. UNREALIZED NET GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
- -- -----------------------------------------------------------
Securities available for sale are stated at estimated fair value, and unrealized
gains and losses are excluded from earnings and reported as a separate component
of stockholders' equity until realized. Securities held to maturity are stated
at amortized cost. Management designates each security, at the time of purchase,
as either available for sale or held to maturity depending upon investment
objectives, liquidity needs and intent.
5. LOANS
- -- -----
The recorded investment in loans that are considered to be impaired, for the
quarter ended September 30, 2003 and for the year ended December 31, 2002, is
summarized below.
---------------------------- --------------------------
For the Quarter Ended For the Year Ended
September 30, 2003 December 31, 2002
---------------------------- --------------------------
Amount measured using the present value of expected future
cash flows, discounted at each loan's effective interest rate $1,325,729 $3,352,079
Impaired collateral-dependent loans 4,992,520 1,602,115
--------- ---------
Total amount evaluated as impaired $6,318,249 $4,954,194
========== ==========
Average impaired loan balance $6,986,432 $6,486,261
As a result of the Company's evaluation of impaired loans, an allowance for
probable loan losses of approximately $2,328,000 and $2,027,000 was established
for $6,318,249 and $4,954,194 of the total impaired loans at September 30, 2003
and December 31, 2002, respectively. Interest income of $43,547 and $7,903 was
recognized on impaired loans for the nine months ended September 30, 2003 and
2002, respectively. No interest income was recognized on such loans for the
three months ended September 30, 2003 and 2002.
Activity in the allowance for probable loan losses for the nine months ended
September 30, 2003 and 2002 is as follows:
2003 2002
---- ----
Balance, January 1, $10,045,516 $9,255,414
Provision charged to income 2,951,253 2,738,000
Charge-offs, net of recoveries of $174,236 in 2003 and $185,075 in 2002 (2,399,970) (1,841,421)
----------- -----------
Balance, September 30, $10,596,799 $10,151,993
=========== ===========
6. LEGAL PROCEEDINGS
- -- -----------------
The Bank is involved in a number of legal proceedings related to Island Mortgage
Network, Inc. and certain related entities, which held deposit accounts at the
Bank during portions of 1999 and 2000. The Bank is defending these lawsuits
vigorously, and management believes that the Bank has substantial defenses, both
substantive and procedural, to the claims that have been threatened or asserted
to date. However, the ultimate outcome of litigation cannot be predicted with
certainty. For a more complete description of the foregoing, see Part II,
Item 1.
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ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview - The Company, a one-bank holding company, was formed on June 24, 1986.
The Company operates as the parent for its wholly owned subsidiaries, State Bank
of Long Island and subsidiaries (the "Bank"), a New York state-chartered
commercial bank founded in 1966, and State Bancorp Capital Trust I (the
"Trust"), an entity formed in 2002 to issue Trust Preferred securities. The
income of the Company is derived through the operations of the Bank and its
subsidiaries, SB Portfolio Management Corp., SB Financial Services Corp., New
Hyde Park Leasing Corporation and its subsidiary P.W.B. Realty, L.L.C.,
Studebaker-Worthington Leasing Corp. ("SWLC") and SB ORE Corp.
Recent Accounting Developments - In November 2002, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness
of Others," which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company's adoption of this
Interpretation as of December 31, 2002 did not have a material impact on the
Company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company has participated in the issue of trust preferred
securities through a trust established for such purpose. Currently, the Company
classifies such securities after total liabilities and before stockholders'
equity on the Consolidated Balance Sheet. The Company is currently assessing the
trust preferred securities structure and the continued consolidation of the
related trust pursuant to FIN No. 46. Management does not believe the results of
such assessment will result in a material impact on the Company's financial
statements upon the deferred adoption of FIN No. 46 in the fourth quarter of
2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," resulting in
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and should be applied prospectively. Implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003
should continue to be applied in accordance with their respective effective
dates. The Company's adoption of SFAS No. 149 as of July 1, 2003, did not have a
material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the balance sheet. The
Company
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currently classifies its trust preferred securities after total
liabilities and before stockholders' equity on the Consolidated Balance Sheet.
Under the provisions of SFAS No. 150, these securities would be reclassified as
borrowed funds. The effective date of SFAS No. 150 has been indefinitely
deferred by the FASB when certain criteria are met. As the structure of the
Company's trust preferred securities meets such criteria, the Company qualifies
for this limited deferral. Therefore, the Company will assess the classification
of the trust preferred securities in conjunction with adoption of FIN No. 46 in
the fourth quarter of 2003, as noted above.
Material Changes in Financial Condition - Total assets of the Company were $1.3
billion at September 30, 2003. When compared to December 31, 2002, total assets
decreased by $83 million or 6%. The decrease was primarily attributable to
declines in the investment portfolio of $59 million, overnight securities
purchased under agreements to resell of $48 million, cash
balances due from correspondent banks of $17 million and the receivable for
investment securities sales of $14 million. These declines were partially offset
by an increase in the loan portfolio of $59 million. The reduction in the
investment portfolio resulted from sales of mortgage-backed securities, U.S.
