SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 0-14874
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
STATE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2846511
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
699 Hillside Avenue
New Hyde Park, N.Y. 11040
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (516) 437-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($5.00 par value)
(Title of Class)
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
requirement for the past 90 days.
Yes [X] No [ ]
As of March 19, 1999, there were 6,596,471 shares of common stock outstanding
and the aggregate market value of common stock of State Bancorp, Inc. held by
nonaffiliates was approximately $118,736,000 based upon the last trade per share
known to Management.
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STATE BANCORP, INC.
Form 10-K
INDEX
PART I Page
----
Item 1. Business
General 1.
Statistical Information 4.
Item 2. Properties 4.
Item 3. Legal Proceedings 5.
Item 4. Submission of Matters to a Vote of Stockholders 5.
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 6.
Item 6. Selected Consolidated Financial Data 6.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7.
Item 8. Consolidated Financial Statements and
Supplementary Data 7.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 7.
PART III
Item 10. Directors and Executive Officers of the
Registrant 8.
Item 11. Executive Compensation 8.
Item 12. Security Ownership of Certain Beneficial
Owners and Management 9.
Item 13. Certain Relationships and Related Transactions 9.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 9.
Signatures 13.
Exhibits
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DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents incorporated by reference and the parts of
the Form 10-K into which such documents are incorporated:
(1) The Annual Report to Stockholders for the year ended December
31, 1998. Referenced in Parts I and II of the December 31,
1998 Annual Report on Form 10-K, Items 1, 5, 6, 7 and 8.
(2) The 1999 Proxy Statement, dated March 25, 1999. Referenced in
Part III of the December 31, 1998 Annual Report on Form 10-K,
Items 10, 11, 12 and 13.
PART I
ITEM 1. BUSINESS
General
Incorporated herein by reference is the Company's 1998 Annual Report to
Stockholders. A discussion on the organization and nature of operations may be
found on page 14.
State Bancorp, Inc. (the "Company") was incorporated under the laws of the State
of New York on November 18, 1985. The acquisition by the Company of 100% of the
outstanding shares of State Bank of Long Island (the "Bank"), on a share for
share basis, was consummated as of the close of business on June 24, 1986.
The Company has no other subsidiaries and does not engage in any activities
other than acting as holding company for the common stock of the Bank. The
business of the Company is conducted through the Bank, which continues to
conduct its business in the same manner and from the same offices as it had done
before the effective date of the reorganization. The Bank, therefore, accounts
for all of the consolidated assets and revenues of the Company.
The Company is subject to supervision and regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended. The Bank is subject to periodic
examination and regulation
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by the State of New York Banking Department and the Federal Deposit Insurance
Corporation.
The Bank was organized in 1966 and is the only independent commercial bank
headquartered in New Hyde Park. It provides general banking services to
residents and businesses located substantially in the eastern end of Queens
County, Nassau County and the western end of Suffolk County. It offers a full
range of deposit products including checking, fixed and variable rate savings,
time, money market and IRA and Keogh accounts. Credit services offered include
commercial mortgages, commercial and installment loans, home equity lines of
credit, residential mortgages, letters of credit and auto loans. In addition,
the Bank provides merchant credit card services, access to annuity products, a
consumer debit card with membership in a national ATM network and, through an
alliance with U.S. Trust Company, the Bank also offers its customers access to
financial planning and wealth management services. The Bank currently has ATMs
at five of its nine branch locations. The Bank also offers its retail customers
the ability to verify their account balances, effect transfers between accounts
and access current deposit and loan rates through an automated telephone voice
response system. Commercial customers can also access this same system or they
may utilize Business Direct Access (BDA), the Company's real-time cash
management system. Through BDA, business and municipal customers can perform all
of the foregoing transactions as well as initiate wire transfers, ACH payments
and stop payment orders from a personal computer.
There is strong competition in the area serviced by the Bank from branches of
several savings banks and savings and loan associations, as well as branches of
the major New York City banks. Of these, the Bank is considerably smaller in
size than virtually all
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of its commercial competitors, and approximates the size of only one or two of
its thrift competitors. Nonetheless, the Bank has demonstrated the ability to
compete profitably with larger financial institutions.
The Bank's business is not of a seasonal nature nor does it depend on one or a
few large customers for its existence. The Bank does not have any foreign
commitments, with the exception of letters of credit issued on behalf of several
of its depositors. The Bank's nature and conduct of business have remained
unchanged since year end 1995.
In 1979, the Bank established New Hyde Park Leasing Corporation to lease various
types of commercial equipment. During 1994, the Bank established SB ORE Corp.
to hold foreclosed property acquired in connection with extensions of credit. In
1998, the Bank established SB Portfolio Management Corp. and SB Financial
Services Corp. SB Portfolio Management Corp. provides investment management
services to the Bank while SB Financial Services Corp. provides balance sheet
management services such as interest rate risk modeling and asset/liability
management reporting along with general advisory services to the Bank and each
of its subsidiaries. SB Portfolio Management Corp. and SB Financial Services
Corp. are each based in Wilmington, Delaware. Total operating income and income
before income taxes of these subsidiaries are less than ten percent of the
respective amounts for the consolidated entity.
Compliance with provisions regulating environmental controls will have no effect
upon the capital expenditures, earnings or competitive position of the Company.
The Company employed 202 full-time and part-time officers and employees as of
December 31, 1998.
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Statistical Information
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Statistical information is furnished pursuant to the requirements of Guide 3
(Statistical Disclosure by Bank Holding Companies) promulgated under the
Securities Act of 1933.
Incorporated by reference is the Company's 1998 Annual Report to stockholders.
The Company's statistical information may be found on pages 38 - 44.
ITEM 2. PROPERTIES
The main office of the Company is located at the Bank's main branch at 699
Hillside Avenue, New Hyde Park, N.Y. The lease on the land used by the Bank
expires on March 27, 2009 and contains an option to renew for an additional
ten-year period.
The Bank's lending division is located at Two Jericho Plaza, Jericho, N.Y. This
lease expires on March 31, 2007.
The Bank operates full service branches at 501 North Broadway, Jericho, N.Y.; 2
Lincoln Avenue, Rockville Centre, N.Y.; 580 East Jericho Turnpike, Huntington,
N.Y.; 740 Veterans Memorial Highway, Hauppauge, N.Y.; 339 Nassau Boulevard,
Garden City South, N.Y., 135 South Street, Oyster Bay, N.Y., 4250 Veterans
Memorial highway, Holbrook, N.Y. and 27 Smith Street, Farmingdale, N.Y. The
Jericho lease expires on October 31, 2011 and contains a twelve-year renewal
option. The Rockville Centre lease expires on May 31, 2000 and has no renewal
options. The Huntington lease expires on December 31, 2003 and has one five-year
renewal option. The Bank's operations center is also located in the Huntington
facility. The Hauppauge lease expires June 30, 2005 and contains two ten-year
renewal options. The Holbrook lease expires on October 31, 2002 and contains two
five-year renewal options. The Farmingdale lease also expires on October 31,
2002
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and it has three five-year renewal options. The Garden City South and Oyster Bay
facilities are owned by the Company.
The fixtures and equipment contained in these operating facilities are owned or
leased by the Bank. The Company considers that all of its premises, fixtures and
equipment are adequate for the conduct of its business.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any pending legal proceedings,
other than ordinary, routine litigation incidental to the banking business. In
the opinion of management, liabilities, if any, resulting from these matters
would not have a material adverse effect on the consolidated financial
statements of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of stockholders during the quarter
ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Incorporated herein by reference is the Company's 1998 Annual Report to
Stockholders. The Company's common stock market data for the past three
years may be found on page 44 thereof.
(b) At December 31, 1998, the approximate number of equity
stockholders were as follows:
(1) (2)
Title of Class Number of Record Holders
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Common Stock 1,325
(c) Annual cash dividends of 52, 42, and 35 cents per share,
restated to give retroactive effect to stock dividends and
splits, were paid in 1998, 1997, and 1996, respectively. The
Company paid a 5% stock dividend in 1998, declared a six for
five stock split in 1997 and paid a stock dividend of 8% in
1996. It is the Company's expectation that dividends will
continue to be paid in the future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(a) Incorporated herein by reference is the Company's 1998 Annual
Report to Stockholders. The Company's five year summary of
operations may be found on page 44.
(b) Additional years are not considered necessary to keep the
above referenced summary from being misleading.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) Incorporated herein by reference is the Company's 1998 Annual
Report to Stockholders. Management's Discussion and Analysis
of Financial Condition and Results of Operations may be found
on pages 25 - 37.
(b) There are no known trends or any known demands, commitments,
events or uncertainties which will result in, or which are
reasonably likely to result in, the Company's liquidity
increasing, or decreasing, in any material way.
(c) As of December 31, 1998, the Company had no material
commitments for capital expenditures.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the Company's 1998 Annual Report to
Stockholders. The Company's audited Consolidated Balance Sheets as of the
close of the last two years may be found on page 10. Reference again is made to
State Bancorp, Inc.'s 1998 Annual Report to Stockholders for the Company's
audited Statements of Consolidated Earnings, Cash Flows and Stockholders' Equity
and Comprehensive Income for each of the three years in the period ended
December 31, 1998. These items may be found on pages 11 - 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Incorporated herein by reference is the Company's 1999 Proxy
Statement, dated March 25, 1999. The identification of the
directors of the Company may be found on pages 11 - 12.
(b) Incorporated herein by reference is the Company's 1999 Proxy
Statement, dated March 25, 1999. The identification of the
executive officers of the Company may be found under
"Principal Officers" on page 2.
There exists no family relationships between any director or
executive officer.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the Company's 1999 Proxy Statement, dated
March 25, 1999. Management remuneration may be found on page 3.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the Company's 1999 Proxy Statement, dated
March 25, 1999. Security ownership of certain beneficial owners and management
may be found on page 14.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the Company's 1999 Proxy Statement, dated
March 25, 1999. Certain relationships and related transactions may be found on
page 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Included in the 1998 Annual Report to Stockholders of State Bancorp,
Inc. and enclosed herewith, are the following financial statements and
notes thereon:
- Consolidated Balance Sheets as of December 31, 1998 and 1997.
- Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996.
- Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
- Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 1998, 1997 and 1996.
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Notes to Consolidated Financial Statements
- Summary of Significant Accounting and Reporting Policies (1)
- Securities Held to Maturity and Securities Available for Sale (2)
- Loans - Net (3)
- Bank Premises and Equipment - Net (4)
- Other Assets (5)
- Lines of Credit and Borrowed Funds (6)
- Income Taxes (7)
- Incentive Stock Option Plans (8)
- Employee Benefit Plans (9)
- Commitments and Contingent Liabilities (10)
- State Bancorp, Inc. (Parent Company Only) (11)
- Financial Instruments with Off-Balance Sheet Risk (12)
- Disclosures About Fair Value of Financial Instruments (13)
- Regulatory Matters (14)
Independent Auditors' Report
Schedules are omitted because they are not applicable or because
required information is shown in the consolidated financial statements
or the notes thereto.
(b) A report on Form 8-K was filed on December 30, 1998 which indicated
that the Company's Board of Directors authorized an increase in it
stock repurchase program under which the Company may buy back up to
200,000 shares of its common stock. This amount represents
approximately three percent of the company's
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current shares outstanding. The Board had previouly authorized the
repurchase of up to 50,000 shares at its February 1998 meeting.
(c) Exhibits
Exhibit
No. Item Method of Filing
- --- ---- ----------------
(3) Articles of incorporation
and By-Laws
a) Articles of Incorporated by reference from exhibit
incorporation B to the Company's Registration
Statement on Form S-4, file No.
33-2958, Filed February 3, 1986.
b) By-Laws, as amended Incorporated by reference from Exhibit
3b to the Company's December 31, 1997
Form 10-K.
(4) Instruments defining the Pages 22-28 of the above referenced
rights of security holders Registration Statement.
(10) Material contracts
a) Deferred compensation Incorporated by reference from exhibit
plan 10b to the Company's December 31, 1986
Form 10-K.
b) (i) Directors' Incorporated by reference from exhibit
incentive retirement 10c to the Company's December 31, 1986
plan Form 10-K.
b) (ii) Agreements of Incorporated by reference from exhibit
participants 10b (ii) to the Company's December 31,
surrendering their 1992 Form 10-K.
rights under the
directors' incentive
retirement plan.
b) (iii) Agreements of Incorporated by reference from exhibit
participants modifying 10b(iii) to the Company's December 31,
agreements described in 1995 Form 10-K.
item b) (ii)
c) 1987 incentive stock Incorporated by reference from exhibit
option plan, as amended 10c to the Company's December 31,
1991 Form 10-K.
d) 1994 incentive stock Incorporated by reference from exhibit
option plan 10d to the Company's December 31,
1993 Form 10-K.
e) (i) Change of control Incorporated by reference from exhibit
agreement no. 1 10e to the Company's December 31,
1997 Form 10-K.
e) (ii) Change of control Incorporated by reference from exhibit
agreement no. 2 10e to the Company's December 31,
1997 Form 10-K.
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e) (iii) Change of control Incorporated by reference from exhibit
agreement no. 3 10e to the Company's December 31,
1997 Form 10-K.
e) (v) Change of control Incorporated by reference from exhibit
agreement no. 5 10e to the Company's December 31,
1997 Form 10-K.
f) State Bank of Long Incorporated by reference from exhibit
Island 401k retirement 10g to the Company's December 31,
plan and trust 1987 Form 10-K.
g) State Bancorp, Inc. Incorporated by reference from exhibit
employee stock 10g to the Company's December 31,
ownership plan 1987 Form 10-K.
h) Deferred compensation Incorporated by reference from exhibit
agreement 10h to the Company's December 31,
1995 Form 10-K.
i) 1999 Incentive Stock Filed herein.
Option Plan.
(13) Annual report to Filed herein.
stockholders
(23) Independent Auditors' Filed herein.
Consent
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SIGNATURES
Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned.
STATE BANCORP, INC.
By: s/Thomas F. Goldrick, Jr., Chairman
-----------------------------------
Thomas F. Goldrick, Jr., Chairman
Date: March 22, 1999
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
on the dates indicated.
Signature Title Date
- --------- ----- ----
s/Thomas F. Goldrick, Jr. Chairman of the Board 3/22/99
- ------------------------- (Principal Executive Officer) -------
Thomas F. Goldrick, Jr.
s/Daniel T. Rowe President 3/22/99
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Daniel T. Rowe
s/Richard W. Merzbacher Vice Chairman 3/22/99
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Richard W. Merzbacher
s/Brian K. Finneran Secretary 3/22/99
- ------------------- (Principal Financial Officer) -------
Brian K. Finneran
s/Gary Holman Vice Chairman of the Board 3/22/99
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Gary Holman
s/J. Robert Blumenthal Director 3/22/99
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J. Robert Blumenthal
s/Carl R. Bruno Director 3/22/99
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Carl R. Bruno
s/Arthur Dulik, Jr. Director 3/22/99
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Arthur Dulik, Jr.
s/Joseph F. Munson Director 3/22/99
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Joseph F. Munson
s/Raymond M. Piacentini Director 3/22/99
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Raymond M. Piacentini
s/John F. Picciano Director 3/22/99
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John F. Picciano
s/Suzanne H. Rueck Director 3/22/99
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Suzanne Rueck
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EXHIBIT (10) i)
1999 INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this Incentive Stock Option Plan (the
"Option Plan") is to secure for STATE BANCORP, INC. (the "Holding Company") and
its stockholders the benefits of the incentive inherent in the ownership of
Common Stock of the Holding Company by those present and future key employees of
the Holding Company, STATE BANK OF LONG ISLAND (the "Bank"), or any other
subsidiary of the Holding Company or of the Bank (collectively referred to as
the "Corporations") who will be responsible for its future growth and continued
success. The Option Plan and the Incentive Stock Options (the "Options") granted
hereunder are intended to comply with the provisions of Sections 421, 422A and
425 of the Internal Revenue Code of 1954, as amended, (the "Code") and the
Option Plan and all Options granted hereunder shall be administered, interpreted
and construed in accordance with such intention.
2. Stock Subject to the Option Plan. There will be reserved for issuance upon
the exercise of the Options which may from time to time be granted under the
Option Plan, an aggregate of 325,000 shares of Common Stock, par value $5.00 per
share, of the Holding Company, subject to adjustment as provided in Section 8.
Shares subject to the Option Plan may be shares now or hereafter authorized but
unissued and issued shares which have been reacquired by the Holding Company. If
any Option under this Option Plan shall expire, terminate, or be canceled for
any reason, without having been exercised in full, the shares which have not
been purchased thereunder shall again become available for the purpose of this
Option Plan unless this Option Plan shall have been terminated, but such
unpurchased shares shall not be deemed to increase the aggregate number of
shares specified above for which Options may be granted, subject to adjustment
as provided in Section 8.
3. Administration of the Option Plan. The Option Plan shall be administered by
a committee selected by the Board of Directors of the Holding Company (the
"Board") consisting of not less than three members, not less than two of whom
shall be members of the Board, who shall serve at the pleasure of the Board and
be designated the Stock Option Committee (the "Committee"). The members of the
Committee shall be directors and other persons selected by the Board who are not
eligible to participate in the Option Plan during such time as they are members
of the Committee.
Subject to the express provisions of the Option Plan with
respect to eligibility, the Committee shall determine the key
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employees to whom, and the time or times at which, Options shall be granted and
the number of shares to be subject to each Option. The Committee shall have
authority to interpret the Option Plan, to prescribe, amend and rescind rules
and regulations relating to it, to determine the terms and provisions of the
respective Options (which terms and provisions need not be the same in each
case), and to make all other determinations deemed necessary or advisable in
administering the Option Plan, all of which determinations shall be final and
binding upon all persons unless otherwise determined by the Board.
A quorum of the Committee shall consist of a majority of its members and the
Committee may act by the vote of a majority of its members at a meeting at which
a quorum is present, or without a meeting by a written consent to such act
signed by all members of the Committee.
4. Eligibility and Participation. Options may be granted only to employees of
the Corporations who, in the opinion of the Committee, exercise such functions
or discharge such responsibilities that they merit consideration as key
employees. Employees who are officers or directors of one or more of the
Corporations may participate in the Option Plan. Directors who are not employees
shall not be granted Options under the Option Plan. An employee may be granted
an Option hereunder and may thereafter be granted an additional Option or
Options if the Committee shall so determine. Options shall not be granted to any
employee pursuant to the Option Plan, the effect of which would be to permit
such person to first exercise options, in any calendar year, for the purchase of
shares having a fair market value in excess of $100,000 (determined at the time
of the grant of the options). An optionee hereunder may exercise options for the
purchase of shares valued in excess of $100,000 (determined at the time of grant
of the options) in a calendar year, but only if the right to exercise such
options shall have first become available in prior calendar years.
5. Option Price. Except as otherwise provided in Section 6 of the Option Plan,
the Option price per share of Common Stock for each Option shall be fixed by the
Committee and with respect to each Option granted hereunder shall not be less
than 100 percent of the fair market value or the book value, whichever is
greater, of the Common Stock of the Holding Company on the date the Option is
granted. Fair market value shall be determined by the Committee which shall use
any reasonable method of valuation, including: (a) if the Common Stock is not
listed for trading on a recognized securities exchange but is traded in the
over-the-counter market, the mean of the highest bid price and the lowest asked
price for the Common Stock on the date of grant as reported by the National
Quotation Bureau, Inc., or any successor organization, or (b) if the Common
Stock is listed for trading on a recognized securities
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exchange, the mean of the high and low sale prices or the closing sale price on
such exchange on the date of grant, whichever shall be higher, of if the Common
Stock shall not have been traded on such exchange on such date, the closing sale
price on such exchange on the first day prior thereto on which the Common Stock
was so traded or the closing bid price on such exchange on the date of grant,
whichever shall be higher, or (c) if a realistic and fair market value of such
shares is not readily determinable, an estimate of the fair market value shall
be made taking into consideration: (i) the difference between the market value
and book value of the shares of comparable financial institutions; and (ii) the
trend of the Holding Company's consolidated earnings and of its book capital
account.