Government Agency securities and long-term municipal notes during the first nine
months of 2003 which were undertaken as a result of the dramatic decline in
interest rates. Management will continue to closely monitor the fixed income
markets throughout the balance of the year to take advantage of any
opportunities that may arise due to any further movement in interest rates.
At September 30, 2003, total deposits were $1.1 billion, a decrease of $79
million or 7% when compared to December 31, 2002. This decline was largely
attributable to a decrease in time deposits of $172 million, coupled with a
decrease in money fund accounts of $40 million. Partially offsetting these
decreases were increases in the core deposit categories of demand, NOW and
savings of $39 million, $36 million and $58 million, respectively. Management
expects that low-cost core deposit balances will continue to grow as a result of
the Company's expanded branch network that now totals fifteen locations
throughout the tri-county area of Nassau, Suffolk and Queens. Low-cost core
deposits represented approximately 76% of total deposits at September 30, 2003
versus 62% at year-end 2002.
Average interest-earning assets for the third quarter of 2003 were up by $48
million or 4% to $1.2 billion from the comparable 2002 period. Sources of asset
expansion included a $72 million or 12% increase in average loans, primarily
commercial mortgages, and an increase in average money market instruments of $7
million. This growth was partially offset by a $31 million or 6% decrease in
average investment securities.
Funding the third quarter asset growth was an $84 million increase in average
deposits, mainly demand deposits and other low-cost core funding. Average core
deposits increased $222 million or 37% during the third quarter of 2003 as
compared to the same period in 2002. Partially offsetting the growth in average
core balances was a decline in average time deposits of $138 million or 33%,
including a decrease of $107 million or 40% in CDs over $100 thousand. Average
borrowed funds decreased by $54 million or 59% during the third quarter of 2003
when compared to the same period last year. This is primarily attributable to a
$45 million decline in securities sold under agreements to repurchase, coupled
with a $7 million decrease in Federal Home Loan Bank of New York overnight
funding. These activities resulted in a third quarter net interest margin on a
tax-equivalent basis of 4.44%, down from 4.71% one year ago. The increased level
of core deposits has allowed the Company to reduce its dependence on higher-cost
funding which, combined with the lower interest rate environment, resulted in a
62 basis points decline in the Company's third quarter average cost of funds to
0.78% as compared to the same period in 2002.
Capital - The Company's capacity to grow its assets and earnings stems, in part,
from the significance of its capital strength. The Company strives to maintain
an optimal level of capital, commensurate with its risk profile, on which an
attractive rate of return to stockholders will be realized over both the short
and long term, while serving the needs of depositors, creditors and regulators.
In determining an optimal capital level, the Company also considers the capital
levels of its peers and the evaluations of its primary regulators. At September
30, 2003,
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the Company's and the Bank's capital ratios are in excess of those necessary for
classification as a "well-capitalized" institution pursuant to the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
Total stockholders' equity amounted to $91 million at September 30, 2003,
representing increases of $4 million and $3 million, respectively, from December
31 and September 30, 2002. Total stockholders' equity grew at rates of 4% and 3%
from December 31 and September 30, 2002, respectively. The Company has no plans
or commitments for capital utilization or expenditures that would affect its
current capital position or would impact its future financial performance. Table
2-1 summarizes the Company's capital ratios as of September 30, 2003 and
compares them to current regulatory guidelines and December 31 and September 30,
2002 actual results.
TABLE 2-1
Tier I Capital/ Total Capital/
Tier I Risk-Weighted Risk-Weighted
Leverage Assets Assets
-------- --------------- --------------
Regulatory Minimum 3.00%-4.00% 4.00% 8.00%
Ratios as of:
September 30, 2003 7.69% 11.62% 12.87%
December 31, 2002 6.95% 11.36% 12.62%
September 30, 2002 6.58% 10.97% 12.22%
Regulatory Criteria for a
"Well-Capitalized" Institution 5.00% 6.00% 10.00%
The Company's stock repurchase program expended $103 thousand during the third
quarter of 2003 to repurchase 5,004 shares at an average cost of $20.53 per
share. Since 1998, a total of 823,931 shares of Company stock have been
repurchased at an average cost of $16.01 per share. Under the Board of
Directors' existing authorization, an additional 176,069 shares may be
repurchased from time to time as conditions warrant.
During the fourth quarter of 2002, the Company raised $10 million from its
participation in a pooled trust preferred securities offering. The trust
preferred securities, which qualify as Tier I capital for regulatory capital
purposes, were issued by the Trust, bear an interest rate tied to three-month
LIBOR and are redeemable by the Company in whole or in part after five years or
earlier under certain circumstances. The initial rate on the securities was
5.27%. During the third quarter of 2003, the weighted average rate on the trust
preferred securities was 4.64%.
Liquidity and Off-Balance Sheet Arrangements - Liquidity management is a
fundamental component of the Company's business strategy. The objective of
liquidity management is to assure the ability of the Company and its
subsidiaries to meet their financial obligations. These obligations include the
withdrawal of deposits on demand or at their contractual maturity, the repayment
of borrowings as they mature, the ability to fund new and existing loan
commitments, the ability to meet payments under various leases, and the capacity
to take advantage of business opportunities as they arise. The Board of
Directors' Funds Management Committee and Management's Asset Liability Committee
are responsible for ensuring a stable source of funding to meet both the
expected and unexpected cash demands of loan and deposit customers. Liquidity is
composed of the maintenance of a strong base of core customer funds, maturing
short-term assets, the ability to sell marketable securities and access to lines
of credit, brokered deposits and the capital markets. The Company complements
its stable base of
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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's use of derivative financial instruments, i.e. interest rate swaps,
creates exposure to credit risk. This credit exposure relates to losses that
would be recognized if the counterparties fail to perform their obligations
under the contracts. To mitigate this exposure to nonperformance, the Bank deals
only with counterparties of good credit standing. At September 30, 2003, the
Bank is party to two interest rate swap agreements to manage its exposure to
fluctuations in interest rates on $50 million of variable rate commercial loans.
The Bank's exposure to credit loss in the event of nonperformance by third
parties for commitments to extend credit and letters of credit is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral required varies, but may include
accounts receivable, inventory, equipment, real estate, and income-producing
commercial properties. At September 30, 2003 and 2002, commitments to originate
loans and commitments under unused lines of credit for which the Bank is
obligated amounted to approximately $213 million and $186 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, including commercial paper, bond financing, and similar
transactions. Collateral may be required to support letters of credit based upon
management's evaluation of the creditworthiness of each customer. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Most letters of credit
expire within one year. Management does not anticipate any material losses as a
result of these transactions. At September 30, 2003 and 2002, the Bank had
letters of credit outstanding of approximately $13 million and $8 million,
respectively. At September 30, 2003, the uncollateralized portion was
approximately $2 million.
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 2003, $553 thousand; in 2004, $2.3 million; in 2005,
$2.2 million; in 2006, $1.7 million; in 2007, $1.6 million; and the remainder to
2012, $6.1 million.
Liquidity at the Company is measured and monitored daily, thereby allowing
management to better understand and react to emerging balance sheet trends.
After assessing actual and projected cash flow needs, management seeks to obtain
funding at the most economical cost to the Company. Throughout the third quarter
of 2003, the
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Company's liquidity position remained stable and well within acceptable industry
standards. During the third quarter of 2003, higher levels of core deposits,
calls of U.S. Government Agency securities and paydowns on mortgage-backed
securities provided a source of readily available funds to meet general
liquidity needs. In addition, at September 30, 2003, the Company had access to
approximately $53 million in Federal Home Loan Bank lines of credit for
overnight or term borrowings with maturities of up to thirty years. At September
30, 2003, the Company also had approximately $16 million in formal and $15
million in informal lines of credit extended by correspondent banks to be
utilized, if needed, for short-term funding purposes.
Tabular Disclosure of Contractual Obligations - Shown below are the amounts of
payments due under specified contractual obligations, aggregated by category of
contractual obligation, for specified time periods. All information is as of
September 30, 2003.
Payments due by period (in thousands)
-------------------------------------
Contractual obligations Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
- ----------------------- ----- ---------------- ----------- ----------- -----------------
Leases covering various Bank equipment,
branches, office space
and land $14,381 $553 $4,408 $3,326 $6,094
Federal funds purchased 23,000 23,000 - - -
Securities sold under agreements to
repurchase 25,815 25,815
Federal Home Loan Bank of New York
overnight funding 50,000 50,000 - - -
Obligations under equipment lease financing 1,152 818 334 - -
Guaranteed preferred beneficial interest in
subordinated debt 10,000 - - - 10,000
Total $124,348 $100,186 $4,742 $3,326 $16,094
- ----- -------- -------- ------ ------ -------
Material Changes in Results of Operations for the Nine Months Ended September
30, 2003 versus 2002 - Net income for the nine months ended September 30, 2003
was $9.6 million, an increase of $1.4 million or 17.1%, when compared to the
same 2002 period. Improvements in net interest income to $39.8 million (up 4.4%)
and noninterest income to $8.3 million were offset by growth in operating
expenses (up 12.1%), a slightly higher provision for probable loan losses and an
increase in the effective income tax rate. Basic earnings per common share were
$1.14 in 2003 and $0.96 in 2002, while fully diluted earnings per share were
$1.11 and $0.95, respectively. The Company's returns on average assets and
stockholders' equity were 0.95% and 14.17% in 2003 and 0.95% and 13.53% in 2002,
respectively.
As shown in Table 2-2 following this discussion, the increase in net interest
income, up $1.7 million to $39.8
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million, resulted from an expanded interest-earning asset base, principally
loans, U.S. Government Agency and mortgage-backed securities. The Company's
average loan portfolio grew by $62 million or 11% compared to the first nine
months of 2002, primarily attributable to an increase in commercial mortgages.
The newer branch locations in both Nassau and Queens Counties are expected to
provide continued opportunity for the Company to further increase the loan
portfolio. The Company, offering superior and responsive personal customer
service coupled with competitive product pricing, has been able to steadily
improve its market share through conservative underwriting and credit standards.