6. Options Granted to Ten Percent (10%) Stockholders. An Option may be granted
under the Option Plan to an employee who, at the time such Option is granted,
owns (within the meaning of Section 422A(b)(6) of the Code, including the
applicable attribution provisions of the Code) stock possessing more than 10
percent of the total combined voting power of all classes of stock of one or
more of the Corporations, only if: (a) at the time such Option is granted, the
purchase price under such Option is not less than 110 percent of the fair market
value or book value, whichever is higher, of the shares of stock subject to
such Option, determined as provided in Section 5 of this Option Plan, and (b)
such Option by its terms is not exercisable after the expiration of five (5)
years from the date such Option is granted.
7. Terms and Conditions of Options. Each Option shall be subject to the terms
of the Option Plan and shall be evidenced by an Incentive Stock Option Agreement
substantially in the form attached hereto as Schedule A and containing or
incorporating by reference the following terms and conditions and such other
terms and conditions not inconsistent therewith as may be determined from time
to time by the Committee.
A. Term of Options. Except as otherwise provided in Section 6 of the Option
Plan, the term of each Option granted pursuant to this Option Plan shall be such
term, not exceeding ten (10) years from the date on which the Option shall have
been granted, as shall be fixed at the time by the Committee and such term shall
be subject to earlier termination as hereinafter provided. No Option may be
granted after the termination of the Option Plan as provided in Section 12.
Options hereunder shall be deemed granted on the date on which the Committee
acts with respect to the grant thereof.
B. Exercise of Option. No Option granted pursuant to this Option Plan shall be
exercisable: (1) unless the holder shall have been an employee of one or more of
the Corporations during the entire period beginning on the date of the granting
of the Option being exercised and ending on the date of such exercise (excluding
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in each case breaks in employment due to military leave or sick leave which are
approved by the Committee), except as provided in Subsections C and D; or (2)
until twelve (12) months after the date on which the Option shall have been
granted, provided, however, that on recommendation of the Committee in any
individual case deemed exceptional by the Committee, the Board of Directors may
specify a period of less than twelve (12) months but not less than six (6)
months after the date on which the Option shall have been granted during which
such Option may not be exercised. The Committee, at the time of the granting of
each Option pursuant to this Option Plan may provide that the Option may not be
exercised in any one year as to more than such percentage of the total number of
shares covered thereby as the Committee shall determine, provided that such
limitation shall not prohibit the exercise of the Option as to all shares
covered thereby within the term of such Option.
C. Effect of Termination of Employment or Death or Change in Control. No Option
may be exercised at any time unless the holder is an employee of one or more of
the Corporations except in the following events: (1) the holder, provided the
Option has not terminated pursuant to the provisions of Subsection D, may, but
only in the case of an employee who is disabled (within the meaning of Section
105(d)(4) of the Code) within one (1) year after the cessation of employment,
exercise his or her Option to the extent he or she was entitled to exercise it
as of the date of such cessation of employment; (2) if an employee to whom an
Option has been granted under the Option Plan shall die while he or she is
employed by one or more of the Corporations, such Option may be exercised within
one (1) year after his or her death to the extent that the employee was entitled
to do so at the date of his or her death, by the person or persons to whom his
or her rights under the Option shall pass by will or by the laws of descent and
distribution. If a Change in Control (as herein defined) shall have occurred
while the holder is an employee of one or more of the Corporations, all Options
shall be accelerated and shall become immediately exercisable. In no event shall
the holder of any Option have the right to exercise it after the expiration of
the term of the Option.
D. Employee's Agreement to Serve. Each employee receiving an Option shall agree
to serve in the employ of one or more of the Corporations for a period of three
(3) years from the date on which it is granted. On recommendation of the
Committee in any individual case deemed exceptional by the Committee, the Board
of Directors may specify an employment period of less than three (3) years but
in no event less than six (6) months. Such employment, subject to the provisions
of any other contract between the Corporations and such employee, shall be at
the pleasure of such Corporation and at such compensation as such Corporation
shall from time to time determine. Any termination of such employee's employment
during the period in which he has agreed pursuant to
<PAGE>
this Subsection D to remain in the employ of one or more of the Corporations
which is either: (1) for cause; or (2) voluntary on the part of the employee and
without the consent of such Corporation (except that a voluntary termination
within three (3) months after a Change in Control shall not be deemed voluntary
on the part of the employee) shall be deemed a violation by the employee of his
agreement and, upon the occurrence of such violation, the Option held by him, to
the extent not theretofore exercised, shall terminate. Such termination of the
Option shall be in addition to all other rights and remedies for breach of
contract to which the Corporations shall be entitled.
E. Restrictions on Common Stock. Common Stock issued upon the exercise of an
Option granted hereunder shall not be transferable until the employee to whom
such Common Stock is issued has fulfilled his agreement to serve in the employ
of one or more of the Corporations as provided in Subsection D of this Section.
Upon the termination of employment of an employee by reason of retirement from
such Corporation or by death or within three (3) months after a Change in
Control, the restrictions imposed by this Subsection E shall expire; if such
employee's employment shall terminate for any other reason before he or she has
fulfilled his or her agreement to serve in the employ of such Corporation as
provided in Subsection D of this Section, then the restrictions imposed by this
Subsection E shall be extended for the period of five (5) years from the date of
such termination. The restrictions imposed by this Subsection E and any other
restrictions which are in the opinion of the Holding Company's counsel either
necessary or required shall be noted on the certificates for the shares of
Common Stock issued upon the exercise of Options granted hereunder by an
appropriate legend. The legend with respect to the restrictions imposed by this
Subsection E shall be substantially as follows:
The shares represented by this certificate are subject to transfer and other
restrictions contained in State Bancorp, Inc.'s 1999 Incentive Stock Option
Plan, a copy of which is on file at the principal office of State Bancorp, Inc.
As and when shares of Common Stock become free of the restrictions imposed by
this Subsection E, the owner thereof shall be entitled, upon demand, to receive
a new certificate therefor which does not bear such a legend.
F. Method of Exercise. Subject to the provisions of the Incentive Stock Option
Agreement and the Option Plan, an Option may be exercised in whole or in part at
any time by written notice to the Holding Company, which notice shall specify
the number of shares as to which the holder of the Option desires to exercise.
The notice shall be accompanied by cash or by an unendorsed certified or
official bank draft or money order for the full Option price, in United States
dollars, payable to the order of the Holding Company.
<PAGE>
G. Non-assignability. No Option shall be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law of otherwise) by the
employee otherwise than by will or the laws of descent and distribution, and
shall be exercisable during his or her lifetime only by him or her and shall not
be subject to execution, attachment or similar process.
H. Rights as a Shareholder. The holder of the Option shall have none of the
rights of a shareholder with respect to any of the shares subject to the Option
until the issuance of a certificate for such shares upon the exercise of the
Option.
I. Adjustment. The number of shares subject to the Option
and the Option price per share shall be subject to adjustment in
the manner provided in Section 8.
8. Adjustments. The number of shares of Common Stock covered by each
outstanding Option, and the price per share thereof in each such Option, shall
be proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Holding Company resulting from a sub-division or
consolidation of shares or a payment of a stock dividend (but only on the Common
Stock) or any other increase or decrease in the number of such shares effected
without receipt of consideration by the Holding Company.
If the Holding Company shall be the surviving corporation in any merger or
consolidation, each outstanding Option shall pertain to and apply to the
securities to which the holder of the number of shares of Common Stock subject
to the Option would have been entitled.
In the event of any proposed dissolution or liquidation of the Holding Company
or a proposed merger or consolidation in which the Holding Company will not be
the surviving corporation, the Holding Company shall mail or otherwise furnish
to the holder of each outstanding Option written notice of such proposed
dissolution, liquidation, merger or consolidation at least twenty (20) days
prior to such dissolution, liquidation, merger or consolidation and each such
holder shall thereupon have the right immediately and prior to such dissolution,
liquidation, merger or consolidation to exercise his or her entire Option or any
part thereof; and any outstanding Option not so exercised shall terminate upon
such dissolution, liquidation, merger or consolidation.
In the event of a change in the Common Stock of the Holding Company as
presently constituted which is limited to a change of all authorized shares with
par value into the same number of shares with a different par value no
adjustment shall be made in the number of shares of Common Stock covered by any
outstanding Option and the term "Common Stock" as used in the Option Plan shall
be
<PAGE>
deemed to refer to the shares of Common Stock as so changed.
Except as herein before expressly provided in this Section, the optionee shall
have no rights by reason of any subdivision or consolidation of shares of stock
of any class or the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or stock
of another corporation, and any issue by the Holding Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to the Option.
If any event occurs which would cause an adjustment in the number of shares of
Common Stock or the securities subject to Option if an Option were outstanding
hereunder then a like adjustment shall be made in the number of shares of Common
Stock or the securities subject to the Option Plan as provided in Section 2.
To the extent that the foregoing adjustments relate to stock or securities of
the Holding Company, such adjustments shall be made by the Board of the Holding
Company, whose determination in that respect shall be final, binding and
conclusive, provided that no Option granted pursuant to the Option Plan shall be
adjusted in a manner that causes the Option to fail to continue to qualify as an
incentive stock option within the meaning of the Internal Revenue Code, as
amended No adjustment provided for in this Section shall require the Holding
Company to issue or sell a fractional share, and the total adjustment with
respect to each Option shall be limited accordingly.
The grant of an Option pursuant to the Option Plan shall not affect in any way
the right or power of the Holding Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business of assets.
9. Uses of Proceeds. The proceeds from the sale of shares of Common Stock
pursuant to Options shall constitute general funds of the Holding Company.
10. Change in Control. Change in Control, for purposes of this Plan, means an
event of a nature that: (i) would be required to be reported by the Holding
Company in response to Item 1 of the current report on Form 8-K, as in effect on
the date hereof, pursuant to Section 13 of the Securities Exchange Act of 1934
(the "Exchange Act"); or (ii) results in a Change in Control of the Bank within
the meaning of the Change in Bank Control Act and the rules and regulations
promulgated by the Federal Deposit Insurance
<PAGE>
Corporation (the "FDIC") at 12 C.F.R. ss.303.80, as in effect on the date hereof
or as same may be amended; or (iii) results in a transaction requiring prior
approval of the Federal Reserve Board ("FRB"), under the Bank Holding Company
Act of 1956 and the regulations promulgated or as same may be amended thereunder
by the FRB at 12 C.F.R. ss.225.11, as in effect on the date hereof or as same
may be amended; or (iv) without limitation, such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank representing 20% or more of the Bank's
outstanding securities or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of a majority of the directors
comprising the Incumbent Board, or whose nomination for election by the Holding
Company's stockholders was approved by the Incumbent Board, shall be, for
purposes of this clause (B), considered as though he or she were a member of the
Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Holding Company or similar
transaction occurs in which the Holding Company is not the resulting entity; or
(D) a proxy statement shall be distributed soliciting proxies from shareholders
of the Holding Company by someone other than the current management of the
Holding Company, seeking stockholder approval of a plan of reorganization,
merger or consolidation of the Holding Company or similar transaction with one
or more corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Holding Company;
or (E) a tender offer is made for 20% or more of the voting securities of the
Holding Company.
11. Modification, Extension and Renewal of Options. Subject to the terms and
conditions and within the limitations of the Option Plan, the Board of the
Holding Company may modify, extend or renew outstanding Options granted under
the Option Plan, or accept the surrender of outstanding Options (to the extent
not theretofore exercised) and authorize the granting of new Options in
substitution therefor (to the extent not theretofore exercised). The Board shall
not, however, modify any outstanding Options so as to specify a lower exercise
price or accept the surrender of outstanding Options and authorize the granting
of new Options in substitution therefore specifying a lower exercise price.
Notwithstanding the foregoing, however, no modification of an Option shall,
without the consent of the individual to whom any Option shall have been
granted, alter or impair any rights or obligations under any Option therefore
granted under the Option Plan.
<PAGE>
12. Governmental and Other Regulations. The Option Plan, and the grant and
exercise of Options hereunder, and the Holding Company's obligation to sell and
deliver stock under such Options, shall be subject to the provisions and
approvals of any regulatory or governmental agency as may be required.
13. Amendment and Termination. The Option Plan shall terminate February 25,
2009 and no Option shall be granted hereunder after that date, provided,
however, that subject to the limitations on exercisability contained in the
Option Plan, any Option granted under the Option Plan prior to such date may
continue to be exercised by the holder after such date until such time as the
Option expires by its terms.
The Board of the Holding Company shall have complete power and authority to
amend the Option Plan, provided, however, that the Board shall not without the
affirmative vote of the holders of a majority of the outstanding Common Stock of
the Holding Company: (i) increase the maximum number of shares for which Options
may be granted under the Option Plan, (ii) reduce the minimum Option price,
(iii) extend the period provided in Section 7(A) during which Options may be
granted or make an option exercisable earlier than as specified in Section 7(B),
(iv) amend the requirements as to the class of employees eligible to receive
Options, or (v) increase the number of shares which may be optioned to all key
employees or any one of them, or (vi) affect outstanding options or any
unexercised rights thereunder, except as provided in Section 8.
14. Effectiveness. The Plan shall be effective upon its approval by the
stockholders of the Holding Company.
15. Termination of Right of Action. Every right of action arising out of or in
connection with the Option Plan or any Options granted hereunder, by or on
behalf of the Holding Company, or by any stockholder of the Holding Company
against any past, present or future member of the Board of Directors or employee
of one of the Corporations, or by an employee (past, present or future) of one
of the Corporations against one or more of the Corporations or against any past,
present or future member of the Board of Directors or an employee of one of the
Corporations shall, irrespective of the place where an action may be brought and
irrespective of the place of residence of any such director or employee, cease
and be barred by the expiration of five (5) years from the date of the act or
omission in respect of which such right of action arises or is alleged to arise.
The Option Plan shall be deemed to have been entered into and adopted and all
Options have been granted in Nassau County, New York, and shall be interpreted,
and the rights and liabilities of all individuals hereunder and under the
Options determined, in accordance with the laws of the State of New York. Every
action,
<PAGE>
suit or proceeding brought to enforce any claim arising out of or in connection
with the Option Plan or any Option shall be commenced only in courts of the
State of New York located in the County of Nassau and having jurisdiction over
the claim involved.
16. Indemnification of Committee. No member or former member of the Committee
or of the Board shall be liable, in the absence of bad faith or misconduct, for
any act or omission with respect to his or her service on the Committee. Service
on the Committee shall constitute service as a Director of the Holding Company
so that members of the Committee shall be entitled to indemnification and
reimbursement as Directors of the Holding Company pursuant to its By-Laws,
resolution and the Business Corporation Law of the State of New York.
17. Compliance with Section 16. If this Plan is qualified under 17 C.F.R.
ss.240.16b-3 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act.
<PAGE>
SCHEDULE A
STATE BANCORP, INC.
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK OPTION AGREEMENT dated as of ______________, 1999, (the "Date
of Grant"), between STATE BANCORP, INC. (the "Holding Company") and (the
"Optionee").
1. As a separate inducement and agreement in connection with employment and not
in lieu of any salary or other compensation for services, and pursuant to the
Holding Company's 1999 Incentive Stock Option Plan (the "Option Plan"), the
Holding Company hereby grants the Optionee the option to purchase shares of its
Common Stock, par value $5.00 per share (the "Optioned Shares"), upon the
following terms and conditions: (a) The option shall be an effective and binding
obligation of the Holding Company only during the Option Term (as hereinafter
defined) and, upon the expiration of the Option Term, the option shall become
null and void to the extent of the Optioned Shares not theretofore purchased.
The "Option Term", for purposes of this Agreement, shall be the period
commencing with the Date of Grant and ending with the earlier of the following
dates: (i) the _____ anniversary of the Date of Grant; or (ii) the termination
of the employment of the Optionee by the Holding Company or a subsidiary
corporation provided, however, the Optionee may, (x): in case of the disability
of the Optionee (within the meaning of Internal Revenue Code 105(d)(4)), and (y)
in case of death, exercise the option within one (1) year after the cessation of
employment to the extent the Optionee was entitled to exercise it as of the date
of such cessation of employment; (b) The option price per share shall be $______
being not less than 100% of the fair market value or the book value, whichever
is greater, of the Common Stock of the Holding Company on the Date of Grant. (c)
The number of shares of Common Stock covered by this option, and the price per
share thereof, shall be subject to adjustment as provided in the Option Plan.
(d) Subject to the provisions of the Option Plan, this Option may be exercised
after the expiration of twelve (12) months after the Date of Grant at any time
during the Option Term; provided, however (i) the Optionee shall have been an
employee of the Holding Company or a subsidiary corporation during the entire
period beginning on the Date of Grant and ending on the date of exercise of the
option, or in the case of the disability (within the meaning of Internal Revenue
Code 105(d)(4) or death of the Optionee, a date not more than one (1) year prior
to exercise
<PAGE>
of the option; (ii) that this option shall not be exercisable in part for less
than ten (10) shares except where the balance of the Optioned Shares shall be
less than ten (10); and (iii) that this option shall not be exercisable as to
more than ( %) percent of the total number of Optioned Shares in any one (1)
calendar year, providing that any options not exercised within the earliest
period permitted may be exercised at any time thereafter within the Option Term;
and (iii) that the Option Holder may exercise this option as to one hundred
(100%) percent of the total number of Optioned Shares upon or after a Change in
Control; (e) The shares of Common Stock covered by this option are subject to
restrictions as provided in the Option Plan. (f) If the Optionee (or any other
person entitled to exercise this option) desires to exercise this option, the
Optionee or such other person, as the case may be, shall give written notice to
the Holding Company at its principal office at 699 Hillside Avenue, New Hyde
Park, New York (or such other place as may hereafter be designated by the
Holding Company) stating the number of shares as to which the Option is being
exercised. Such notice shall be accompanied by cash or an unendorsed certified
or official bank draft or money order payable to the order of the Holding
Company for the full price, in United States dollars, of the shares as to which
the option is being exercised. (g) The terms and provisions of this option are
subject to and shall be governed by the terms and provisions contained in the
Option Plan, which is hereby incorporated herein by reference and made a part of
this Agreement.
2. Optionee agrees to remain in the employ of the Holding Company or a
subsidiary corporation for a period of at least three (3) years from the Date of
Grant. Such employment, subject to the provisions of any contract between the
Holding Company and the Optionee, shall be at the pleasure of the Holding
Company and at such compensation as the Holding Company shall from time to time
determine. Any termination of the Optionee's employment during the period of
three years referred to above which is either: (a) for cause; or (b) voluntary
on the part of the Optionee and without the consent of the Holding Company
(except that a voluntary termination within three (3) months following a Change
in Control shall not be deemed voluntary on the part of the Option Holder),
shall be deemed a violation by the Optionee of his or her agreement and, upon
the occurrence of such violation, this Option shall terminate and Optionee shall
have no further rights under this Agreement or the Option or Options granted
under the Option Plan. Such termination of this option shall be in addition to
any other rights and remedies for breach of contract to which the Holding
Company shall be entitled.