Products such as the Small Business Line of Credit and the home equity product,
Prime for Life, as well as the web-based commercial cash management system and
an online banking service, continue to be well received and are generating loan
volume and creating new cross-sell opportunities for the Company's full range of
deposit and credit products. In addition, the Company has full time staff that
concentrates on the marketing and sales efforts of new and existing retail
products, including a full range of lease-financing transactions that are
handled by SWLC.
The Company's investment portfolio increased 21%, on average, during the first
nine months of 2003 as compared to 2002. This is primarily due to increases in
average U.S. Government Agency securities and average mortgage-backed securities
of $68 million and $31 million, respectively, somewhat offset by a continued
reduction in exposure to lower-yielding, short-term local municipal paper.
Although the Company's year-to-date average cost of funds declined to 0.95%,
reductions in the average yields on loans and investment securities resulted in
a 50 basis points narrowing of the September year-to-date net interest margin to
4.34% from 4.84% a year ago.
Noninterest income improved $4.7 million, or 133.1%, for the first nine months
of 2003 as compared to 2002. This was due in large measure to a $4.4 million
increase in net security gains, coupled with an increase in other operating
income. Sales of mortgage-backed securities, U.S. Government Agency securities
and long-term municipal notes during the first nine months of 2003, undertaken
as a result of the continued low level of interest rates, produced the gains.
Management will continue to closely monitor the fixed income markets throughout
the balance of the year to take advantage of any opportunities that may arise
due to any further movement in interest rates. Other operating income increased
as the result of growth in residential mortgage loan sale fees, letter of credit
fees, cash management fees and annuity sales commissions in 2003.
The 12.1% growth in total operating expenses during the first nine months of
2003 as compared to 2002 was due to increases in several categories. The most
significant increases pertained to salaries and other employee benefits (up $1.7
million), occupancy costs (up $438 thousand) and legal expenses (up $1.3
million). The increase in salaries and benefits costs resulted largely from the
opening of two new branches in the first half of 2002 coupled with growth in
support staff and related benefit costs during 2003, while the growth in
occupancy expense was due to both the expanded branch network and the additional
occupancy requirements for the Company's support areas. The growth in legal
expenses was due primarily to the ongoing litigations related to Island Mortgage
Network and its affiliates ("IMN"), as previously discussed in detail in the
Company's 2001, 2002 and 2003 Securities and Exchange Commission filings and as
discussed in detail in Part II, Item 1 herein. The Company will incur additional
costs, not quantifiable at this time, related to the IMN litigations during the
remainder of 2003, but management expects that the third quarter legal expenses
are generally indicative of expenses to be incurred for the balance of the year.
The above factors resulted in an operating efficiency ratio (total operating
expenses as a percentage of fully taxable equivalent net interest and
noninterest revenue, excluding securities transactions) of 72.0% for the first
nine months of 2003 as compared to 66.9% in 2002. The Company's other primary
measure of expense control, the ratio of total operating expenses to average
total assets, improved during the first nine months of 2003 to
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3.10% from a level of 3.24% in 2002.
Income tax expense rose by $1.4 million for the first nine months of 2003 as
compared to 2002, resulting in an increase in the Company's effective tax rate
to 30.4% from 25.5% a year ago. This rise is largely due to a reduction in
tax-exempt income coupled with a higher effective New York state tax rate.
Material Changes in Results of Operations for the Three Months Ended September
30, 2003 versus 2002 - Net income for the three months ended September 30, 2003
was $3.4 million, an increase of $817 thousand or 31.3%, when compared to the
same 2002 period. The improvement in noninterest income to $3.1 million was
partially offset by slightly lower net interest income, growth in operating
expenses (up 5.9%), a higher provision for probable loan losses and an increase
in the effective income tax rate. Basic earnings per common share were $0.41 in
2003 and $0.31 in 2002, while fully diluted earnings per share were $0.39 and
$0.31, respectively. The Company's returns on average assets and stockholders'
equity were 1.06% and 15.08% in 2003 and 0.85% and 12.19% in 2002, respectively.
The reasons supporting the third quarter earnings performance are, for the most
part, similar to those already discussed in the nine-month analysis. The
decrease of $72 thousand in net interest income resulted from a 27 basis points
narrowing of the net interest margin to 4.44% during the third quarter of 2003.
Growth in average interest-earning assets of 4%, principally driven by growth in
the loan portfolio, was offset by the lower interest rate environment.
Noninterest income improved $2.3 million for the third quarter of 2003 as
compared to 2002. This was due in large measure to a $2.2 million increase in
net security gains, a $76 thousand increase in other operating income, mainly
due to growth in residential mortgage loan sale fees, and a $24 thousand
increase in service charges on deposit accounts.
The 5.9% growth in total operating expenses during the third quarter of 2003 as
compared to 2002 was primarily due to increases in salaries and other employee
benefits (up $448 thousand), occupancy costs (up $85 thousand) and equipment
costs (up $84 thousand), partially offset by a decrease in marketing expenses of
$188 thousand.
The above factors resulted in an operating efficiency ratio (total operating
expenses as a percentage of fully taxable equivalent net interest and
noninterest revenue, excluding securities transactions) of 71.0% for the third
quarter of 2003 as compared to 66.5% in 2002. The Company's other primary
measure of expense control, the ratio of total operating expenses to average
total assets, increased nominally during the third quarter of 2003 to 3.14% from
a level of 3.10% in 2002.
Income tax expense rose by $731 thousand for the third quarter of 2003 as
compared to 2002, resulting in an increase in the Company's effective tax rate
to 32.0% from 25.3% a year ago.
Asset Quality - Nonperforming assets (defined by the Company as nonaccrual loans
and other real estate owned) totaled $10 million at September 30, 2003, a $4
million increase from December 31, 2002 and a $3 million increase from the
comparable 2002 date. The increase in nonperforming assets is primarily the
result of the second quarter 2003 movement to nonaccrual status of two large
commercial credits. In the third quarter of 2003, one of these credits totaling
$2.7 million was moved to other real estate owned. Management of the Company
expects to dispose of this property within six to nine months with no material
impact on the Company's financial statements. As of September 30, 2003, there
were no restructured accruing loans. This compares to balances of $107 thousand
and $112 thousand at year-end 2002 and September 30, 2002, respectively.
Restructured loans continue to accrue and pay interest in accordance with their
modified terms. Loans 90 days or more past due and
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still accruing interest totaled $386 thousand, reflecting increases of $257
thousand and $305 thousand whencompared to year-end 2002 and September 30, 2002,
respectively.
In management's opinion, one of the most critical accounting policies 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 continually evaluates the loan portfolio to
insure the level of the allowance for probable loan losses is adequate to absorb
any future losses. Management evaluates the fair value of collateral supporting
the impaired loans using independent appraisals and other measures of fair
value. This process involves subjective judgments and assumptions and is subject
to change based on factors that may be outside the control of the Company.
The allowance for probable loan losses amounted to $11 million or 1.6% of total
loans at September 30, 2003 versus $10 million and 1.7%, respectively, at the
comparable 2002 date. The allowance for probable loan losses as a percentage of
nonaccrual loans, restructured accruing loans and loans 90 days or more past due
and still accruing, declined to 129% at September 30, 2003 from 153% at December
31, 2002 and from 130% one year ago.
The Company's loan portfolio is concentrated in commercial and industrial loans
and commercial mortgages, the majority of which are fully secured by collateral
with market values in excess of the carrying value of the underlying loans. The
provision for probable loan losses for the first nine months of 2003 and 2002
was $3.0 million and $2.7 million, respectively. Net loan charge-offs during the
same periods were approximately $2.4 million and $1.8 million, respectively. The
provision for probable loan losses is continually evaluated relative to
portfolio risk and regulatory guidelines considering all economic factors that
affect the loan loss reserve, such as fluctuations in the Long Island real
estate market and interest rates, economic slowdowns in industries and other
uncertainties. It will continue to be closely reviewed during the remainder of
2003. Due to the uncertain nature of the current economy, management anticipates
further loan charge-offs during the rest of 2003. A further review of the
Company's nonperforming assets may be found in Table 2-3 following this
analysis.
Forward-Looking Statements and Risk Factors - This report contains
forward-looking statements, including among other things, identifications of
trends, loan growth, comments on the adequacy of the allowance for probable loan
losses, effects of asset sensitivity and interest changes, and information
concerning market risk referenced in Item 3 of Part I. The words "expects,"
"believes," "anticipates" and other similar expressions are intended to identify
forward-looking statements. The forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results or earnings to differ
materially from such forward-looking statements include, but are not limited to,
the following: (1) general economic conditions, (2) competitive pressure among
financial services companies, (3) changes in interest rates, (4) deposit flows,
(5) loan demand, (6) changes in legislation or regulation, (7) changes in
accounting principles, policies and guidelines, (8) litigation liabilities,
including costs, expenses, settlements and judgments and (9) other economic,
competitive, governmental, regulatory and technological factors affecting State
Bancorp, Inc.'s operations, pricing, products and services. Investors are
encouraged to access the Company's periodic reports filed with the SEC for
financial and business information regarding the Company at
www.statebankofli.com/corporate. The Company undertakes no obligation to publish
revised events or circumstances after the date hereof.