3. This Option shall not be transferred, assigned, pledged or hypothecated in
any way (whether by operation of law or otherwise) by the Optionee otherwise
than by will or laws of descent and distribution and shall be exercisable during
his or her lifetime only by the Optionee, and shall not be subject to execution,
<PAGE>
attachment or similar process.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Date of Grant.
STATE BANCORP, INC.
BY:_______________________
__________________________
(Optionee)
<PAGE>
EXHIBIT (13)
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
STATE BANCORP, INC. [LOGO]
1998 ANNUAL REPORT
WE ARE LONG ISLAND
<PAGE>
[LOGO] STATE BANCORP, INC.
State Bank of Long Island was founded in 1966 by an energetic group of
civic minded businessmen seeking to enhance the quality of banking services on
Long Island. They succeeded perhaps beyond their fondest expectations--and for
many years now State Bank has ranked among the highest performing banks in New
York State.
Over the years, the Bank has shown measured, orderly growth. By adhering
to that philosophy, the Bank has grown to be the largest independent commercial
bank headquartered in Nassau County. We have built a reputation for providing
high-quality personal service and have specialized in meeting the needs of the
commercial, small business, municipal and consumer markets throughout Long
Island.
[GRAPHIC OMITTED]
TABLE OF CONTENTS
1 Financial Highlights
2 Letter to Our Stockholders, Customers and Friends
4 Community Service
6 Technology
7 Subsidiaries
8 Board of Directors
9 Financial Table of Contents
10 Consolidated Financial Statements
14 Notes to Consolidated Financial Statements
24 Independent Auditors' Report
25 Management's Discussion and Analysis of Financial Condition and Results of
Operations
38 Statistical Information
44 Market Data and Five Year Summary of Operations
45 Board of Directors and Executive Officers
46 State Bank of Long Island--Officers
48 State Bancorp, Inc. and Subsidiary Advisory Board
Inside Back Cover
Corporate Information
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
(in thousands)
<TABLE>
<CAPTION>
1998 % Change 1997
=========================================================================================
<S> <C> <C> <C>
Total Assets ......................... $732,694 (0.7)% $738,089
Stockholders' Equity ................. $ 60,858 10.8% $ 54,930
Net Income ........................... $ 8,203 15.5% $ 7,105
Return on Average Assets ............. 1.11% 1.05%
Return on Average Stockholders' Equity 14.16% 13.76%
==========================================================================================
</TABLE>
Net Income
(dollars in millions)
[GRAHPIC OMITTED]
Shareholders' Equity
(dollars in millions)
[GRAHPIC OMITTED]
Total Average Assets
(dollars in millions)
[GRAHPIC OMITTED]
1
<PAGE>
TO OUR STOCKHOLDERS, CUSTOMERS AND FRIENDS
As we begin the final year of the current millennium and look towards the much
anticipated year 2000, we do so with a great sense of pride, looking back over
our many years of accomplishment and continued growth. 1998 was indeed a year in
which all of us associated with State Bancorp can take great satisfaction. Not
only was it our twenty-eighth consecutive year of record earnings, but it was
also a year in which our Company recorded significant levels of growth in loans,
deposits and total stockholders' equity as well. It is the history of these many
successes that causes all of us in the State Bank family to look forward with
eager anticipation to the new millennium, which will now be upon us in just a
few short months.
We have also been encouraged during 1998 by the continuing strength of our
local economy. All across Long Island, the sense of economic vibrancy resounds
in virtually all sectors, from commercial real estate and record levels of
employment, to our service and technology sectors as well. While we are greatly
appreciative of the opportunities this economic vitality has afforded our
Company, we are well aware that such strength likely cannot endure indefinitely,
and consequently we monitor closely the ongoing condition of our Long Island
economy, of which we are so very much a part.
Summarizing the financial highlights of 1998, net income was $8.2 million
or $1.27 per share, representing an increase of 15.5% as compared to 1997. As
noted earlier, we are very proud that our level of earnings in 1998 represented
the twenty-eighth consecutive year of such record results, truly a remarkable
accomplishment and one that we feel may well be unparalleled both within New
York State and on a national scope as well. The Company's capital ratios, of
course, continue at levels well in excess of Federal regulatory guidelines for
well capitalized institutions. Loans and deposits, our key balance sheet
components, increased on average by 7% and 9% respectively during the course of
1998 as compared with the prior year. This continues to be a most encouraging
trend, and one which we expect will prevail throughout the balance of 1999. The
continuing growth of our Company, coupled with the increasing efficiencies we
have been able to realize, will certainly serve us well as we move into the new
millennium.
For a more detailed analysis of the Company's consolidated financial
statements, please refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 25 of this report.
During 1998, we were able to realize continued growth in many of our newer
product offerings. Specifically, our Small Business Line of Credit product, as
well as our recently introduced home equity loan product, Prime for Life, have
been met with a great deal of success during the past year. Prime for Life has
proven to be extremely attractive to a large number of our existing as well as
new customers, primarily due to its lifetime prime rate of interest and the fact
that there are absolutely no closing costs involved. Similarly, our Small
Business Line of Credit has proven to offer great value to our business clients
by providing ready access to a significant line of credit.
Also during 1998, we officially began the operation of our Bank's two
newest subsidiaries, SB Financial Services Corp. and SB Portfolio Management
Corp. Both of these subsidiaries, chartered in Delaware, are managed by Matthew
T. Novak, who was formerly associated with the Company for many years in the
capacity of Vice President and Comptroller. We are delighted to have Matt's
expertise back on board and look forward to a continuing increase in the level
of contribution being provided by these subsidiaries in the areas of
asset/liability management and fixed income portfolio management.
As we move through 1999, we also look forward to a continuing expansion of
our relationship with U.S. Trust Company. This alliance was forged during the
past year for the purpose of bringing a full range of investment management and
trust services to our growing customer base. As a leader in providing these
services to the New York market for over 145 years, we are delighted that U.S.
Trust is now able to bring the highest level of investment and wealth management
products and services to our valued customers.
We again would like to bring to the attention of our Stockholders our
Dividend Reinvestment Plan, which continues to afford our Stockholders the
opportunity to reinvest their cash dividends into Company stock. Since its
inception in 1993, this Plan has been exceptionally well received and has served
to contribute nearly $4 million in capital toward the continuing growth of our
Company. We have attached a perforated card in this report should you wish to
become a participant in this highly regarded program.
Once again, the untiring efforts of both our Board of Directors and our
Advisory Board have contributed greatly to the successes enjoyed by our Company
over these many years.
2
<PAGE>
We were delighted to welcome eleven new members to our expanded Advisory Board
during 1998. We believe that each of these individuals will bring significant
business strengths to our Company. They now join the thirty-two continuing
members of our Advisory Board to constitute a diverse group of professionals,
representing a broad cross-section of our Long Island business community. A
roster of our Advisory Board members, together with their respective business
affiliations, appears on page 48 of this report.
We also note the retirement in the last quarter of 1998 of one of our
Company's long-standing directors, Robert J. Grady. Bob has served our Company
in the capacity of Director, as well as Chairman of many of our Board's
committees, since 1968. In his thirty years of service with the Board, Bob has
contributed considerable time and effort in helping to guide our Company through
three decades of growth and prosperity. It is with a great sense of appreciation
that we wish him and his family much happiness in retirement.
The year 1998 was one of great accomplishment for all of us here at State
Bancorp and State Bank of Long Island. It is with eager anticipation that we now
turn our attention to the 21st century and the number of challenges and
opportunities that will be brought before us. We remain confident that the years
ahead will bring us even greater successes as we continue to serve the people,
businesses and governments of Long Island.
[PHOTO OMITTED]
/s/ Thomas F. Goldrick, Jr.
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
[PHOTO OMITTED]
/s/ Richard W. Merzbacher
Richard W. Merzbacher
Vice Chairman
[PHOTO OMITTED]
/s/ Daniel T. Rowe
Daniel T. Rowe
President
3
<PAGE>
COMMUNITY SERVICE
At State Bank of Long Island, building relationships in the communities we serve
extends beyond the financial services we provide. In addition to being a leading
provider of commercial and consumer loans, cash management, checking, savings
and investment options, we are an active partner with various non-profit and
charitable organizations whose purpose is to improve the overall well-being of
our community. Many of our officers serve on the Board of Directors of local
organizations, and employees are encouraged to volunteer their time for Chambers
of Commerce, local business associations, civic and senior citizen groups and
various fund drives. Giving back to the communities we serve through direct
contributions and the enthusiastic volunteering of our staff are essential
elements of our corporate character. Being a good neighbor is a high priority at
State Bank of Long Island.
[PHOTO OMITTED]
St. Mary's Children and Family Services, Inc.
St. Mary's, founded in 1894 by the Sisters of Mercy, is a non-profit,
non-sectarian agency caring for abused, neglected and troubled children and
families in crisis. St. Mary's cares for more than 800 children of all ages and
from all walks of life. In addition to the main residential campus in Syosset,
St. Mary's has 5 group homes in Nassau and Suffolk Counties, a Preventive
Service Office in Garden City and more than 90 foster families who provide care
for children in need.
In addition to the many financial services that State Bank of Long Island
provides to St. Mary's, our staff participates in training programs for senior
students that offer basic instruction in money management and the operation of
financial markets. Recently, several of these students were invited to take part
in a "hands-on, job shadowing day" in our branches where they got a first-hand
look at how a bank operates. Also, one of the students was invited to the
American Stock Exchange with the Bank's senior management to take part in the
ceremonial activities for the Bank's first day of AMEX trading. The job
shadowing program was, in many ways, as enlightening to the Bank's staff as it
was to the students. As corporate citizens, there are no commitments we can make
that are more compelling than those involving the well-being of our future
generation, especially those at-risk.
"The commitment of State
Bank's Staff and the enthusiastic
participation of St. Mary's students
made the job shadowing
program a great success."
Big Brothers Big Sisters of Long Island
Big Brothers Big Sisters of Long Island is a not-for-profit organization
that is affiliated with Big Brothers Big Sisters of America. The national agency
was chartered by Congress in 1904. The Long Island Chapter recruits, trains and
carefully matches volunteers/mentors on a one-to-one basis with children in the
program. The children are those who display a need for special adult attention,
friendship, guidance and role modeling. When a match is made, an agency social
worker supervises the child and volunteer on a regular basis, always striving
toward achieving short-and long-term goals tailored to the child's needs.
[GRAPHIC OMITTED]
The Long Island Chapter also began a High School Program to meet the needs
of at-risk youth in local schools. This Program now operates in eleven school
districts on Long Island and is a model which has been replicated throughout the
United States. The agency must raise more than fifty
4
<PAGE>
[PHOTO OMITTED]
percent of its annual budget through private donations and special events such
as Bowl For Kids Sake. State Bank of Long Island supports the good works of Big
Brothers Big Sisters with direct contributions and by participating in the
bowling fund raiser. During 1998, over 30 of our employees took part in the
bowl-a-thon and received an award for being the leading fund raiser for the
event. Our leadership in these initiatives helps broaden the general awareness
of Big Brothers Big Sisters' intervention programs and the difference that they
can make in a child's life.
L.I.V.E.
The Long Island Volunteer Enterprise (L.I.V.E.) is a coalition of
companies, who, in cooperation with Long Island United Way and the Long Island
Volunteer Center, join in a community service effort to help improve Long
Island. During its five-year history, L.I.V.E. has provided hundreds of
non-profit and community-based organizations with over 13,000 corporate
volunteers to help meet the needs of those agencies. Teams of volunteers from
sponsoring companies, which now total over 115, contribute one day's effort on
meaningful projects, such as painting and refurbishing shelters and group homes,
serving in soup kitchens, revitalizing parks, planting trees and gardens and
mentoring. State Bank's employees are understandably proud of the rewarding
projects they have completed, such as the repainting of the ice house on
Sagamore Hill, refitting a playground at a child center and restoring historical
landmarks.
[GRAPHIC OMITTED]
"Teams of State Bank L.I.V.E.
volunteers are pitching in,
cleaning up and renewing the
Long Island spirit that is key
to our quality of life."
Hauppauge Industrial Award
The Hauppauge Industrial Association is a business organization of
approximately 700 companies in the Hauppauge area. The goal of the Association
is to create an environment in which business can prosper and contribute to the
growth of the Long Island region. Each year, the HIA honors member companies
that are leaders in their fields and have made noteworthy contributions to the
economic or social well-being of the community. For 1998, State Bank of Long
Island was the sponsor of the Small Business Achievement Award. This Award is
given to a company with less than 100 employees that has successfully met the
competitive challenges in its industry and has made a commitment to grow on Long
Island. The recipient was Carr Business Systems which has been providing
companies with sales and service of office equipment since 1937. As a result of
sponsoring this Award, State Bank not only generates goodwill, but also
increases the awareness of our small business services.
There are numerous other philanthropic agencies with which we have
long-standing partnerships. Our relationship with the Red Cross, for example,
goes back almost to our beginning and continues today unabated. We are principal
sponsors of the Oysterfest, Art & Essay Contest for National Children's Dental
Health Month and several mini-marathons across Long Island.
At State Bank we believe that being a good neighbor goes beyond just good
business.
5
<PAGE>
TECHNOLOGY
State Bank of Long Island is committed to keeping up with the rapid changes that
are constantly occurring in technology and to implementing improvements when
they provide added value to our customers. With our record growth, our
successful launching of new branches and our expanding customer base, the
demands on our systems support capabilities have increased dramatically. As a
result, last year we upgraded our mainframe computer system to a Unisys
NX5601-21 series processor which both improved our on-line transaction
processing and system response time. This server combines in a single system the
user-friendly open environment that characterizes today's client/server
solutions with the mission critical capabilities traditionally associated with
enterprise servers. Most importantly, the new server gives us the capacity to
continue expanding our business base and to enhance the services we already
offer.
"Investing in new technology will
help us work more effectively
in the new millennium."
Bringing Technology to Business
An immediate impact of the new mainframe was an upgrade to a Windows
environment for our Business Direct
Access (BDA) customers. BDA is a state-of-the-art electronic cash management
system that links business customers via a personal computer to all of their
State Bank accounts. Through menu interfaces, customers have the ability to
check balances, make transfers, initiate wire and ACH transactions, stop
payments and send and receive electronic messages. The new Windows environment
provides quicker access to account information in a point and click format that
is more familiar to its users. Our new server can fully support BDA and other
processing applications without reducing response time to any system.
Year 2000
The year 2000 brings with it many challenges, particularly with respect to
computer systems. The major issue is the ability of computer systems to properly
handle dates subsequent to 1999. For example, some systems may interpret
01/01/00 as January 1, 1900 rather than January 1, 2000. The concern is that
systems will malfunction or produce inaccurate and unreliable information in
critical areas.
Y2K [LOGO]
6
<PAGE>
At State Bank of Long Island, we have been aware of this potential problem
for several years and have been addressing the possible effects it may have on
our operations. We have formed a Year 2000 Action Team to thoroughly examine
every aspect of our operations, as well as those of each of the major vendors
and customers that support us. The Action Team has developed a Plan to address
the potential effect of Year 2000 on our critical applications. The first three
phases of the Plan are completed: Awareness, Assessment and Renovation. The
Validation phase has begun and will continue through 1999. Although all critical
applications have been tested and deemed compliant, we will continue to test
applications throughout 1999 to re-affirm that they will function properly on
and after January 1, 2000.
SUBSIDIARIES
In 1998, the Bank organized and capitalized two wholly-owned Delaware
subsidiaries, SB Portfolio Management Corp. and SB Financial Services Corp. The
purpose of the Delaware subsidiaries is the performance of balance sheet
management services and activities which will enhance the Bank's earnings and
market value within a desired risk profile.
SB Portfolio Management Corp. maintains and manages a fixed income
investment portfolio contributed by the Bank in exchange for all of its common
stock. The investment portfolio is used as a primary tool for implementing
balance sheet management strategies while satisfying the primary investment
objectives of liquidity, income and safety. The investment activities conducted
by this subsidiary include strategy development, security selection, trade
execution, trade settlement and security safekeeping.
SBFinancial Services Corp. provides balance sheet management services,
primarily to the Bank and SBPortfolio Management Corp., with a focus on interest
rate risk management. Interest rate risk management services includes the
measurement and monitoring of a financial institution's exposure to changes in
interest rates, as well as the development of appropriate on-balance sheet and
off-balance sheet hedging strategies to manage this type of market risk within
an acceptable range of risk tolerance. In addition, balance sheet optimization,
capital adequacy, funding strategies, performance measurement, and merger and
acquisition services will be performed by this subsidiary.
Strategic initiatives that the Delaware subsidiaries will evaluate in 1999
are:
o Short term investment portfolio yield enhancement strategies.
o Investment portfolio growth and sector diversification alternatives.
o Third party provider of asset/liability and Delaware nexus services.
o Delaware balance sheet expansion opportunities.
7
<PAGE>
BOARD OF DIRECTORS
[PHOTO OMITTED]
Standing from left to right:
Joseph F. Munson
Chairman, TRM International, Inc.
Richard W. Merzbacher
Vice Chairman, State Bancorp, Inc. and
President, State Bank of Long Island
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
State Bancorp, Inc. and State Bank of Long Island
Raymond M. Piacentini
Vice President, Donaldson, Lufkin & Jenrette,
Investment Services, Inc.
Seated:
Daniel T. Rowe
President, State Bancorp, Inc. and
Vice Chairman, State Bank of Long Island
Gerald P. Rosenberg
Secretary to the Board
[PHOTO OMITTED]
Standing from left to right:
Gary Holman
Vice Chairman of the Board of Directors,
State Bancorp, Inc. and State Bank of Long Island;
Partner, Lamb & Barnosky, LLP
Suzanne H. Rueck
Manager, New Hyde Park Inn
Arthur Dulik, Jr.
Chief Financial Officer, Altana, Inc.
Carl R. Bruno
Chief Financial Officer,
DiFazio Electric, Inc.
Seated:
John F. Picciano
Attorney
J. Robert Blumenthal
President, Harwyn Enterprises, Inc.