(17)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
TABLE 2 - 2 NET INTEREST INCOME ANALYSIS
- -----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
-----------------------------------------------------
($ IN THOUSANDS)
2003 2002
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------------------------- ----------------------------------
ASSETS:
Interest-earning assets:
Mortgage-backed securities $ 276,419 $ 6,225 2.97 % $ 245,715 $ 8,739 4.76 %
Municipal securities 76,973 2,347 4.02 90,609 2,683 3.96
Government Agency and other securities 229,835 6,918 3.97 145,279 5,260 4.84
-------- ------ ----- -------- ------ ----
Total securities 583,227 15,490 3.50 481,603 16,682 4.63
-------- ------- ----- -------- ------- ----
Federal funds sold 2,939 21 0.94 3,062 38 1.66
Securities purchased under agreements to
resell 41,408 360 1.15 33,141 432 1.74
Interest-bearing deposits 1,764 9 0.68 1,752 16 1.22
Loans 638,776 33,017 6.82 577,220 32,547 7.54
-------- ------- ----- -------- ------- ----
Total interest-earning assets 1,268,114 48,897 5.08 1,096,778 49,715 6.06
---------- ------- ----- ---------- ------- ----
Non-interest-earning assets 84,494 58,075
------- ------
Total Assets $1,352,608 $ 1,154,853
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $ 606,441 $ 3,421 0.75 % $ 381,666 $ 2,718 0.95 %
Time deposits 319,760 4,571 1.89 412,726 7,401 2.40
-------- ------ ----- -------- ------ ----
Total savings and time deposits 926,201 7,992 1.14 794,392 10,119 1.70
-------- ------ ----- -------- ------- ----
Federal funds purchased 6,821 72 1.39 3,075 45 1.96
Securities sold under agreements to
repurchase 15,047 152 1.33 46,871 674 1.92
Other borrowed funds 29,268 420 1.89 26,949 693 3.44
Guaranteed preferred beneficial interest
in subordinated debt 10,000 415 5.47 - - -
------- ---- ----- -- -- -
Total interest-bearing liabilities 987,337 9,051 1.22 871,287 11,531 1.77
-------- ------ ----- -------- ------- ----
Demand deposits 237,522 192,365
Other liabilities 37,178 10,145
------- ------
Total liabilities 1,262,037 1,073,797
Stockholders' equity 90,571 81,056
------- ------
Total Liabilities and
Stockholders' Equity $1,352,608 $ 1,154,853
=========== ===========
Net interest income/rate spread 39,846 3.87 % 38,184 4.29 %
----- -----
Add tax-equivalent basis adjustment 1,323 1,553
------ -----
Net interest margin - tax-equivalent basis $ 41,169 4.34 % $ 39,737 4.84 %
========= ===== ========= =====
(18)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
TABLE 2 - 3
- --------------------------------------------------------------------------------
STATE BANCORP, INC.
ANALYSIS OF NONPERFORMING ASSETS AND THE ALLOWANCE FOR PROBABLE LOAN LOSSES
SEPTEMBER 30, 2003 VERSUS DECEMBER 31, 2002 AND SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS BY TYPE:
PERIOD ENDED:
-------------------------------------------------------
9/30/2003 12/31/2002 9/30/2002
--------- ---------- ---------
Nonaccrual Loans $7,817 $6,317 $7,595
Other Real Estate Owned 2,650 - -
----- ----- -----
Total Nonperforming Assets $10,467 $6,317 $7,595
====== ===== =====
Restructured Accruing Loans $0 $107 $112
Loans 90 Days or More Past Due
and Still Accruing $386 $129 $81
Gross Loans Outstanding $679,622 $620,384 $597,893
Total Stockholders' Equity $91,485 $87,683 $88,933
ANALYSIS OF THE ALLOWANCE FOR
PROBABLE LOAN LOSSES:
QUARTER ENDED:
-------------------------------------------------------
9/30/2003 12/31/2002 9/30/2002
--------- ---------- ---------
Beginning Balance $10,395 $10,152 $9,894
Provision 984 822 816
Net Charge-Offs (782) (928) (558)
------ ------ ------
Ending Balance $10,597 $10,046 $10,152
====== ====== ======
KEY RATIOS:
PERIOD ENDED:
-------------------------------------------------------
9/30/2003 12/31/2002 9/30/2002
--------- ---------- ---------
Allowance as a % of Total Loans 1.6% 1.6% 1.7%
Nonaccrual Loans as a % of Total Loans 1.2% 1.0% 1.3%
Nonperforming Assets (1) as a % of Total
Loans and Other Real Estate Owned 1.5% 1.0% 1.3%
Allowance for Probable Loan Losses as
a % of Nonaccrual Loans 135.6% 159.0% 133.7%
Allowance for Probable Loan Losses as a %
of Nonaccrual Loans, Restructured
Accruing Loans and Loans 90 Days or
More Past Due and Still Accruing 129.2% 153.3% 130.4%
(1) Excludes restructured accruing loans and loans 90 days or more past due and
still accruing interest.
(19)
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at
December 31, 2002 in the Company's Annual Report on Form 10-K. There have been
no material changes in the Company's market risk at September 30, 2003 compared
to December 31, 2002. The following is an update of the discussion provided
therein.
The Company's largest component of market risk continues to be interest rate
risk, virtually all at the Bank level. Interest rate risk is the risk to
earnings or capital arising from movements in interest rates. This risk can be
quantified by measuring the change in net interest margin relative to changes in
market rates. The Company's Funds Management Committee sets forth guidelines
that limit the level of interest rate risk within specified tolerance ranges.
Management must determine the appropriate level of risk which will enable the
Company to achieve its performance objectives within the confines imposed by its
business objectives and the external environment within which it operates.
Interest rate risk arises from repricing risk, basis risk, yield curve risk and
options risk, and is measured using financial modeling techniques, including
quarterly interest rate shock simulations, to measure the impact of changes in
interest rates on earnings for periods of up to two years. These simulations are
used to determine whether corrective action may be warranted or required in
order to adjust the overall interest rate risk profile of the Company.
Simulation results, utilizing the Sendero asset/liability model, are influenced
by a number of estimates and assumptions that are inherently uncertain and, as a
consequence, results will neither precisely estimate net interest income nor
precisely measure the impact of higher or lower interest rates on net interest
income.
To mitigate the impact of changes in interest rates, the balance sheet may be
structured so that repricing opportunities exist for both assets and liabilities
in approximately equivalent amounts at basically the same time intervals.
Imbalances in these repricing opportunities at any point in time constitute an
interest-sensitivity gap, which is the difference between interest-sensitive
assets and interest-sensitive liabilities. These static measurements are best
utilized as early indicators of potential interest rate exposures. The primary
objectives of the Company's asset/liability management are to continually
evaluate the interest rate risk inherent in the Company's balance sheet and its
possible impact on net interest income; to determine the level and direction of
risk appropriate given the Bank's strategic focus, operating environment,
liquidity requirements and performance objectives; and to manage this risk in a
prudent manner consistent with approved policy.
A static "behavioral" gap report (see Table 3-1), a snapshot at a single point
in time, measures the difference between assets and liabilities repricing
characteristics in selected future time periods based on the current interest
rate environment. The assumptions used in the report are the same as those used
for the December 31, 2002 analysis. The Company's one-year cumulative gap ratio
at September 30, 2003 is 134.8%. The Company's asset-sensitive position, meaning
that more assets reprice on a cumulative basis than liabilities, may imply that
net interest income could decrease in declining rate scenarios and increase in
rising rate scenarios. However, a static gap report should only be considered a
directional indicator of the possible changes to net interest income given
changes in interest rates.
The Company is still not subject to foreign currency exchange or commodity price
risk and does not own any trading assets. At September 30, 2003, the Company is
party to two interest rate swap agreements to manage its exposure to
fluctuations in interest rates on its variable rate commercial loans. There have
been no material changes in the composition of assets or deposit liabilities
from December 31, 2002. The Company continues to monitor the impact of interest
rate volatility upon net interest income and net portfolio value in the same
manner as at December 31, 2002. The Board of Directors has not amended the
approved limits of acceptable variances.
(20)
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK (CONTINUED)
SEPTEMBER 30, 2003
TABLE 3-1 LIQUIDITY AND INTEREST RATE SENSITIVITY
- ----- --- ---------------------------------------
SENSITIVITY TIME HORIZON
-----------------------------------------------------------------------------------------------
($ IN THOUSANDS) Noninterest-
INTEREST - SENSITIVE ASSETS : 1) 0 - 6 Months 6-12 Months 1 - 5 Years Over 5 Years Sensitive Total
- -------------------- -------- -- ------------ ----------- ----------- ------------ --------- -----
Loans (net of unearned income) 2) $368,222 $37,936 $190,738 $74,909 $7,817 $679,622
Interest-Bearing Deposits 1,259 1,259
Securities Held to Maturity 30,079 40,000 70,079
Securities Available for Sale 3) 48,820 60,062 216,572 150,556 3,909 479,919
------- ------- ------- ------- ------ ---------
Total Interest-Earning Assets 448,380 137,998 407,310 225,465 11,726 1,230,879
Unrealized Net Gain on Securities
Available for Sale 743 743
Noninterest-Bearing Cash and Due
from Banks 32,662 32,662
All Other Assets 7) 4,188 1,822 145 47 9,174 15,376
------- ------- ------- ------- ------ ---------
Total Assets $485,973 $139,820 $407,455 $225,512 $20,900 $1,279,660
------- ------- ------- ------- ------ ---------
INTEREST - SENSITIVE LIABILITIES : 1)
- -------------------- ------------- --
Savings Accounts 4) $16,535 $16,535 $132,281 $99,210 $264,561
Money Fund and NOW Accounts 5) 26,051 24,050 192,540 45,380 288,021
Time Deposits 6) 178,980 63,199 17,865 725 260,769
------- ------- ------- ------- ------ ---------
Total Interest-Bearing Deposits 221,566 103,784 342,686 145,315 - 813,351
Federal Funds Purchased, Securities
Sold Under Agreements to Repurchase
and Other Borrowings 99,389 244 334 99,967
Guaranteed Preferred Beneficial Interest
in Subordinated Debt 10,000 10,000
------- ------- ------- ------- ------ ---------
Total Interest-Bearing Liabilities 330,955 104,028 343,020 145,315 - 923,318
Net Payable - Securities Purchases 1,006 1,006
All Other Liabilities, Equity and
Demand Deposits 7) 20,815 13,637 91,901 137,498 91,485 355,336
------- ------- ------- ------- ------ ---------
Total Liabilities and Equity $352,776 $117,665 $434,921 $282,813 $91,485 $1,279,660
------- ------- ------- ------- ------ ---------
Cumulative Interest-Sensitivity Gap 8) $117,425 $151,395 $215,685 $295,835 $307,561
Cumulative Interest-Sensitivity Ratio 9) 135.5 % 134.8 % 127.7 % 132.0 % 133.3 %
Cumulative Interest-Sensitivity Gap
As a % of Total Assets 9.2 % 11.8 % 16.9 % 23.1 % 24.0 %
(1) Allocations to specific interest-sensitivity periods are based on the
earlier of the repricing or maturity date.