8
<PAGE>
FINANCIAL TABLE OF CONTENTS
10 Consolidated Financial Statements
14 Notes to Consolidated Financial Statements
24 Independent Auditors' Report
25 Management's Discussion and Analysis of Financial
Condition and Results of Operations
38 Statistical Information
44 Market Data and Five Year Summary of Operations
9
<PAGE>
CONSOLIDATED BALANCE SHEETS STATE BANCORP, INC. AND SUBSIDIARY
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Notes 1998 1997
===============================================================================================================================
ASSETS:
<S> <C> <C> <C>
Cash and due from banks ............................................... 10 $ 19,274,435 $ 26,932,820
Securities purchased under agreements to resell ....................... 1 -- 34,000,000
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ............................................. 19,274,435 60,932,820
Securities held to maturity (estimated fair value of $2,526,401 in 1998
and $10,644,882 in 1997) ............................................ 1,2 2,516,035 10,637,143
Securities available for sale--at estimated fair value ................ 1,2 279,338,611 277,577,567
Loans (net of allowance for possible loan losses of
$5,788,440 in 1998 and $5,123,651 in 1997) .......................... 1,3,12 414,847,940 372,509,616
Bank premises and equipment--net ...................................... 1,4 3,878,013 3,501,031
Other assets .......................................................... 1,5,7 12,838,476 12,930,760
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ............................................................ $ 732,693,510 $ 738,088,937
===============================================================================================================================
LIABILITIES:
Deposits: ............................................................. 1
Demand .............................................................. $ 125,327,460 $ 107,639,101
Savings ............................................................. 195,614,058 179,958,856
Time ................................................................ 276,079,430 323,629,963
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits ........................................................ 597,020,948 611,227,920
Federal funds purchased ............................................... 6 -- 6,000,000
Securities sold under agreements to repurchase ........................ 6 34,529,000 14,818,000
Other short-term borrowings ........................................... 6 35,000,000 47,000,000
Accrued expenses, taxes and other liabilities ......................... 7 5,285,670 4,112,754
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ....................................................... 671,835,618 683,158,674
- -------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES .................................. 9,10,12
STOCKHOLDERS' EQUITY: ................................................... 8,14
Preferred stock, $0.01 par value, authorized 250,000 shares ........... -- --
Common stock, $5.00 par value, authorized 20,000,000 shares;
issued 6,593,340 shares in 1998 and 6,503,832 shares in 1997;
outstanding--6,512,138 shares in 1998 and 6,414,537 shares in 1997 .. 32,966,700 30,970,630
Surplus ............................................................... 24,236,479 18,457,388
Retained earnings ..................................................... 4,866,852 6,567,744
Treasury stock ........................................................ 1 (188,375) --
Accumulated other comprehensive income ................................ (364,710) (215,067)
Unearned compensation ................................................. 9 (659,054) (850,432)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity .............................................. 60,857,892 54,930,263
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 732,693,510 $ 738,088,937
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME STATE BANCORP, INC. AND SUBSIDIARY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Notes 1998 1997 1996
=====================================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME: ......................................... 1
Loans .................................................. 3 $ 36,638,602 $ 34,345,284 $ 29,063,647
Federal funds sold and securities purchased
under agreements to resell ........................... 3,370,650 1,989,006 1,734,542
Securities held to maturity and securities
available for sale:
United States Treasury securities .................... -- -- 648,878
States and political subdivisions .................... 1,967,036 2,108,431 1,607,059
Mortgage-backed securities ........................... 2,560,897 4,781,902 7,658,115
Government Agency securities ......................... 10,040,535 7,305,284 2,343,098
Other ................................................ 191,444 134,275 123,386
- ---------------------------------------------------------------------------------------------------------------------
Total interest income .................................... 54,769,164 50,664,182 43,178,725
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Time certificates of deposit of $100,000 or more ....... 12,283,595 10,150,061 7,390,698
Other deposits and temporary borrowings ................ 11,880,491 12,540,136 11,739,929
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense ................................. 24,164,086 22,690,197 19,130,627
- ---------------------------------------------------------------------------------------------------------------------
Net interest income .................................... 30,605,078 27,973,985 24,048,098
Provision for Possible Loan Losses ....................... 1,3 1,800,000 1,950,000 1,500,000
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible
loan losses ............................................ 28,805,078 26,023,985 22,548,098
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts .................... 1,148,359 1,236,964 1,305,089
Net security (losses) gains ............................ (63,771) (53,180) 135,130
Other operating income ................................. 448,523 450,515 417,912
- ---------------------------------------------------------------------------------------------------------------------
Total other income ....................................... 1,533,111 1,634,299 1,858,131
- ---------------------------------------------------------------------------------------------------------------------
Income before operating expenses ......................... 30,338,189 27,658,284 24,406,229
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and other employee benefits ................... 9 10,982,354 9,827,811 8,857,594
Occupancy .............................................. 10 1,732,772 1,557,255 1,341,643
Equipment .............................................. 728,757 613,620 514,630
Marketing and advertising .............................. 543,000 361,000 360,355
Deposit assessment fees ................................ 137,936 123,015 729,386
Amortization of intangibles ............................ 83,554 605,147 605,147
Other operating expenses ............................... 3,759,110 3,634,588 3,127,758
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses ................................. 17,967,483 16,722,436 15,536,513
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ............................... 12,370,706 10,935,848 8,869,716
PROVISION FOR INCOME TAXES ............................... 1,7 4,168,161 3,830,358 3,167,704
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME ............................................... $ 8,202,545 $ 7,105,490 $ 5,702,012
=====================================================================================================================
BASIC EARNINGS PER COMMON SHARE .......................... 1 $ 1.27 $ 1.11 $ 0.95
=====================================================================================================================
DILUTED EARNINGS PER COMMON SHARE ........................ 1 $ 1.24 $ 1.09 $ 0.94
=====================================================================================================================
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ............................................ 6,477,600 6,372,748 6,002,625
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS STATE BANCORP, INC. AND SUBSIDIARY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
============================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................................... $ 8,202,545 $ 7,105,490 $ 5,702,012
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses .............................. 1,800,000 1,950,000 1,500,000
Depreciation and amortization of bank premises and equipment .... 689,991 553,591 536,390
Amortization of intangibles ..................................... 83,554 605,147 605,147
Deferred income tax benefit ..................................... (417,000) (365,200) (203,029)
Amortization of net premium on securities ....................... 794,427 1,520,924 1,336,874
Net security losses (gains) ..................................... 63,771 53,180 (135,130)
Gain on sale of other real estate owned ("OREO") ................ (17,060) (56,680) (89,084)
Amortization of unearned compensation ........................... 264,155 316,125 155,254
Decrease (increase) in other assets, net ........................ 1,017,041 (2,458,249) 149,082
Increase in accrued expenses, taxes and other liabilities ....... 1,122,956 1,263,659 134,572
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................. 13,604,380 10,487,987 9,692,088
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities held to maturity ............. 14,803,516 32,606,246 28,255,808
Purchases of securities held to maturity ............................ (6,684,533) (12,817,751) (30,562,652)
Proceeds from sales of securities available for sale ................ 395,716,130 203,914,634 149,572,257
Proceeds from maturities of securities available for sale ........... 257,840,968 144,113,718 82,595,593
Purchases of securities available for sale .......................... (656,400,168) (468,983,407) (187,378,118)
Increase in loans--net .............................................. (44,978,324) (26,355,020) (68,946,068)
Proceeds from sale of OREO .......................................... 342,060 1,083,343 789,084
Purchases of bank premises and equipment, net ....................... (1,066,973) (1,058,498) (573,114)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................. (40,427,324) (127,496,735) (26,247,210)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in demand and savings deposits .................. 33,343,561 (9,747,425) (21,446,672)
(Decrease) increase in time deposits ................................ (47,550,533) 146,524,856 (1,842,793)
(Decrease) increase in Federal funds purchased ...................... (6,000,000) 2,400,000 (13,400,000)
Increase (decrease) in securities sold under agreements to repurchase 19,711,000 (59,261,000) (9,138,774)
(Decrease) increase in other short-term borrowings .................. (12,000,000) 35,000,000 2,000,000
Cash dividends paid ................................................. (3,294,506) (2,538,326) (1,952,039)
Proceeds from shares issued under the dividend reinvestment plan .... 867,842 809,862 703,183
Proceeds from stock options exercised ............................... 275,570 77,008 191,825
Purchase of treasury stock .......................................... (188,375) -- --
Proceeds from rights exercised ...................................... -- -- 4,263,307
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities ................... (14,835,441) 113,264,975 (40,621,963)
- ----------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................. (41,658,385) (3,743,773) (57,177,085)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 60,932,820 64,676,593 121,853,678
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 19,274,435 $ 60,932,820 $ 64,676,593
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Interest paid ....................................................... $ 24,363,965 $ 22,027,177 $ 19,121,173
============================================================================================================================
Income taxes paid ................................................... $ 4,358,592 $ 4,328,779 $ 3,557,075
============================================================================================================================
Transfer from loans to OREO ......................................... $ 840,000 $ 189,334 $ 1,726,663
============================================================================================================================
Adjustment to unrealized net loss on securities available for sale .. $ (225,954) $ 1,221,056 $ 1,528,398
============================================================================================================================
Dividends declared but not paid as of year end ...................... $ 780,485 $ 730,526 $ 600,126
============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Treasury Comprehensive
Notes Stock Surplus Earnings Stock Income
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ................ $21,059,560 $ 16,402,404 $ 3,159,000 $ (33,412)
Comprehensive income:
Net income ............................ 5,702,012
Other comprehensive income, net
of tax:
Unrealized holding losses arising
during the period .................
Reclassification adjustment
for gains included in net income ..
Total other comprehensive income ...... (902,688)
Total comprehensive income ..............
Cash dividend ($.35 per share) .......... 1 (2,130,974)
8% stock dividend (340,671 shares at
market value) ......................... 1 1,703,355 2,895,703 (4,599,058)
Shares issued under the dividend
reinvestment plan (57,752 shares
at 95% of market value) ............... 288,760 414,423
Stock options exercised ................. 8 125,000 66,825
Rights exercised ........................ 9 2,328,565 3,134,742
Amortization of unearned compensation ... 9 1,234
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 .............. 25,505,240 22,915,331 2,130,980 (936,100)
Comprehensive income:
Net income ............................ 7,105,490
Other comprehensive income, net
of tax:
Unrealized holding gains arising
during the period .................
Reclassification adjustment for
losses included in net income .....
Total other comprehensive income ...... 721,033
Total comprehensive income ..............
Cash dividend ($.42 per share) .......... 1 (2,668,726)
6 for 5 stock split (1,026,672
shares at $5.00 par value) ............ 1 5,133,360 (5,133,360)
Shares issued under the dividend
reinvestment plan (54,581 shares at
95% of market value) .................. 272,905 536,957
Stock options exercised ................. 8 59,125 17,883
Amortization of unearned compensation ... 9 120,577
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 .............. 30,970,630 18,457,388 6,567,744 (215,067)
Comprehensive income:
Net income ............................ 8,202,545
Other comprehensive income, net of tax:
Unrealized holding losses arising
during the period .................
Reclassification adjustment for gains
included in net income ................
Total other comprehensive income ...... (149,643)
Total comprehensive income ..............
Cash dividend ($.52 per share) .......... 1 (3,344,465)
5% stock dividend (312,332 shares at
market value .......................... 1 1,561,660 4,997,312 (6,558,972)
Shares issued under the dividend
reinvestment plan (42,725 shares
at 95% of market value) ............... 213,625 654,217
Stock options exercised ................. 8 220,785 54,785
Treasury stock purchased ................ 1 $ (188,375)
Amortization of unearned compensation ... 9 72,777
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 .............. $ 32,966,700 $ 24,236,479 $ 4,866,852 $ (188,375) $ (364,710)
===========================================================================================================================
<CAPTION>
Compre-
Unearned hensive
Compensation Total Income
========================================================================================
<S> <C> <C> <C>
Balance, January 1, 1996 ................ $ 40,587,552
Comprehensive income:
Net income ............................ 5,702,012 $ 5,702,012
-------------
Other comprehensive income, net
of tax:
Unrealized holding losses arising
during the period ................. (648,084)
Reclassification adjustment
for gains included in net income .. (254,604)
-------------
Total other comprehensive income ...... (902,688) (902,688)
-------------
Total comprehensive income .............. $ 4,799,324
=============
Cash dividend ($.35 per share) .......... (2,130,974)
8% stock dividend (340,671 shares at
market value) ......................... --
Shares issued under the dividend
reinvestment plan (57,752 shares
at 95% of market value) ............... 703,183
Stock options exercised ................. 191,825
Rights exercised ........................ $ (1,200,000) 4,263,307
Amortization of unearned compensation ... 154,020 155,254
- ------------------------------------------------------------------------
Balance, December 31, 1996 .............. (1,045,980) 48,569,471
Comprehensive income:
Net income ............................ 7,105,490 $ 7,105,490
-------------
Other comprehensive income, net
of tax:
Unrealized holding gains arising
during the period ................. 713,816
Reclassification adjustment for
losses included in net income ..... 7,217
-------------
Total other comprehensive income ...... 721,033 721,033
-------------
Total comprehensive income .............. $ 7,826,523
=============
Cash dividend ($.42 per share) .......... (2,668,726)
6 for 5 stock split (1,026,672
shares at $5.00 par value) ............ --
Shares issued under the dividend
reinvestment plan (54,581 shares at
95% of market value) .................. 809,862
Stock options exercised ................. 77,008
Amortization of unearned compensation ... 195,548 316,125
- ------------------------------------------------------------------------
Balance, December 31, 1997 .............. (850,432) 54,930,263
Comprehensive income:
Net income ............................ 8,202,545 $ 8,202,545
-------------
Other comprehensive income, net of tax:
Unrealized holding losses arising
during the period ................. (127,239)
Reclassification adjustment for gains
included in net income ................ (22,404)
-------------
Total other comprehensive income ...... (149,643) (149,643)
-------------
Total comprehensive income .............. $ 8,052,902
=============
Cash dividend ($.52 per share) .......... (3,344,465)
5% stock dividend (312,332 shares at
market value .......................... --
Shares issued under the dividend
reinvestment plan (42,725 shares
at 95% of market value) ............... 867,842
Stock options exercised ................. 275,570
Treasury stock purchased ................ (188,375)
Amortization of unearned compensation ... 191,378 264,155
- ------------------------------------------------------------------------
Balance, December 31, 1998 .............. $ (659,054) $ 60,857,892
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting and
Reporting Policies
Organization and Nature of Operations--The consolidated financial statements
include the accounts of State Bancorp, Inc. and its wholly-owned subsidiary,
State Bank of Long Island (the "Bank"). The Bank's consolidated financial
statements include the accounts of its wholly-owned subsidiaries, SB Portfolio
Management Corp. ("SB Portfolio"), SB Financial Services Corp. ("SB
Financial"), SB ORE Corp. and New Hyde Park Leasing Corporation. SB Portfolio
and SB Financial are Delaware-based subsidiaries formed in June 1998. SB
Portfolio manages a portfolio of fixed income investments, and SB Financial
provides balance sheet management services with a focus on interest rate risk
management. State Bancorp, Inc. and subsidiary are collectively referred to
hereafter as the "Company." All intercompany accounts and transactions have been
eliminated.
The Company was incorporated as a bank holding company under the laws of
the State of New York in 1985 to provide consumer, commercial and municipal
banking services to clients located primarily in the Queens, Nassau and Suffolk
County areas. It offers a full range of deposit and loan products through nine
full-service branches. In addition, the Company offers merchant credit card
services, access to annuity products and offers a consumer debit card with
membership in a national ATM network. The Company currently has ATMs at five of
its nine branch locations.
Basis of Presentation--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and with general practice within the
banking industry. The following is a summary of the more significant accounting
and reporting policies:
Securities Held to Maturity and Securities Available For Sale--At the time of
purchase of a security, the Bank designates the security as either available for
sale or held to maturity, depending upon investment objectives, liquidity needs
and intent. Securities held to maturity are stated at cost, adjusted for premium
amortized or discount accreted, if any. The Bank has the positive intent and
ability to hold such securities to maturity. Securities available for sale are
stated at estimated fair value. Unrealized gains and losses are excluded from
income and reported net of tax as a separate component of stockholders' equity
until realized. Trading securities are purchased and held principally for the
purpose of selling them in the near term. Trading generally reflects active and
frequent buying and selling, and trading securities are generally used with the
objective of generating profits on short-term differences in price. As of
December 31, 1998 and 1997, the Bank did not hold any trading securities.
Interest earned on investment securities is included in interest income.
Realized gains and losses on the sale of securities are reported in the
statements of consolidated income and determined using the adjusted cost of the
specific security sold.
Income Recognition--The Bank discontinues the accrual of interest on loans
whenever there is reasonable doubt that interest and/or principal will be
collected, or when either principal or interest is ninety days or more past due
and the loan is not well collateralized nor in the process of collection. Income
is not accrued for installment loans which are ninety days past due unless the
Bank holds cash collateral therefor. Interest received on nonaccrual loans is
either applied against principal or reported as income, according to
management's judgement as to the collectibility of the principal.
Allowance for Possible Loan Losses--The allowance for possible loan losses is
established through a provision for loan losses charged to expenses. Loans are
charged against the allowance when management believes that the collectibility
of the principal is unlikely, while recoveries of previously charged-off loans
are credited to the reserve. The balance in the allowance for possible loan
losses is maintained at a level that, in the opinion of management, is
sufficient to absorb future losses. To determine that level, management
identifies problem loans based on the financial condition of the borrower, the
value of any collateral and/or guarantor support. Based upon the resultant risk
categories assigned to each loan and the procedures regarding impairment
described below, an appropriate reserve level is determined. Management also
evaluates the quality of, and changes in, the portfolio, while also taking into
consideration the Bank's historical loss experience, the existing economic
climate of the service area in which the Bank operates, examinations by
regulatory authorities, internal reviews and other evaluations in determining
the appropriate allowance balance. While management utilizes all available
information to estimate the adequacy of the allowance for possible loan losses,
the ultimate collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based upon changes in
economic conditions and other relevant factors.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures." Commercial and commercial real
estate loans are considered impaired when, based on current information and
events, it is probable that the Company will not be able to collect all of the
principal and interest due under the contractual terms of the loan.
14
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
Management considers all nonaccrual loans for impairment. Large groups of
smaller-balance homogeneous loans, such as consumer and residential mortgages,
are collectively evaluated for impairment.
The allowance for possible loan losses related to loans that are impaired
includes reserves which are based upon the expected future cash flows,
discounted at the loan's effective interest rate, or the fair value of the
underlying collateral for collateral-dependent loans, or the observable market
price. This evaluation is inherently subjective as it requires material
estimates, including the amount and timing of future cash flows expected to be
received on impaired loans, that may be susceptible to significant change.
Bank Premises and Equipment--Net--Bank premises and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation expense is
computed by the straight-line method over the estimated useful lives of the
related assets which range from 3 to 40 years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the remaining
terms of the leases.
Loan Origination Fees and Costs--Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
on the related loan.
Income Taxes--The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
Company's consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial accounting and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. As changes in tax laws are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Treasury Stock--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.
Cash Dividends--Cash dividends per common share have been restated to give
retroactive effect to stock splits and dividends.
Stock Dividends--Stock dividends issued are recorded by transferring the
aggregate market value of the shares issued from retained earnings to common
stock and surplus. All per share information included in the consolidated
financial statements and the notes thereto has been restated to give retroactive
effect to stock dividends.
Earnings Per Common Share--The Company adopted SFAS No. 128, "Earnings Per
Share" effective December 31, 1997. 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 bid
price for the common stock. Retroactive recognition has been given for stock
dividends and splits, as well as for the adoption of SFAS No. 128.
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Net Income ........................... $8,202,545 $7,105,490 $5,702,012
Average dilutive stock
options outstanding ................ 213,334 259,777 186,627
Average exercise price per share ..... $ 6.43 $ 8.18 $ 6.70
Average market price--
diluted basis ...................... $ 20.11 $ 17.83 $ 12.90
Average common shares
outstanding ........................ 6,477,600 6,372,748 6,002,625
Increase in shares due to exercise
of options--diluted basis .......... 126,745 140,650 70,234
- --------------------------------------------------------------------------------
Adjusted shares outstanding--
diluted ............................ 6,604,345 6,513,398 6,072,859
- --------------------------------------------------------------------------------
Net income per share--basic .......... $ 1.27 $ 1.11 $ 0.95
================================================================================
Net income per share--diluted ........ $ 1.24 $ 1.09 $ 0.94
================================================================================
Statements of Cash Flows--For the purpose of presenting the consolidated
statements of cash flows, the Company considers Federal funds sold and
securities purchased under agreements to resell to be cash equivalents because
such assets are convertible into fixed amounts of cash within several days of
initial purchase.