(2) Nonaccrual loans are shown in the noninterest-sensitive category.
(3) Estimated principal reductions have been assumed for mortgage-backed
securities based upon their current constant prepayment rates. Securities
containing embedded options are reflected in the sensitivity time horizon
category that best reflects the impact of the "moneyness" of the embedded
option.
(4) Savings deposits, excluding short-term municipal deposits, are assumed to
decline at a rate of 12.5% per year over an eight-year period based upon the
nature of their historically stable core deposit relationships. Short-term
municipal deposits are included in the 0 - 6 months category.
(5) Money fund and NOW accounts of individuals, partnerships and corporations
are assumed to decline at a rate of 16.7% per year over a six-year period and
5.9% per year over a seventeen-year period, respectively, based upon the nature
of their historically stable core deposit relationships. Money fund and NOW
accounts of municipalities are assumed to decline at a rate of 20% per year over
a five-year period, except for short-term municipal deposits that are included
in the 0 - 6 months category.
(6) Reflected as maturing in each instrument's period of contractual maturity.
(7) Other assets and liabilities are shown according to their contractual
payment schedule or a reasonable estimate thereof. Demand deposits, excluding
short- term municipal deposits, are assumed to decline at a rate of 9.1% per
year over an eleven-year period based upon the nature of their historically
stable core deposit relationships. Short-term municipal deposits are included in
the 0 - 6 months category.
(8) Total interest-earning assets minus total interest-bearing liabilities.
(9) Total interest-earning assets as a percentage of total interest-bearing
liabilities.
(21)
ITEM 4. - CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Principal Financial Officer, the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Principal Financial Officer have concluded that these
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and regulations and are operating in an effective manner. No
change in the Company's internal control over financial reporting (as defined in
Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
ITEM 1. - LEGAL PROCEEDINGS
As previously reported, the Bank has been named (along with other defendants) in
lawsuits related to the activities of Island Mortgage Network, Inc. and certain
related companies ("IMN"). The cases pending against the Bank as of November 7,
2003 are as follows:
Blanton, et al. v. IMN Financial Corp., et al., Adv. Proc. No. 01-8096,
----------------------------------------------
Bankruptcy Court for the Eastern District of New York, and Moritz, et al. v.
-----------------
National Settlement Services Corp., et al., Civil Action No. 3:00 CV 426 MU,
- ------------------------------------------
Western District of North Carolina. While technically these cases remain
pending, the Bank has executed binding settlement agreements with the
plaintiffs in both cases, and finalization of those settlements is contingent
only upon the fulfillment of certain conditions precedent by the
plaintiffs, which have not yet occurred but are expected to occur.
The cost of settling these litigations is not material.
Alan M. Jacobs, as Chapter 11 Trustee v. State Bank of Long Island,
------------------------------------------------------------------
Adv. Proc. No. 02-8157, Bankruptcy Court for the Eastern District of New York.
The Court denied the Trustee's motion for summary judgment on its
$14 million preference claim and granted State Bank's cross-motion for
summary judgment, dismissing that claim. The Trustee recently moved for
leave to file an amended complaint; the motion is scheduled to be argued on
January 13, 2004.
Broward Title Co. v. Alan Jacobs, et al., Adv. Proc. No. 01-8181,
----------------------------------------
Bankruptcy Court for the Eastern District of New York.
Household Commercial Financial Services, Inc., et al. v. Action
-----------------------------------------------------------------
Abstract, Inc., et al., Adv. Proc. No. 02-8167, Bankruptcy Court for the
- -----------------------
Eastern District of New York.
The Bank is defending the active lawsuits vigorously, and management believes
that the Bank has substantial defenses to the claims that have been asserted.
However, the ultimate outcome of these lawsuits cannot be predicted with
certainty. It also remains possible that other parties may pursue additional
claims against the Bank related to the Bank's dealings with IMN and its
affiliates. The Bank's legal fees and expenses will be significant, and those
costs, in addition to any costs associated with settling the IMN-related
litigations or satisfying any adverse judgments, could have a material adverse
effect on the Bank's results of operations or financial position. The Bank is
continuing to explore the extent to which insurance coverage may be available to
defray some of the
(22)
costs associated with the IMN-related litigations.
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 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
31 Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
--------------------
On July 18, 2003, the Company issued the earnings release for the
period ended June 30, 2003.
(23)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE BANCORP, INC.
11/14/03 s/Daniel T. Rowe
- -------- -------------------------
Date Daniel T. Rowe, President
11/14/03 s/Brian K. Finneran
- -------- --------------------------------------
Date Brian K. Finneran, Secretary/Treasurer
(Principal Financial Officer)
(24)