Loans Foreclosed--Property acquired through foreclosure (other real estate owned
or "OREO") is stated at the lower of cost or fair value less estimated selling
costs. Losses arising at the time of foreclosure are charged against the
allowance for possible loan losses. Revenues and expenses from operations or
changes in the carrying value of these assets are included in other income and
operating expenses.
Intangibles--Intangibles consist of core deposit intangibles and the excess
market value of leases acquired. Intangibles are carried at cost less
accumulated amortization. Amortization is provided over the period of
anticipated benefit (3 to 19 years).
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.
Recent Accounting Developments--During 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
130 requires an entity to present, as a component of comprehensive income, the
amounts from transactions and other
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
events which currently are excluded from the statement of income and are
recorded directly to stockholders' equity. SFAS No. 131 requires an entity to
disclose financial information in a manner consistent to internally used
information and requires more detailed disclosures of operating and reporting
segments than are currently in practice. The adoption of SFAS No. 130 and No.
131, which concerns disclosure standards only, did not have a material impact on
the Company's financial position and results of operations.
Accounting Principles Issued But Not Adopted--In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management
believes that the adoption of SFAS No. 133 will not have a material impact on
the consolidated financial statements.
Reclassifications--Certain reclassifications have been made to prior years'
amounts to conform them to the current year's presentation.
2. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and estimated fair
value of securities held to maturity and securities available for sale at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1998
- ------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
================================================================================================
<S> <C> <C> <C> <C>
Securities Held to Maturity:
Obligations of states
and political
subdivisions ............. $ 2,516,035 $ 10,458 $ (92) $ 2,526,401
- ------------------------------------------------------------------------------------------------
Total Securities Held
to Maturity ................ 2,516,035 10,458 (92) 2,526,401
- ------------------------------------------------------------------------------------------------
Securities Available for Sale:
Obligations of states
and political
subdivisions ............. 21,644,855 7,483 (12,103) 21,640,235
Government Agency
securities ............... 213,274,365 193,205 (444,399) 213,023,171
Corporate securities ....... 2,368,150 -- -- 2,368,150
Mortgage-backed
securities and
collateralized
mortgage
obligations .............. 42,641,405 -- (334,350) 42,307,055
- ------------------------------------------------------------------------------------------------
Total Securities
Available for Sale ......... 279,928,775 200,688 (790,852) 279,338,611
- ------------------------------------------------------------------------------------------------
Total Securities ............. $282,444,810 $ 211,146 $ (790,944) $281,865,012
================================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1997
- ------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
================================================================================================
<S> <C> <C> <C> <C>
Securities Held to Maturity:
Obligations of states
and political
subdivisions ............. $ 10,637,143 $ 9,837 $ (2,098) $ 10,644,882
- ------------------------------------------------------------------------------------------------
Total Securities Held
to Maturity ................ 10,637,143 9,837 (2,098) 10,644,882
- ------------------------------------------------------------------------------------------------
Securities Available for Sale:
Obligations of states
and political
subdivisions ............. 59,879,966 5,432 (72,275) 59,813,123
Government Agency
securities ............... 153,177,184 154,020 (43,477) 153,287,727
Corporate securities ....... 2,368,150 -- -- 2,368,150
Mortgage-backed
securities and
collateralized
mortgage
obligations .............. 62,516,478 35,291 (443,202) 62,108,567
- ------------------------------------------------------------------------------------------------
Total Securities
Available for Sale ......... 277,941,778 194,743 (558,954) 277,577,567
- ------------------------------------------------------------------------------------------------
Total Securities ............. $288,578,921 $ 204,580 $ (561,052) $288,222,449
================================================================================================
</TABLE>
The amortized cost and estimated fair value of securities held to maturity
and securities available for sale at December 31, 1998, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
- --------------------------------------------------------------------------------
Amortized Estimated
Cost Fair Value
================================================================================
Securities Held to Maturity:
Due in one year or less .................... $ 2,432,035 $ 2,434,001
Due after five years through ten years ..... 84,000 92,400
- --------------------------------------------------------------------------------
Total Securities Held to Maturity ............ $ 2,516,035 $ 2,526,401
================================================================================
Securities Available for Sale:
Due in one year or less .................... $ 21,549,855 $ 21,541,435
Due after one year through five years ...... 5,000,000 5,005,000
Due after five years through ten years ..... 101,815,416 101,832,121
Due after ten years ........................ 108,922,099 108,653,000
- --------------------------------------------------------------------------------
Subtotal ..................................... 237,287,370 237,031,556
Mortgage-backed securities and
collateralized mortgage obligations ........ 42,641,405 42,307,055
- --------------------------------------------------------------------------------
Total Securities Available for Sale .......... $279,928,775 $279,338,611
================================================================================
In 1998, 1997 and 1996, gross gains of $231,194, $192,958 and $325,979 and
gross losses of $294,965, $246,138 and $190,849, respectively, were realized on
the sale of securities available for sale.
At December 31, 1998, the Bank did not own any securities held to maturity
or securities available for sale for any one issuer in excess of ten percent of
stockholders' equity.
Securities held to maturity and securities available for sale with an
amortized cost of $279,701,658 and $262,904,988 and an estimated fair value of
$279,121,413 and $262,606,489 at December 31, 1998 and 1997, respectively, were
pledged for public deposits, securities sold under agreements to repurchase and
fiduciary purposes.
16
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
3. LOANS--NET
At December 31, 1998 and 1997, net loans consisted of the following:
1998 1997
================================================================================
Commercial and industrial .................. $197,601,552 $172,524,092
Real estate--mortgage ...................... 187,740,359 174,479,673
Real estate--construction .................. 17,164,726 14,712,909
Loans to individuals ....................... 7,748,895 7,077,091
Tax exempt and other ....................... 10,461,323 8,919,977
- --------------------------------------------------------------------------------
Gross loans ................................ 420,716,855 377,713,742
Less:
Unearned income .......................... 80,475 80,475
Allowance for possible loan losses ....... 5,788,440 5,123,651
- --------------------------------------------------------------------------------
Loans--net ................................. $414,847,940 $372,509,616
================================================================================
The Bank's real estate loans and loan commitments are primarily for
properties located throughout Long Island, New York. It is the Bank's policy to
spread risk among a broad range of industries and to monitor concentration and
associated levels of risk on an ongoing basis. As of December 31, 1998 and 1997,
the only concentration of loans exceeding ten percent of total loans was the
Bank's loans totaling $71,590,000 and $64,030,000, respectively, from real
estate operators, lessors and developers. Repayment of these loans is dependent
in part upon the overall economic health of the Company's market area and
current real estate values. Credit losses arising from lending transactions in
this industry compare favorably with the Bank's credit loss experience on its
portfolio as a whole. The Bank considers the credit circumstances, the nature of
the project, and loan to value ratios for all real estate loans. The Bank's loan
to value policies are generally more conservative than regulatory guidelines.
The Bank makes loans to its directors and executive officers, and other
related parties, in the ordinary course of its business. These loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and,
in the opinion of management, do not bear more than normal credit risk. Loans
made to directors and executive officers, either directly or indirectly, totaled
$1,537,146 and $1,428,618 at December 31, 1998 and 1997, respectively. New loans
totaling $2,727,675 and $3,394,719 were extended and payments of $2,619,147 and
$4,137,588 were received during 1998 and 1997, respectively, on these loans.
Activity in the allowance for possible loan losses for the three years
ended December 31, 1998 is as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Balance, January 1 ............. $ 5,123,651 $ 5,008,965 $ 5,004,216
Provision charged to income .... 1,800,000 1,950,000 1,500,000
Charge-offs, net of recoveries
of $520,990, $222,429
and $99,796 .................... (1,135,211) (1,835,314) (1,495,251)
- -------------------------------------------------------------------------------
Balance, December 31 ........... $ 5,788,440 $ 5,123,651 $ 5,008,965
================================================================================
As of December 31, 1998 and 1997, the recorded investment in loans that
are considered to be impaired is summarized below.
- --------------------------------------------------------------------------------
1998 1997
================================================================================
Amount measured using the present value
of expected future cash flows, discounted
at each loan's effective
interest rate ................................ $5,529,049 $6,329,049
Impaired collateral-dependent loans ............ 3,133,067 2,756,308
- --------------------------------------------------------------------------------
Total amount evaluated as impaired ............. $8,662,116 $9,085,357
- --------------------------------------------------------------------------------
Average impaired loan balance .................. $8,437,893 $9,575,104
- --------------------------------------------------------------------------------
Interest income recognized
on impaired loans ............................ $ 315,543 $ 420,421
================================================================================
As a result of the Bank's measurement of impaired loans, an allowance for
possible loan losses of approximately $1,420,000 and $953,000 was established
for $8,352,709 and $9,085,357 of the total impaired loans at December 31, 1998
and 1997, respectively. No specific allowance was required for the remaining
balance of impaired loans in 1998.
At December 31, 1998 and 1997, loans with unpaid principal balances on
which the Bank is no longer accruing interest income were $3,676,431 and
$4,257,674, respectively. Interest income would have been approximately
$262,000, $367,000 and $575,000 greater in 1998, 1997 and 1996, respectively,
had these loans been current. Interest income on total nonaccrual loans, which
is recorded only when received, amounted to approximately $64,000, $70,000 and
$35,000 for 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, loans restructured, and still accruing
interest in accordance with the modified terms, were $5,544,775 and $7,288,860,
respectively. Interest income would have been approximately $248,000, $349,000
and $427,000 greater in 1998, 1997 and 1996, respectively, had the restructured
loans performed according to their original terms.
4. Bank Premises and Equipment--Net
At December 31, 1998 and 1997, Bank premises and equipment consisted of
the following:
- --------------------------------------------------------------------------------
Accumulated
Depreciation/ Net Book
Cost Amortization Value
================================================================================
December 31, 1998:
Building ..................... $1,727,116 $ 727,607 $ 999,509
Leasehold improvements ....... 1,348,110 466,993 881,117
Furniture and fixtures ....... 3,400,524 2,308,849 1,091,675
Computer equipment
and software ............... 1,868,853 963,141 905,712
- --------------------------------------------------------------------------------
Total .......................... $8,344,603 $4,466,590 $3,878,013
================================================================================
December 31, 1997:
Building ..................... $1,711,391 $ 661,102 $1,050,289
Leasehold improvements ....... 1,139,326 404,762 734,564
Furniture and fixtures ....... 3,328,176 2,107,529 1,220,647
Computer equipment
and software ............... 1,232,194 736,663 495,531
- --------------------------------------------------------------------------------
Total .......................... $7,411,087 $3,910,056 $3,501,031
================================================================================
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Other Assets
At December 31, 1998 and 1997, other assets consisted of the following:
- --------------------------------------------------------------------------------
1998 1997
================================================================================
Core deposit intangibles (net of accumulated
amortization of $3,296,322 and $3,248,904) ..... $ -- $ 47,418
Interest receivable--investments ................. 3,837,573 4,634,195
Interest receivable--loans ....................... 2,002,240 2,342,674
Net deferred income taxes ........................ 3,466,081 2,972,770
Prepaid expenses ................................. 774,634 770,998
Excess market value of leases acquired
(net of accumulated amortization
of $222,833 and $186,697) ...................... 399,633 435,769
Cash surrender value of life insurance policies .. 1,232,822 1,157,367
Principal receivable--mortgage-backed securities . 28,882 28,667
Other real estate owned .......................... 704,334 189,334
Other ............................................ 392,277 351,568
- --------------------------------------------------------------------------------
Total ............................................ $12,838,476 $12,930,760
================================================================================
6. Lines of Credit and Borrowed Funds
At December 31, 1998 and 1997, correspondent banks extended unsecured
lines of credit aggregating $16,500,000 to the Bank for the purchase of Federal
funds and for foreign exchange transactions. The average amount outstanding
under these credit facilities was $996,000 in 1998 and $2,620,000 in 1997. At
December 31, 1998 and 1997, $0 and $6,000,000, respectively, were outstanding
under these facilities.
Securities sold under agreements to repurchase generally mature within one
to seven days from the transaction date. The average amount outstanding under
such agreements was $3,411,000 in 1998 and $25,680,000 in 1997. At December 31,
1998 and 1997, $34,529,000 and $14,818,000, respectively, were outstanding under
such agreements.
In addition to the above, the Bank may use a line of credit with the
Federal Home Loan Bank of New York ("FHLB") for overnight funding or on a term
basis to match fund asset purchases. Based upon a multiple of the FHLB stock
that the Bank owns, approximately $28,500,000 of this line may be drawn on a
term or overnight basis. The FHLB line is renewed on an annual basis. In October
1997, the Bank entered into a five year, callable term borrowing with FHLB under
this line. At December 31, 1998 and 1997, $25,000,000 was outstanding under the
term line, at an interest rate of 5.49%. The average amount outstanding for 1998
and 1997 was $25,000,000 and $4,520,000, respectively. On an overnight basis, $0
and $22,000,000 were outstanding as of December 31, 1998 and 1997, respectively.
The average amount outstanding under this facility was $2,393,000 in 1998 and
$6,865,000 in 1997.
Also, in February 1998, the Bank entered into a ten year, callable term
borrowing with a brokerage firm. At December 31, 1998, $10,000,000 was
outstanding under this agreement, at an interest rate of 4.85%. The average
amount outstanding for 1998 was $8,712,000.
7. Income Taxes
The components of income tax expense for the years ended December 31,
1998, 1997 and 1996 are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Federal:
Current ............. $ 3,654,631 $ 3,059,510 $ 2,465,747
Deferred ............ (372,000) (320,722) (202,633)
- --------------------------------------------------------------------------------
Subtotal .............. 3,282,631 2,738,788 2,263,114
- --------------------------------------------------------------------------------
State:
Current ............. 930,530 1,136,048 904,986
- --------------------------------------------------------------------------------
Deferred ............ (45,000) (44,478) (396)
- --------------------------------------------------------------------------------
Subtotal .............. 885,530 1,091,570 904,590
- --------------------------------------------------------------------------------
Total ................. $ 4,168,161 $ 3,830,358 $ 3,167,704
================================================================================
Total income tax expense was different from the amounts computed by
applying the statutory Federal income tax rate to income before income taxes due
to the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997 1996
==================================================================================================
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Income tax
expense at
statutory rate ... $ 4,206,040 34.0% $ 3,718,188 34.0% $ 3,015,703 34.0%
Increase (reduction)
in taxes resulting
from:
Tax exempt
interest on
investments,
net of interest
expense
disallowed
of $306,676,
$330,121 and
$190,349........ (568,481) (4.6) (575,904) (5.3) (520,137) (5.9)
State income tax,
net of Federal
tax benefit .... 584,450 4.7 720,436 6.6 597,029 6.7
Other ............ (53,848) (0.4) (32,362) (0.3) 75,109 0.9
- --------------------------------------------------------------------------------------------------
Income tax
expense .......... $ 4,168,161 33.7% $ 3,830,358 35.0% $ 3,167,704 35.7%
==================================================================================================
</TABLE>
At December 31, 1998 and 1997, the deferred tax assets and liability are
comprised of the
following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997
=================================================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses .................. $ 2,222,180 $ 1,942,645
Unrealized holding loss on securities
available for sale ................................ 225,455 149,144
Intangible assets ................................... 788,143 866,453
Bank premises and equipment ......................... 132,293 149,533
Other ............................................... 98,010 63,777
- -------------------------------------------------------------------------------------------------
Subtotal .............................................. 3,466,081 3,171,552
Deferred tax liability--recapture of
allowance for possible loan losses .................. -- (198,782)
- -------------------------------------------------------------------------------------------------
Net deferred tax assets ............................... $ 3,466,081 $ 2,972,770
=================================================================================================
</TABLE>
18
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
The deferred tax assets and liability are netted and presented in a single
amount, which is included in other assets in the accompanying consolidated
balance sheets. The income tax (benefit) expense associated with net security
(losses) or gains amounted to ($33,534), ($21,777) and $55,376 in 1998, 1997 and
1996, respectively.
8. Incentive Stock Option Plans
Under the terms of the Company's incentive stock option plans adopted in
January 1987 and April 1994, options have been granted to certain key personnel
which entitle each holder to purchase shares of the Company's common stock. The
option price is the higher of the fair market value or the book value of the
shares at the date of grant. Such options are exercisable commencing one year
from the date of grant, at the rate of 25 percent per year, and expire eight
years from the date of the grant.
At December 31, 1998, 95,119 options for the purchase of 159,432 shares
were exercisable, and 89,291 shares were reserved for possible issuance. A
summary of stock option activity follows after giving retroactive effect to all
stock splits and dividends:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Option Price Weighted Average
Number Number (Approximate Fair Exercise Price
of Options of Shares Value at Date of Grant) Total Per Share
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding--
January 1, 1996.................................. 118,647 241,004 $ 10.60-$ 30.00 $ 1,432,363 $ 6.43
Granted.......................................... 30,900 42,048 $ 14.25 440,325 $10.47
Exercised........................................ (7,453) (33,893) $ 10.60-$ 30.00 (191,825) $ 5.66
Cancelled or forfeited........................... (4,199) (8,777) $ 10.60-$ 30.00 (54,339) $ 6.19
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding--
December 31, 1996................................ 137,895 240,382 $ 10.60-$ 14.25 1,626,524 $ 7.25
Granted.......................................... 36,600 46,116 $13.375 489,525 $10.62
Exercised........................................ (6,525) (12,880) $ 10.60-$ 14.25 (77,008) $ 5.98
Cancelled or forfeited........................... (1,200) (1,590) $ 12.625-$ 14.25 (16,163) $10.17
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding--
December 31, 1997................................ 166,770 272,028 $ 10.60-$ 14.25 2,022,878 $ 7.87
Granted.......................................... 55,150 57,910 $ 23.00 1,268,450 $21.90
Exercised........................................ (21,345) (45,906) $ 10.60-$ 14.25 (275,570) $ 6.00
Cancelled or forfeited........................... (900) (1,062) $13.375-$ 23.00 (16,988) $16.00
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding--
December 31, 1998 199,675 282,970 $ 10.60-$ 23.00 $2,998,770 $11.01
=================================================================================================================================
</TABLE>
The following summarizes shares subject to purchase from options
outstanding and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Weighted Average
Shares Remaining Weighted Average Shares Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise price
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
$5.52-$ 6.28 .............. 89,500 1.4 years $ 5.81 89,500 $ 5.81
$8.43-$10.62 .............. 136,082 5.2 years $ 9.84 69,932 $ 9.50
$21.90 .................... 57,388 7.1 years $21.90 -- $ --
- --------------------------------------------------------------------------------------------------------------------
282,970 4.4 years $11.01 159,432 $ 7.43
=====================================================================================================================
</TABLE>
The estimated fair value of options granted during 1998 and 1997 was $6.04
and $2.48 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 two 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.
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Net income
As reported ................. $ 8,202,545 $ 7,105,490 $ 5,702,012
Pro Forma ................... $ 8,029,596 $ 7,020,040 $ 5,639,263
- --------------------------------------------------------------------------------
Basic earnings per common share
As reported ................. $ 1.27 $ 1.11 $ 0.95
Pro Forma ................... $ 1.24 $ 1.10 $ 0.94
================================================================================
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The fair value of options granted under the Company's incentive stock
option plans during 1998, 1997 and 1996 were estimated on the date of grant
using the Binomial option-pricing model with the following weighted-average
assumptions used:
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Dividend yield .................... 2.7% 3.8% 3.4%
Expected volatility ............... 26.0% 13.3% 13.8%
Risk free interest rate ........... 4.56% 6.63% 6.25%
Expected life of options .......... 7 years 7.5 years 7.8 years
================================================================================
9. Employee Benefit Plans
The Bank has an Employee Stock Ownership Plan (the "ESOP") which is a
defined contribution plan covering substantially all full-time employees. Bank
contributions to the ESOP represent a minimum of three percent of an employee's
annual gross compensation. Employees become 20 percent vested after two years of
employment, with an additional 20 percent vesting each year. Full vesting takes
place upon the completion of six years of employment. Employee contributions are
not permitted. At Dec ember 31, 1998, the ESOP had all of its assets invested in
the Company's common stock. The Bank funds all amounts when due.
In conjunction with the Rights Offering in July 1996, the ESOP borrowed
$1,200,000 from the Company to purchase 126,000 of the Company's shares
(adjusted for stock dividends and splits). As such, the Company recorded a
deduction from stockholders' equity to reflect the unearned compensation for the
shares. As the unearned shares are released from collateral and allocated among
participants, the Company recognizes compensation expense equal to the current
market price of the shares released and the shares become outstanding for
earnings per share computations. Contributions under the ESOP charged to
operations amounted to $631,494, $541,722 and $433,294 in 1998, 1997 and 1996,
respectively. Of that amount, compensation expense of $398,242 and $316,125 is
applicable to the 20,093 shares and the 19,555 shares allocated in 1998 and
1997, respectively. As of December 31, 1998 and 1997, the value of the 69,202
and the 85,043 unallocated shares was $1,124,533 and $2,189,857, respectively.
The Bank has a 401(k) Retirement Plan and Trust (the "401(k) Plan"), which
covers substantially all full-time employees. Employees may elect to contribute
up to sixteen percent of their annual gross compensation to the 401(k) Plan, and
the Bank will match one half of the employee's contribution up to a maximum of
three percent of the employee's annual gross compensation. Employees are fully
vested in both their own and Bank contributions. Bank contributions under the
401(k) Plan amounted to $180,825, $168,902 and $151,731 in 1998, 1997 and 1996,
respectively. The Bank funds all amounts when due. At December 31, 1998,
contributions to the 401(k) Plan were invested in either a bond, equity, money
market, capital appreciation, international equity, emerging markets equity, or
diversified fund as directed by each employee.
During 1995, the Bank adopted non-qualified deferred compensation plans
(the "Plans") for each officer for whom contributions under the ESOP are limited
by the applicable provisions of the Internal Revenue Code. Bank contributions
under the Plans totaled $51,653, $35,755 and $25,297 in 1998, 1997 and 1996,
respectively.
10. Commitments and Contingent Liabilities
Leases--The Bank 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:
- --------------------------------------------------------------------------------
1999..........................................................$1,081,319
2000.......................................................... 1,103,199
2001.......................................................... 1,119,231
2002.......................................................... 1,121,177
2003.......................................................... 1,039,214
Remainder to 2011............................................. 3,582,152
- --------------------------------------------------------------------------------
Total $9,046,292
================================================================================
Rent expense was approximately $982,000, $858,000 and $657,000 for 1998,
1997 and 1996, respectively.
Directors' Incentive Retirement Plan--The Company has a Directors' Incentive
Retirement Plan for former directors of the Company who elected to retire after
having completed certain minimum service requirements. Under the retirement
plan, directors who elect to retire are entitled to receive, for a period of
five years after such retirement, certain compensation, as defined in the
retirement plan, as long as such director continues to consult with the Company
in an advisory capacity (or, if the director expires prior to the completion of
the consulting period, the beneficiary or estate designated by the director is
entitled to receive such remaining compensation).
In 1992, the Company adopted a new retirement plan, whereby five
individuals (four directors and the secretary to the Board of Directors), who
had been eligible to receive benefits under the old retirement plan, agreed to
cancel and surrender their rights in the old retirement plan in exchange for the
terms of the new retirement plan. The new retirement plan provides for the
payment of certain compensation annually to these five individuals through March
1, 2007. These individuals must be available to consult with the Company in an
advisory capacity during this period (or, if the director or secretary expires
prior to the completion of the consulting period, the beneficiary or estate
designated by the director or secretary is entitled to receive such remaining
compensation).
Directors' Stock Plan--The Company approved a Directors' Stock Plan in 1998 for
each outside director and the secretary to the Board of Directors. Commencing
January 1, 1999, and on January 1 of each subsequent year, each participant will
be granted an award of 100 share credits for the preceding year of service. Each
participant will also receive share credits for cash or stock dividends that
would have been paid if the share credits had been actual shares. Awards shall
be paid after the
20
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
participant has ceased to be a director or secretary. If the participant
expires, the shares will be awarded to his/her beneficiary or estate. There are
105,000 shares reserved for possible issuance.
During 1998, 1997 and 1996, the Bank charged approximately $126,000,
$133,000 and $263,000, respectively, to operations relating to the retirement
and stock plans.
Severance Commitments--The Company has five Executive Severance Plans (the
"Plans") for certain key executives who are full-time employees of the title of
Senior Vice President and above and who are designated as Plan participants by
the Board of Directors. The Plans provide for certain rights accruing to
participants in the event of a termination of the participant's employment
within one year after a change in control of the Company. These rights include a
cash payment and the continuation of certain employee benefits. In addition,
all stock options held by a participant will become immediately exercisable. In
the event that the participant enters into an employment contract, as defined
in the Plans, all rights to the severance payment and other benefits set forth
above will terminate. No amounts have been paid or accrued under the Plans.
Pending Claims and Contingent Liabilities--There are various pending claims and
contingent liabilities arising in the normal course of business which are not
reflected in the accompanying consolidated financial statements. Management
considers that the aggregate liability, if any, resulting from pending claims
and contingent liabilities will not be material.
Other--The Bank is required to maintain balances with the Federal Reserve Bank
of New York to satisfy reserve requirements. These balances averaged
approximately $3,391,000 and $5,812,000 in 1998 and 1997, respectively.
11. State Bancorp, Inc. (Parent Company Only)
Certain condensed financial information follows (in thousands of dollars):
December 31,
- --------------------------------------------------------------------------------
1998 1997
================================================================================
BALANCE SHEET
Assets:
Cash ........................................... $ 636 $ 176
Dividends receivable and other assets .......... 1,023 1,026
Investment in the Bank ......................... 60,311 54,459
- -------------------------------------------------------------------------------
Total Assets ..................................... $ 61,970 $ 55,661
================================================================================
Liabilities ...................................... $ 1,112 $ 731
- -------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock ................................ -- --
Common stock ................................... 32,967 30,970
Surplus ........................................ 24,236 18,457
Retained earnings .............................. 4,867 6,568
Treasury stock ................................. (188) --
Unrealized net loss on securities
available for sale ............................. (365) (215)
Unearned compensation .......................... (659) (850)
- -------------------------------------------------------------------------------
Total Stockholders' Equity ....................... 60,858 54,930
================================================================================
Total Liabilities and Stockholders' Equity ....... $ 61,970 $ 55,661
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Income Statement
Dividends from the Bank .................... $ 3,344 $ 2,668 $ 2,131
Equity in the undistributed earnings
of the Bank .............................. 4,859 4,437 3,571
- -------------------------------------------------------------------------------
Net Income ................................. $ 8,203 $ 7,105 $ 5,702
================================================================================
Cash Flows
Operating Activities:
Net income ............................... $ 8,203 $ 7,105 $ 5,702
Decrease (increase) in other assets ...... 3 (426) (179)
Increase in liabilities .................. 332 -- 179
Equity in the undistributed earnings
of the Bank ............................ (4,859) (4,437) (3,571)
- -------------------------------------------------------------------------------
Net cash provided by operating activities .. 3,679 2,242 2,131
- --------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid ...................... (3,295) (2,538) (2,131)
Proceeds from issuance of
common stock ........................... 1,143 887 5,313
Capital contribution to the Bank ......... (879) (4,833) (895)
Payment to repurchase common stock ....... (188) -- --
- -------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities ..................... (3,219) (6,484) 2,287
- --------------------------------------------------------------------------------
Net Changes in Cash ........................ $ 460 $(4,242) $ 4,418
================================================================================
</TABLE>
12. Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby and
documentary letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
financial statements. The Company has not engaged in derivatives activities for
any of the reported periods.
The Bank's exposure to credit loss in the event of nonperformance by
third parties for commitments to extend credit and letters of credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral required varies, but may include
accounts receivable, inventory, equipment, real estate, and income-producing
commercial properties. At December 31, 1998 and 1997, commitments to
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
originate loans and commitments under unused lines of credit for which the Bank
is obligated amounted to approximately $120,688,000 and $83,214,000,
respectively.
Letters of credit are conditional commitments issued by the Bank
guaranteeing payments of drafts in accordance with the terms of the letter of
credit agreements. Commercial letters of credit are used primarily to facilitate
trade or commerce and are also issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. Collateral may be required to support letters of credit based upon
management's evaluation of the creditworthiness of each customer. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Most letters of credit
expire within one year. Management does not anticipate any material losses as a
result of these transactions. At December 31, 1998 and 1997, the Bank had
letters of credit outstanding of approximately $3,933,000 and $3,461,000,
respectively.
13. Disclosures About Fair Value of Financial Instruments
Fair value estimates are made as of a specific point in time based on the
characteristics of financial instruments and market information. Where
available, quoted market prices are used. However, markets do not exist for a
portion of the Bank's financial instruments and, as a result, fair value
estimates require judgements regarding future cash flows. These judgements are
subjective in nature, involve uncertainties and therefore may change
significantly at future measurement dates. The fair value information that
follows is intended to supplement, but not replace, the basic consolidated
financial statements and other traditional financial data presented through out
this report. The calculation of estimated fair values is based on market
conditions at December 31, 1998 and 1997 and is not reflective of current or
future fair values. Furthermore, the value of long-term relationships with
depositors is not reflected. The value of those relationships is significant.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Short -Term Investments--For cash and short-term investments (due from
banks, Federal funds sold, securities purchased under agreements to resell,
accrued interest receivable and certain other short-term assets), the carrying
amount is a reasonable estimate of fair value.
Securities Held to Maturity and Securities Available for Sale--For securities
held to maturity and securities available for sale, the estimated fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using a quoted market price for similar
securities.
Loans--The fair value of loans is estimated by discounting the expected future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposits--The fair value of demand deposits, savings accounts and time deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other Short-Term Liabilities--Other short-term liabilities (Federal funds
purchased, securities sold under agreements to repurchase, accrued interest
payable and certain other short-term liabilities) are considered to have fair
values equal to their carrying amounts due to their short-term nature. These
instruments are presented in the table below as other short-term liabilities.
Commitments to Extend Credit, Standby Letters of Credit and Commercial Letters
of Credit--The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counter parties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of standby letters of credit and commercial letters of credit is based on fees
currently charged for similar agreements.
The estimated fair values of the Bank's financial instruments, in
thousands, are as follows:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
====================================================================================
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments ........... $ 25,889 $ 25,889 $ 68,681 $ 68,681
Securities held to
maturity and securities
available for sale .... 281,855 281,865 288,215 288,222
Loans--net of the
allowance for
possible loan
losses ................ 414,848 430,084 372,509 378,245
- -----------------------------------------------------------------------------------
Total ..................... $722,592 $737,838 $729,405 $735,148
====================================================================================
Financial liabilities:
Deposits ................ $597,021 $598,523 $611,228 $612,167
Other short-term
liabilities ........... 70,860 70,860 69,349 69,349
- -----------------------------------------------------------------------------------
Total ..................... $667,881 $669,383 $680,577 $681,516
====================================================================================
</TABLE>
22
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
14. Regulatory Matters
Dividends paid by the Company are subject to restrictions by certain
regulatory agencies. Under these restrictions, approximately $9,764,000 was
available for payment of dividends at December 31, 1998, without prior approval
of those regulatory agencies.
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 judgements 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. Management believes, as of
December 31, 1998, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, 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 and ratios are as follows
(in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
- ----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company .......................... $60,823 8.05% $30,208 4.00% N/A N/A
The Bank ............................. $60,276 7.98% $30,214 4.00% $37,760 5.00%
Tier I Capital to Risk Weighted Assets:
The Company .......................... $60,823 12.82% $18,982 4.00% N/A N/A
The Bank ............................. $60,276 12.64% $19,077 4.00% $28,615 6.00%
Total Capital to Risk Weighted Assets:
The Company .......................... $66,611 14.04% $37,965 8.00% N/A N/A
The Bank ............................. $66,064 13.85% $38,153 8.00% $47,691 10.00%
- ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company .......................... $54,662 7.50% $29,155 4.00% N/A N/A
The Bank ............................. $54,191 7.43% $29,174 4.00% $36,444 5.00%
Tier I Capital to Risk Weighted Assets:
The Company .......................... $54,662 12.55% $17,416 4.00% N/A N/A
The Bank ............................. $54,191 12.40% $17,476 4.00% $26,214 6.00
Total Capital to Risk Weighted Assets:
The Company .......................... $59,786 13.73% $34,833 8.00% N/A N/A
The Bank ............................. $59,315 13.58% $34,951 8.00% $43,689 10.00%
======================================================================================================================
</TABLE>
23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
State Bancorp, Inc.
New Hyde Park, New York
We have audited the accompanying consolidated balance sheets of State
Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, aswell as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of State Bancorp, Inc. and
subsidiary at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 21, 1999
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS STATE BANCORP, INC. AND SUBSIDIARY
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
State Bancorp, Inc. (the "Company") is a one-bank holding company which
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. The income
of the Company is derived through the operation of the Bank and its
subsidiaries, SB Portfolio Management Corp. ("SB Portfolio"), SB Financial
Services Corp. ("SB Financial"), New Hyde Park Leasing Corporation and SB ORE
Corp.
The Bank serves its customer base through nine full-service branches and a
lending center in Jericho. Of the Bank's branch locations, five are in Nassau
County and four are located in Suffolk County. The Bank offers a full range of
retail banking services to individuals, corporations, municipalities and small
to medium-sized businesses. Retail products include checking accounts, NOW
accounts, money market accounts, passbook and statement savings accounts,
certificates of deposit, individual retirement accounts, commercial loans,
personal loans, residential, construction, home equity, commercial mortgage
loans, consumer loans and small business lines of credit. In addition, the Bank
also provides access to annuity products, discount brokerage services and,
through its association with U.S. Trust Company, a full range of wealth
management and financial planning services.
During 1998, SB Portfolio and SB Financial, based in Wilmington, Delaware,
each wholly-owned subsidiaries of the Bank, were formed. SB Portfolio provides
investment management services to the Bank and the Company while SB Financial
provides balance sheet management services such as interest rate risk modeling,
asset/liability management reporting and general advisory services to the Bank.
For the year ended December 31, 1998, the Company again achieved record
levels of earnings, loans, core deposits and stockholders' equity. The following
discussion is intended to provide the reader with further insight into the
principal factors contributing to the financial results of the Company and its
operating subsidiary for the periods shown. It should be read in conjunction
with the consolidated financial statements and notes thereto for a full
understanding of this analysis.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Summary of Financial Performance
The Company achieved its twenty-eighth consecutive year of record earnings
during 1998. Net income increased by 15.5% to $8.2 million or $1.27 basic
earnings per common share in 1998 versus $7.1 million or $1.11 per share in 1997
(per share earnings have been adjusted to reflect the impact of the five percent
stock dividend declared by the Company during 1998). Fully diluted earnings per
common share were $1.24 and $1.09 in 1998 and 1997, respectively. Growth in net
interest income (up 9.4%), a reduction in the provision for loan losses and a
lower effective income tax rate were the principal reasons for the improved
earnings during 1998. The increase in net interest income resulted from an
expanded interest-earning asset base, primarily through growth in the commercial
loan portfolio. Somewhat offsetting the foregoing factors was a decline in other
income coupled with an increase in operating expenses, principally salaries and
benefits.
The Company's capital position, by all industry-standard measures,
remains strong. The ratio of average total stockholders' equity to average total
assets was 7.83% and 7.61% in 1998 and 1997, respectively. Based upon banking
industry regulatory guidelines, a "well capitalized" institution must maintain a
Tier I leverage ratio of at least 5.00% and Tier I and total capital to
risk-weighted assets ratios of at least 6.00% and 10.00%, respectively. At
December 31, 1998, the Company's Tier I leverage ratio was 8.05% while its
risk-weighted ratios were 12.82% for Tier I capital and 14.04% for total
capital. These ratios are substantially in excess of the foregoing regulatory
guidelines and also compare favorably to the Company's peers.
The growth in net income during 1998 resulted in improvements in each of
the Company's primary measures of financial performance. During 1998, return on
average assets increased by 6 basis points versus 1997 to 1.11%, while return on
average equity improved to 14.16%, an increase of 40 basis points from 13.76% in
1997. The improved financial performance ratios achieved during 1998 result from
continued leveraging of the Company's capital base. The proceeds of the
Company's 1996 common stock rights offering along with retained earnings were
utilized during 1998 to grow the loan and investment portfolios while also
maintaining the Company's strong capital foundation. Long Island, the Company's
primary trade area, enjoyed yet another year of economic growth and expansion
during 1998. During the past ten years, Long Island's economy has transformed
itself from one that was largely dependent on one industry for job creation and
growth to one that is now as varied as it is strong. Long Island has become a
fertile growth area for small business, particularly in the high-tech, medical
and services sectors. The Company continues to be an active participant in small
business lending to a wide variety of Long Island industries. During 1998 loan
demand was good overall, though much of the growth took place late in the year.
On a year over year basis, total loans grew by 11.4% versus 1997. All signs
continue to point to a continued thriving economy in 1999; however, the Long
Island marketplace is among the most competitive in the country, and management
is well aware that past performance is not indicative of future results. Intense
competition from commercial and savings banks, financial services conglomerates
and insurance companies has created a virtual banking industry where consumers
and businesses alike can obtain loans online and invest in CDs and mutual funds
with institutions across the country, or around the world, by the click of a
mouse. This all out scramble for penetration into the consumer and business
"pocketbook" of the Company's
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
customer base has created pricing concerns for management relative to the credit
risk of the Company's small business borrower base. This competition, along with
an increased sophistication among consumers and corporate treasurers, makes
management's outlook for 1999 one of cautious optimism. Management of the
Company is acutely aware of the current economy's position in the longest
post-war business expansion on record. For all of the foregoing reasons, it is
likely that 1999 will see loan growth of five to eight percent in the Company's
core competencies of commercial and industrial credits and commercial mortgages
but at spreads that continue to shrink. This scenario, combined with a yield
curve that may continue to flatten, could result in net interest margin
compression during 1999. Additional asset growth will likely come from the fixed
income investment portfolio at thinner spreads than the loan portfolio produces.
The Company will aggressively pursue expense reductions and operating
efficiencies along with noninterest income sales initiatives to offset a portion
of the shortfall in net interest income. The outlook for interest rates in 1999,
while uncertain, appears to call for continued reductions in both long- and
short-term rates in an effort to bring down the "real" rate of interest to a
level closer to the historical standard. Lower rates would provide additional
stimulus for the economy, both local and national, to continue its remarkable
expansion. Management expects that the upcoming year will provide additional
challenges for the Company. Growth in the local economy, a stable interest rate
environment, well-situated branch locations, a competitive product line, and,
most of all, a professional and motivated staff, should, however, produce yet
another year of growth in earnings during 1999.
INFORMATION SERVICES
Banking When and Where the Customer Wants It
The one constant in banking over the past ten years has been that the pace
of technological change continues to accelerate. It has accelerated to a level
at which even "Moore's Law" seems obsolete. The new breed of banking customer
wants and needs to have full-service banking available twenty-four hours a day,
seven days a week. The new breed of bank must deliver these services or it will
not survive into the millennium. State Bancorp has always prided itself on being
both "High Tech" and "High Touch." This phrase, while somewhat overused in the
past few years, aptly describes the technological mission statement that will
enable the Company to thrive and prosper in the coming years.
During 1998, the Company strengthened its technology partnership with
Fiserv and Unisys by replacing its mainframe computer system with equipment that
will provide for improved current processing while also allowing for future
growth and expansion. The Company's continued growth in locations and
transactions required a technological "centerpiece" that could support a
multi-channel service delivery system for years to come. The Unisys Clearpath
mainframe installed during 1998 is a workhorse that will do just that.
During 1998, the Company also consolidated its Management Information
Systems and Data Processing departments under one roof at our Huntington
facility. This group is responsible for the wide range of Company hardware and
software, both PC and mainframe, that supports the entire spectrum of customer
service provided by our relationship bankers. We have already seen great
synergies between the departments that were not available previously due to
logistical issues. This area of the Company will be counted on to support the
systems backbone that allows a community bank like State Bancorp to effectively
compete with far larger and more geographically diverse financial service
organizations. With products such as Touch24 and Business Direct Access and with
a corporate website, www.statebankofli.com, the Company's business and consumer
clientele need not change out of their pajamas to perform their basic banking
services. These service delivery channels level the playing field with our
larger bank and nonbank competitors.
During 1999, the Company expects to introduce document imaging in an
effort to improve customer service by reducing research time for branch and loan
department personnel. This system will enable the Company to convert its paper
documents to images with the ability to store and retrieve the documents within
seconds. A logical extension of this technology is check imaging and image proof
of deposit. Each of these processes will be reviewed during the upcoming year
with an eye toward implementation during 2000. These technologies will enable
the Company to both improve customer service and streamline back office
operations. It is not the Company's intent to be a market leader with respect to
the introduction of new products, however, we will continue to provide products
and services that our customers need and, indeed, demand.
Year 2000 Compliance
The Year 2000 ("Y2K") problem centers on the inability of certain computer
systems to recognize the year 2000. Many existing computer systems may
incorrectly identify a four-digit date field ending in "00" as the year 1900
rather than the year 2000. The Company, like other banks and financial services
firms that rely on date-sensitive information in their calculations, may be
negatively impacted by the Y2K problem. If computer systems are not corrected to
properly identify the year 2000, computer systems applications may fail or
produce erroneous results, which could impact the Company's ability to transact
normal business activities. In addition, in certain instances, failure to
adequately address the Y2K problem could adversely impact the Company's
suppliers and creditors and the creditworthiness of its borrowers.
The Company's Y2K Action Team was formed in 1996 to address this problem.
The Y2K Action Team has completed the first three phases of this project: the
Awareness, Assessment and Renovation phases. The Validation phase, which is the
most
26
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
important phase of the project, has begun and will continue throughout 1999.
Although all critical applications have been tested and deemed compliant, the
Company will continue to test certified applications throughout 1999 to reaffirm
that they will function properly on and after January 1, 2000.
The Company has also sent out Year 2000 awareness literature to all of its
deposit customers, and, in addition, Y2K questionnaires have been sent to each
of the Company's commercial and municipal customers to assess their awareness of
the Year 2000 problem. The Company, in certain instances, relies on outside
vendors and other third party service providers to perform various services.
Before proceeding with any new contracts or extensions of existing contracts,
the Company requires each of these service providers to provide written proof of
their Y2K compliance.
The Company has not developed any of its own computer programs internally
nor does it employ a programming staff. All of the software related to its major
application systems has been purchased from third party vendors. Generally,
software provided by third parties and included in the Company's systems is
developed by leading software suppliers with Y2K programs underway and a
majority of these vendors have certified that their products are Y2K compliant.
As part of its assessment procedures, the Company assessed the action plans of
each major outside vendor. However, there can be no guarantee that the software
of other companies, on which the Company's systems rely, will be converted in a
timely manner or that failure to properly convert by another company would not
have a material adverse effect on the Company. The Company presently believes
that, with continued modifications to existing software and conversions to new
software, its Y2K problems will be mitigated without causing a material adverse
effect upon the operations of the Company and that its internal systems and
equipment will be Y2K compliant in a timely manner.
Even if the Company expects all of the Y2K Project to be successful with
respect to its own applications, the possibility remains that the Company may
experience Y2K-related disruptions caused by the inadequate preparations of
third parties, including service bureaus, electric and gas utilities,
telecommunications companies and the providers of institutional clearing
services. In the event that system failures occur related to the Y2K problem,
the Company has revised its business resumption contingency plans to address
these risks. Each of the Company's business units has incorporated their unique
risks into a modified business resumption plan. These plans will be continually
reviewed throughout 1999.
Monitoring and managing the Y2K Project will result in additional direct
and indirect costs to the Company. Direct charges include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for Y2K compliance, training, and any resulting costs for
developing business resumption contingency plans for any mission critical Y2K
problems. Indirect costs will principally consist of the time devoted by
employees to monitoring software vendor progress, testing enhanced software
products and implementing any contingency plans. The Company estimates that its
total costs related to the Y2K problem will total approximately $250,000, of
which $148,000 is related to the cost to enhance or replace existing software
and hardware. The balance of the Y2K-related expenses represents the
redeployment of existing resources within the Company. Two of the Company's
other information technology projects, document and check imaging and personal
computer banking, have been delayed due to the completion of the Y2K project.
Both direct and indirect costs of addressing the Y2K problem will be charged to
earnings as incurred. To date, $107,000 of the total estimated cost associated
with the Y2K problem has been incurred. Funds are provided by operations and are
included in existing operating budgets.
The preceding Y2K discussion contained various for ward- looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Y2K discussion, the words "believes," "expects,"
"estimates" and similar expressions are intended to identify forward-looking
statements. All forward-looking statements involve a number of risks and
uncertainties. The anticipated impact and costs of the Y2K project, as well as
the date on which the Company expects to complete the validation testing phase
and the contingency plan of the Y2K project, are based on management's best
estimates using information currently available as well as numerous assumptions
about future events. However, there can be no guarantee that these estimates
will be achieved and actual results may differ materially from these plans.
Differences include, but are not limited to, the availability of qualified
personnel and other information technology; the ability to identify and
remediate all date-sensitive lines of computer code or to replace computer chips
in affected systems or equipment; and the actions of governmental agencies or
other third parties with respect to Y2K problems. Based on its current estimates
with information currently available, costs to ensure compliance with Y2K issues
did not have a material adverse impact on the Company's consolidated financial
statements during 1998, nor are they expected to in 1999.
NET INTEREST INCOME
1998 versus 1997
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits and borrowed funds is the Company's
largest source of recurring earnings. Net interest income is affected by the
level and composition of assets, liabilities and stockholders' equity, as well
as changes in market interest rates. Net interest income improved by 9.4% to
$30.6 million in 1998 as the result of growth in average interest-earning assets
of $64 million (10.1%). This asset expansion was due largely to growth in loans,
taxable Government Agency securities and money market instruments. Increases in
commercial loans and commercial mortgages paced the $24 million or 6.8%
expansion in average loans outstanding in 1998 versus 1997. Average investment
securities
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
increased by $13 million or 7.9% due to a $44 million increase in Government
Agency paper, primarily callable issues with five to ten-year final maturities.
This growth was funded in part by cash flows from the Company's mortgage-backed
portfolio and maturities and sales of local tax-exempt municipal issues.
Short-term money market instruments increased by $27 million, on average,
principally as collateral for the Company's municipal deposit gathering
function. Earning asset growth in 1998 followed increases of 15.1% and 9.0% in
1997 and 1996, respectively. Additional funding of the asset expansion came via
increases in core deposits, principally demand balances, large denomination
certificates of deposit, money fund accounts, securities sold under agreements
to repurchase (repos) and other borrowed funds, principally Federal Home Loan
Bank of New York (FHLB) term advances.
Average core deposit balances increased by $15 million or 11.3% to $325
million in 1998. Management of the Company has made the retention and growth of
these low-cost deposits (demand, money market and savings deposits) a key
element in the Company's expansion strategy. These low-cost deposits also are
critical to the Company's efforts to widen its net interest margin. During 1998
and 1997, average core deposit balances represented 51.0% and 53.1% of total
deposits, respectively. Growth in the commercial banking sector and an expanded
municipal banking department, which resulted in new relationships throughout
Long Island, were responsible for the growth in all core deposit categories.
Average demand deposit balances grew by 16.4% and 13.9% in 1998 and 1997,
respectively, and have increased by approximately 67% on average since 1995.
During 1998, the Company's net interest margin narrowed slightly to 4.47%, from
4.52% a year ago. The reduced margin resulted from a shift in the earning-asset
mix to a greater dependence on lower-yielding money market instruments and
taxable investment securities. Growth in these asset categories occurred at a
faster rate than in the loan portfolio which produces average yields in excess
of 350 to 400 basis points higher. The result of this asset shifting was a
fifteen basis point decline in the average interest-earning asset rate to 7.91%
in 1998. Despite the increase in core deposit funding previously described, the
average rate paid on the Company's supporting funds declined by a nominal ten
basis points due to the utilization of large-denomination certificates of
deposit and short- term borrowed funds to support a majority of the asset
expansion. Although these funds were utilized to support asset growth that adds
incrementally to net interest income, their incremental spread is somewhat
narrower than the Company's overall net interest margin and, therefore, causes
some margin compression. Management anticipates an expansion of the net interest
margin in 1999 as demand deposit balances and loan volumes are each projected to
increase at rates that approximate 1998 levels. Management of the Company
expects that the maturation of its new Suffolk County branches will provide
access to additional low-cost sources of funds as well as provide ample
opportunity to expand the Company's loan portfolio in previously underserved
areas of the county. In addition, further penetration into Queens County is also
expected to produce additional commercial banking relationships that will
enhance profitability in 1999 and beyond.
Average total loans grew by 6.8%, 15.0% and 19.9% in 1998, 1997 and 1996,
respectively. This growth, which has moderated somewhat due to intense
competition from competitors ranging from small credit unions to financial
services behemoths such as Citigroup, has been achieved with no adverse impact
on credit quality. The Company added to its lending staff during 1998 and,
combined with a very strong local economy and improved product offerings, was
able to generate quality loan growth in a very competitive marketplace. The
combination of low interest rates and low inflation has driven both the local
and national economies during the past several years. The Company's customer
base has actively sought to increase their lines of credit and make additional
investments in property, plant, equipment and residences during this very
favorable economic climate. The Company has responded by developing new products
such as its Small Business Line of Credit and Prime For Life home equity
offering. These innovative products, coupled with responsive and personal
customer service, have enabled the Company to take advantage of opportunities
presented by the continued consolidation of the local banking market. Average
commercial loans, consumer installment loans and tax-exempt lending grew at
rates of 9.1%, 28.5% and 7.4%, respectively, in 1998. At December 31, 1998,
total loans outstanding amounted to $421 million, up 11.4% when compared to the
comparable 1997 date. The year-end loan portfolio was comprised of approximately
47% commercial loans, 38% commercial mortgages, 9% residential mortgages and 6%
all other loans. It is expected that the 1999 loan mix will remain, on a
percentage basis, approximately the same as 1998.
Based upon recent local and national economic forecasts, management of the
Company is confident that loan growth will be strong in 1999, though at a rate
similar to that experienced in 1998, not nearly at the rates of growth seen in
1997 and 1996. A continuation of the banking industry's recent consolidation and
an expanded effort to penetrate the Suffolk and Queens County marketplaces are
expected to provide substantial opportunity to continue to increase the loan
portfolio over the next 12-18 months.
1997 versus 1996
Net interest income expanded by $3.9 million or 16.3% during 1997 as the
result of growth in interest-earning assets of $84 million coupled with a four
basis point widening of the net interest rate margin. The asset expansion
resulted from increases in Government Agency securities (up $73 million),
primarily callable issues, commercial loans and commercial mortgages (up $45
million in total) and short-term money market instruments. Funding the growth in
interest-earning assets were paydowns on mortgage-backed securities, maturing
U.S. Treasury securities and increases in core deposits, principally
28
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
demand balances, large denomination certificates of deposit, repos and other
borrowed funds, principally FHLB advances.
The foregoing shift in the Company's balance sheet mix resulted in an
increase in the net interest rate margin to 4.52%, the Company's widest margin
since 1989. The improved spread was due to an increase in the yield earned on
interest-earning assets coupled with growth in interest-free demand deposits and
equity capital utilized to fund the asset growth. Somewhat offsetting these
positive factors were higher rates on time deposits, primarily certificates of
deposit over $100,000, repos and other borrowed funds.
SECURITIES HELD TO MATURITY AND SECURITIES
AVAILABLE FOR SALE
SFAS No. 115 requires the Company, at the time of purchase, to designate
each investment security as either "available for sale" ("AFS"), "held to
maturity" or "trading," depending upon investment objectives, liquidity needs
and ultimate intent. Securities available for sale are stated at the lower of
aggregate cost or market value, with unrealized gains or losses reported as a
separate component of stockholders' equity until realized. Securities held to
maturity are stated at cost, adjusted for amortization of premium or accretion
of discount, if any. Trading securities are generally purchased with the intent
of capitalizing on short-term price differences by selling them in the near
term. The Company did not hold any trading securities at December 31, 1998 and
1997.
At December 31, 1998, the Company held $279 million in AFS securities
(approximately 99% of the investment portfolio) at a pre-tax unrealized net loss
of $590 thousand, up from $364 thousand at year-end 1997. At year-end, the AFS
portfolio was divided into the following categories: 76% callable U.S.
Government Agency securities; 15% MBS securities (mainly FNMA and GNMA
obligations); and 9% local municipal and other securities. The balance of the
investment portfolio was comprised of short-term local municipal notes
classified as held to maturity. The vast majority of the growth in the Company's
investment portfolio took place in the U.S. Government Agency category. Agency
holdings increased by $60 million at year-end 1998 versus the same period a year
ago. These securities are all callable within two years, and most have final
maturities of less than ten years. The relatively flat yield curve that has
continued to prevail for the past two years again provided little spread
opportunity during 1998 in any instrument other than an agency issue. The
Company's investment policy is conservative and has liquidity and safety
paramount among its objectives. Agency securities satisfy these objectives while
also providing a spread above the Company's incremental funding rate. The
Company's portfolio of tax-exempt local municipal notes declined by $46 million
at year-end 1998 versus the comparable 1997 date. The Company continues to
expand its municipal relationships and, as a natural outgrowth of that business,
purchases short-term (one year or less) municipal paper. Much of the municipal
paper that is purchased is classified as available for sale and is sold into the
secondary market very shortly thereafter. During 1998, the Company's holdings of
mortgage-backed securities declined by $20 million as the result of principal
paydowns which have accelerated in recent years as a direct result of the
prevailing low interest rate environment. Management expects that this trend
will continue in 1999 and the mortgage- backed portfolio will decline throughout
the year as interest rates are forecast to remain relatively stable during the
next twelve months.
The Company's investment portfolio is low-risk in nature due to its
concentration of U.S. Government Agency, local municipal notes and AAA-rated MBS
balloon and pass-through securities. As of December 31, 1998, the MBS portfolio
had an average life of 2.4 years after adjusting for historical pre-payment
patterns. Approximately 41% of the MBS portfolio, including collateralized
mortgage obligations ("CMOs"), had final maturities in excess of five years. In
general, principal prepayments on these securities will increase as interest
rates fall and, conversely, prepayments will slow down as interest rates rise.
CMOs accounted for approximately 2% of the total investment portfolio as of
year-end 1998. None of the CMOs held by the Company met the regulatory
definition of a high-risk security nor did the Company own any structured notes
as of December 31, 1998. The Government Agency portfolio, callable in 1999 and
2000, had final maturities in the seven-to fifteen-year maturity range.
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
One of management's main objectives is to maintain a high quality loan
portfolio in all economic climates. This objective is achieved by maintaining
high underwriting standards coupled with regular evaluation of each borrower's
creditworthiness and risk exposure. Management seeks to avoid loan
concentrations within industries and customer segments in order to minimize
credit exposure. The Company's senior lending personnel work in conjunction with
line lenders to determine the level of risk in the Company's loan-related assets
and establish an adequate level for the allowance for possible loan losses. An
outside loan review consultant is also utilized to independently verify the loan
classifications and the adequacy of the allowance for possible loan losses.
Management actively seeks to reduce the level of nonperforming assets, defined
as nonaccrual loans and other real estate owned, through aggressive collection
efforts and, where necessary, litigation and charge-off. Other real estate owned
properties are aggressively marketed for sale utilizing local commercial and
residential realtors, where necessary.
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 or overexpansion, the risk inherent in the Company's
loan portfolio will increase. The timing and amount of loan losses
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
that occur is dependent upon several factors, most notably current and expected
economic conditions and the financial condition of the Company's borrowers. The
allowance for loan losses is available to absorb charge-offs from any loan
category, while additions are made through the provision for loan losses, which
is a charge to operating earnings. The adequacy of the provision and the
resulting allowance for loan losses is determined by management's continuing
review of the loan portfolio, including identification and review of individual
problem situations that may affect a borrower's ability to repay, delinquency
and nonperforming loan data, collateral values, regulatory examination results
and changes in the size and character of the loan portfolio. Thus an increase in
the size of the loan portfolio or in any of its components could necessitate an
increase in the allowance even though credit quality and problem loan totals may
be improving.
As illustrated in Table I, the Company's nonperforming assets declined by
$67 thousand to $4.4 million at year-end 1998 versus 1997 following a $2.4
million decline in 1997 versus 1996. At December 31, 1998, total nonperforming
assets, defined by the Company as nonaccrual loans and other real estate owned,
as a percentage of loans and other real estate owned declined to 1.04% as
compared to 1.18% and 1.95% at year-end 1997 and 1996, respectively. Nonaccrual
loans as a percentage of total loans declined for the third consecutive year to
0.87% at year-end 1998 versus 1.13% and 1.66% at the comparable 1997 and 1996
dates. The year-end 1998 decline in nonperforming assets, as defined by the
Company, resulted from a $582 thousand decrease in nonaccrual loans, which was
largely offset by an increase in other real estate owned of $515 thousand. The
reduction in nonaccrual loans during 1998 resulted from a combination of loan
repayments and charge-offs. The year-end 1998 other real estate owned balance is
comprised of one residential property and one income-producing commercial
building. Each of these properties is actively being marketed for sale, and
management expects they will be sold during 1999 with no material income
statement impact.
Management of the Company actively reviews the level and composition of
nonperforming assets. During 1998, this meant a continuation of recent years'
strategy of collection through litigation combined with enhanced collateral
positions on virtually all nonperforming assets. The result, as outlined above,
was a continued reduction in nonperforming assets during 1998 and improved
coverage ratios at year-end. Nonaccrual loans and nonperforming assets to total
loans, the allowance for loan losses as a percentage of nonaccrual loans and the
allowance for loan losses as a percentage of nonaccrual loans, restructured,
accruing loans and loans 90 days or more past due and still accruing have all
improved during 1998 and most have improved for the past several years. As
outlined in the Company's recent Form 10-Q filings, one commercial mortgage
credit totaling $5.0 million was restructured during 1996 to a rate of interest
below its contractual rate. The project is now complete, however, the
restructured rate on this credit will remain below the contractual rate until
cash flows are again sufficient to support a market rate of interest. At
December 31, 1998, the Company's portfolio of restructured, accruing loans was
comprised mainly of loans which have demonstrated performance in accordance with
the terms of their restructure agreements, however, they did not yield a market
rate of interest subsequent to their restructuring.
Based upon current economic conditions, management has determined that the
current level of the allowance for loan losses is adequate in relation to the
risks present in the portfolio. Management considers, among other things,
delinquency trends, concentrations within segments of the loan portfolio as well
as recent charge-off experience when assessing the degree of credit risk in the
portfolio. Collateral appraisals and estimates of current value influence the
estimation of the required allowance balance at any point in time. The Company's
loan port folio is concentrated in commercial and industrial loans and
commercial mortgages, the majority of which are fully secured by collateral with
a market value in excess of the carrying value of the individual loans. In
recognition of the improved credit quality recorded during both 1997 and 1998
and the lower level of net charge-offs experienced ($1.1 million in 1998 versus
$1.8 million in 1997), the provision for loan losses declined slightly to $1.8
million in 1998 versus $1.95 million in 1997. The resulting allowance for loan
losses balance of $5.8 million at December 31, 1998 amounted to 1.38% of loans
outstanding versus 1.36% in 1997 and 1.42% in 1996. Also adding to the higher
level of the allowance during 1998 was an increase in recoveries on loans
previously charged off to $521 thousand, the highest level in over fifteen
years. Although the local economy continued to grow and expand during the past
year, existing weaknesses in certain sectors of the economy may cause future
problems. The potential consequences of an increase in interest rates or a
prolonged economic slowdown in industries which impact the Company's borrower
base, make it difficult to forecast the impact on asset quality that will result
during 1999 or any additional charge-offs that will be required during the year.
It is the present intent of management to further increase the level of
the allowance for possible loan losses to reflect any exposure represented by
fluctuations in the Long Island real estate market, and the underlying value
that that market provides as collateral to certain segments of the loan
portfolio. In recognition of the economic uncertainties previously elaborated
upon, the normal risks inherent in any credit portfolio and expected growth in
the loan portfolio, management anticipates that the 1999 provision for loan
losses will likely exceed 1998's level. The provision is continually evaluated
relative to portfolio risk and regulatory guidelines and will continue to be
closely reviewed throughout 1999. In addition, various regulatory agencies, as
an integral part of their examination process, closely review the allowance for
loan losses. Such agencies may require the Company to recognize additions to the
30
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
allowance based on their judgement of information available to them at the time
of their examinations.
The Company has no foreign loans outstanding. The only concentration of
loans exceeding 10% of total loans is the Bank's loans totaling $72 million from
real estate operators, lessors, and developers. Repayment of these loans is
dependent in part upon the overall economic health of the Company's market area
and current real estate values. Management of the Company is not aware of any
trends, events or uncertainties that will have, or that are reasonably likely to
have, a material effect on the company's liquidity, capital resources or future
operating results. For loans not separately disclosed herein, management is not
aware of information relating to any material credit that would impact the
ability of those borrowers to comply with loan repayment terms.
<TABLE>
<CAPTION>
Table I Analysis of Nonperforming Assets at December 31,
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) ............. 1998 1997 1996 1995 1994
===========================================================================
Nonaccrual Loans ................... $ 3,676 $ 4,258 $ 5,869 $ 8,247 $ 6,707
Other Real Estate .................. 704 189 1,027 -- 1,555
- --------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets ......... $ 4,380 $ 4,447 $ 6,896 $ 8,247 $ 8,262
===========================================================================
Restructured, Accruing Loans ....... $ 5,545(1) $ 7,289(1) $ 6,524(1) $ 3,344 $ 3,608
===========================================================================
Loans 90 Days or More Past Due
and Still Accruing Interest ........ $ 1,352 $ 1,590 $ 1,228 $ 337 $ 1,162
===========================================================================
Total Loans Outstanding ............ $420,636 $377,633 $353,303 $287,643 $255,230
Total Stockholders' Equity ......... $ 60,858 $ 54,930 $ 48,569 $ 40,588 $ 36,170
Allowance for Loan Losses .......... $ 5,788 $ 5,124 $ 5,009 $ 5,004 $ 4,929
Key Ratios at December 31:
Allowance for Loan Losses as a
Percent of Total Loans ............. 1.38% 1.36% 1.42% 1.74% 1.93%
Nonaccrual Loans as a Percent
of Total Loans .................... 0.87% 1.13% 1.66% 2.87% 2.63%
Nonperforming Assets (2) as a
Percent of Total Loans and Other
Real Estate ....................... 1.04% 1.18% 1.95% 2.87% 3.22%
Allowance for Loan Losses as a
Percent of Nonaccrual Loans ........ 157.45% 120.34% 85.35% 60.68% 73.49%
Allowance for Loan Losses as a
Percent of Nonaccrual Loans,
Restructured, Accruing
Loans and Loans 90 Days or More
Past Due and Still Accruing Interest 54.74% 39.00% 36.77% 41.95% 42.95%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes one credit totaling $5.0 million at December 31, 1998 and 1997
and $4.7 million at December 31, 1996 which is collateralized by
commercial real estate with a current appraised value in excess of the
carrying value of the credit. The restructured rate on this credit will
remain below the contractual rate until cash flows are again sufficient to
support a market rate of interest.
(2) Excludes restructured, accruing loans and loans 90 days or more past due
and still accruing interest.
OTHER INCOME
1998 versus 1997
Other income declined by 6.2% to $1.5 million in 1998 when compared to
1997. This decline resulted from a lower level of service charges on deposit
accounts, principally return item charges, a higher level of net security losses
and a nominal reduction in other operating income (down 0.4%). The 1998 decline
follows a 12.0% decline in 1997 and a 30.5% improvement in 1996. If securities
transactions are excluded from other income, the Company would have recorded a
5.4% reduction in other income during 1998, a reduction of 2.0% in 1997 and
growth of 16.5% in 1996.
Service charges on deposit accounts represent the Company's primary source
of other income. These fees declined by 7.2% in 1998 versus 1997 as the result
of the loss of several high volume, high maintenance relationships, an increase
in average demand deposit balances to cover service charges and a substantial
decline in insufficient funds fees on both personal and business accounts. The
Company has experienced two consecutive years of declines in deposit service
charge income largely due to more effective management of demand balances by its
customer base.
During 1998, the Company recorded $64 thousand in net security losses as
the result of selected sales of investment securities, principally local
short-term municipal notes, to achieve certain portfolio restructuring goals.
This compares to net losses of $53 thousand in 1997.
Other operating income decreased by a modest 0.4% during 1998 as the
result of declines in annuity commission income, safe deposit rent and checkbook
fees. On a positive note, strong growth in letter of credit fees, merchant
services income, ATM processing fees and wire transfer income largely offset the
foregoing reductions. Products such as telephone bill payment and home banking,
expected to be introduced during 1998, are now on schedule for 1999 and are
expected to generate additional revenue next year. In addition, continued growth
of the Company's commercial customer base, due largely to the Company's new
branch locations in Suffolk County and anticipated penetration in the Queens
County marketplace, is also expected to yield increases in deposit service
charges and related fees next year. In addition, the assessment of an ATM
surcharge on noncustomers will also add to fee income during 1999 as the Company
prices this value-added service more competitively. The Company has also added a
full-time sales director to the branch banking division in an effort to improve
the cross-selling of various products to existing customers as well as to more
readily identify prospective customers through ongoing marketing efforts in
local communities.
31
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
1997 versus 1996
Other income declined by 12.0% in 1997 versus 1996. This decline was due
to a lower level of securities transaction income coupled with a decrease in
service charges on deposits. The lower level of service charge income was due to
the same reasons noted in the 1998 versus 1997 comparison.
OPERATING EXPENSES
1998 versus 1997
Operating expenses increased by 7.4% to $18.0 million in 1998 when
compared to 1997. The largest component of the increase was in salaries and
other employee benefits, up $1.2 million or 11.7%, resulting from growth in
staff count, increased health care costs, higher supplementary compensation
accruals, and related increases in 401(k) and employee stock ownership plan
(ESOP) contributions. Also contributing to the growth in expenses during 1998
were increases in occupancy costs (up 11.3%), equipment expenses (up 18.9%),
deposit assessment fees (up 12.1%) and other operating, marketing and
advertising expenses (up 7.7%). Some what offsetting these increases was a $522
thousand reduction in amortization of intangibles expense as the premium paid
for deposits acquired in 1992 branch purchases was fully amortized early in
1998.
Growth in operating expenses during 1998 was slightly below the level
recorded in 1997 (7.4% versus 7.6%). Despite this minor improvement, the Company
is still focused on its targets of improving the rate of growth in annual
operating expenses to a level below the prevailing rate of inflation in addition
to reducing the operating efficiency ratio (total operating expenses divided by
the sum of fully taxable equivalent net interest income and other income) to a
level below 50%. Expansion of staff and facilities resulting from the opening of
two new branches in late 1997 along with growth in both the lending staff and
operational support functions have resulted in rates of operating expense growth
above corporate targets in recent years. The resultant expansion of the
Company's asset and revenue bases, however, has more than kept pace.
The Company's primary expense control rates of measurement, relative to
its peer group, are still strong. Expense control is measured many different
ways, however, the Company continues to utilize the operating efficiency ratio
and the ratio of operating expenses to average assets as its primary yardsticks.
The Company's operating efficiency ratio improved to 54.4% in 1998 versus 54.8%
and 58.1% in 1997 and 1996, respectively. Excluding a one-time savings
association insurance fund (SAIF) recapitalization fee of $498 thousand paid by
the Company during 1996, the operating efficiency ratio would have been 56.2% in
that year. The second measure of expense control utilized by the Company is
total operating expenses to average assets. The Company recorded ratios of
2.43%, 2.47% and 2.64% in 1998, 1997 and 1996, respectively, in this category.
Excluding the SAIF assessment, the 1996 ratio would have been 2.56%. These
ratios all compare very favorably to the Company's peers and place it in the top
15% of its industry peer group. Management of the Company continues to place
great emphasis on control of operating expenses, but always in the context of
prudent growth of profitable lines of business. Management is also aware,
however, that the resources necessary to grow the Company's revenue base must
also be made available in order to improve earnings. Along these lines,
management also monitors the ratio of average assets per employee and, at over
$4.2 million per employee, the Company ranks in the top 10% of its peer group in
this category. This efficient utilization of staff is another reason behind the
Company's excellent record of growth in earnings and assets. Although the
Company's staff count has more than doubled during the past six years,
management has always adhered to the Company founders' original philosophy of
"measured, orderly growth."
Growth in both net interest income and other income are again expected to
outpace increases in operating expenses during 1999, thereby resulting in
anticipated improvements in each of the foregoing expense control ratios next
year. The Company's long-term goal, as stated in previous stockholder
communications, continues to be to reduce its operating efficiency ratio to a
level of 50% or less and to lower the operating expenses to average assets ratio
to 2.25% by the year 2000. An analysis of the components of 1998 operating
expenses, by category, follows.
Occupancy expenses totaled $1.7 million in 1998, an increase of 11.3%
versus 1997. This increase resulted principally from the opening of two branch
facilities in Suffolk County in December 1997. The full year impact of these
locations was felt in 1998. In addition, the full year impact of occupying the
Jericho lending facility was recorded in 1998 (versus nine months in 1997) and,
coupled with rent escalations at this facility and two branch locations, also
added to the increase in occupancy expenses during 1998. Higher utility costs,
primarily due to the additional space occupied, and higher real estate taxes
also added to 1998's expense growth. During 1999, occupancy costs are expected
to remain at approximately the level recorded in 1998. The favorable settlement
of pending certiorari proceedings during 1999 are expected to offset scheduled
rent escalations during the next twelve months.
Equipment expenses grew by 18.8% in 1998 due to higher depreciation
expenses and costs related to equipment purchases. Depreciation expense
increased due to purchases of office equipment related to the new branch
facilities, growth in the Company's personal computer network and the
replacement of the Company's mainframe computer during the latter half of 1998.
Growth in this category amounted to 27.5% in 1998 and it is expected that this
category will again increase during 1999, though at a lower rate, due to the
full year impact of the mainframe depreciation coupled with additional planned
technology initiatives during the coming year.
Deposit assessment fees increased by 12.1% as the result of growth in the
Company's assessable deposit base. The majority of the Company's deposits are
insured by the Bank Insurance
32
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
Fund ("BIF") while the balance is insured by the Savings Association Insurance
Fund ("SAIF"). Currently, the Company's BIF assessment rate is $0.01 per $100 of
deposits while SAIF deposits are assessed at a rate of $0.06 per $100 of
deposits to support the FICO bonds issued by the FDIC. Based upon year-end 1998
deposit levels and preliminary projections for 1999 deposit growth, management
anticipates an increase of approximately 8%-10% in the Company's 1999 deposit
assessment fees.
Amortization of intangibles declined by $522 thousand or 86.2% due to the
runoff of the core deposit premium paid in connection with branches acquired in
1992 from Anchor Savings Bank. Excluding further acquisition activity,
intangibles amortization will be flat in 1999 versus 1998.
Other operating expenses, including marketing and advertising expenses,
increased by 7.7% to $4.3 million in 1998 when compared to 1997. This increase
resulted from growth in several categories, most notably marketing and
advertising expenses, computer software maintenance, stationery and supplies
costs, postage, other real estate expenses and checkbook charges. The increase
in marketing and advertising costs related to the grand opening celebrations for
the two new branches and promotional materials related to the Small Business
Line of Credit and Prime For Life loan products. Computer software maintenance
cost increases resulted from enhanced product offerings and licensing of
software related to expanded usage of PCs by all Company staff. Other real
estate expenses grew in 1998 as the result of gains recorded in 1997 on the sale
of properties previously owned. Likewise, stationery and supplies and postage
expenses increased as the direct result of an expansion of both the branch
network and general business activities. Management of the Company expects that
operating expenses will continue to grow as the Company expands its operations,
the markets it serves and the products it offers. Management anticipates an
overall rate of increase of 5%-7% as a likely 1999 expense growth estimate.
1997 versus 1996
Operating expenses increased by 7.6% in 1997 to $16.7 million. As was the
case in the 1998 comparison, growth in salaries and other employee benefits was
the principal reason for this increase. An increase in staff count, higher
supplementary compensation accruals and related increases in 401(k) and ESOP
contributions resulted in an 11.0% rise in salaries and benefits expenses during
1997.
Occupancy costs rose by 16.1% in 1997 due to the relocation of the
Company's lending group to larger offices in the Jericho Plaza office complex.
In addition, higher utility costs and real estate taxes also added to the growth
in this expense category in 1997.
Equipment expenses expanded by 19.2% when compared to 1996 due to higher
costs for depreciation, equipment purchases, rentals, maintenance and repairs.
The expansion of the Company's wide area personal computer network, coupled with
the purchase of other office equipment, resulted in an 11.0% increase in
depreciation expense in 1997.
Deposit assessment fees declined by 83.1% in 1997 as the result of changes
in the FDIC assessment rate structure coupled with a one-time payment of $498
thousand to the FDIC during 1996 to support the SAIF recapitalization.
Amortization of intangibles was flat in 1997 versus 1996.
Other operating expenses, including marketing and advertising expenses,
increased by 14.5% to $4.0 million in 1997 when compared to 1996. This increase
resulted from growth in several categories, mainly credit and collection fees,
computer software maintenance, audit and examination fees, directors' meeting
fees and meeting and seminar expenses.
EFFECTIVE INCOME TAX RATE
1998 versus 1997
The Company's effective tax rate declined to 33.7% in 1998 from 35.0% a
year earlier. This decrease was largely due to the establishment of the Bank's
Delaware subsidiary, SB Portfolio in June 1998. SB Portfolio provides investment
management services to the Bank and the Company. At year-end 1998, approximately
$160 million in Government Agency securities were managed by SB Portfolio in
Delaware, and consequently the income thereon is exempt from New York State
income taxes. Somewhat offsetting this improvement was a decline in tax-exempt
municipal income resulting from a decline in the average volume of tax-exempt
loans and municipal securities. Management of the Company anticipates that the
1999 effective tax rate will approximate 31.0% due to the full year operation of
SB Portfolio.
1997 versus 1996
The Company's effective tax rate declined to 35.0% in 1997 from 35.7% a
year earlier. This decrease was largely due to a higher level of tax-exempt
income coupled with a larger deduction in 1997 for dividends paid on shares
owned by the Company's ESOP. In addition, the phase out of the New York State
business surtax in July 1996 also served to reduce the Company's effective tax
rate in 1997.
CAPITAL RESOURCES
The Company's foundation for success and its capacity to grow its assets
and earnings largely stem from the significance of its capital position. 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 depositors',
creditors' and regulatory needs. In determining an optimal capital level, the
Company also considers the capital levels of its peers and the evaluations of
its primary regulators. During 1998, the Company's capital foundation was
expanded by the amount of its net income earned and common stock issued net of
cash dividends paid to stockholders and shares repurchased. At December 31,
1998, stockholders' equity totaled $60.9 million, an increase of $5.9 million or
10.8% over year-end 1997. Total equity at December 31, 1997 and 1996
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
was $54.9 million and $48.6 million, respectively. The application of SFAS No.
115 resulted in a $365 thousand reduction in stockholders' equity at December
31, 1998 and a $215 thousand reduction in equity at December 31, 1997. The
increase in stockholders' equity during 1997 was solely earnings-driven while
year-end 1996 capital was bolstered by the Company's common stock rights
offering which added $4.3 million in net proceeds to the equity base upon its
completion in that year.
Internal capital generation, defined as net income less cash dividends
paid on common stock, is the primary catalyst supporting the Company's future
growth of assets and, most importantly, stockholder value. Management constantly
evaluates the Company's capital position in light of current and future growth
objectives. Although the Company did not access either the equity or debt
markets in 1998, management continues to monitor these markets closely.
Significant growth in equity capital during 1998 prompted the Board of
Directors to approve a stock repurchase program during the past year. Originally
capped at 50,000 shares in February 1998, the Board later in the year expanded
the maximum number of shares eligible for repurchase to 200,000. As of year-end
1998, the Company had repurchased 12,000 shares of its common stock in the open
market. Management closely monitors the stock price for opportunities to
repurchase shares at levels that will be immediately accretive to earnings per
share. Subject to market conditions, it is anticipated that additional shares
will be repurchased under this program during 1999. The Company has no present
plans to issue or utilize preferred shares. These shares do, however, also
afford management additional flexibility with respect to future equity
financings to support business expansion.
Management strives to provide stockholders with a competitive return on
their investment in the Company. During 1998, the Board of Directors distributed
quarterly cash dividends on the Company's common stock of $0.12 per share and a
$0.05 special dividend in July 1998 ($0.52 in total, adjusted for the 5% stock
dividend paid in 1998) in addition to paying a 5% stock dividend.
The Company also makes a common stock dividend reinvestment plan available
to its stockholders. This plan allows existing stockholders to reinvest cash
dividends in Company stock and/or to purchase additional shares through optional
cash investments on a quarterly basis. Shares are purchased at a 5% discount
from the current market price under either plan option. During 1998 and 1997,
$868 thousand and $810 thousand, respectively, were added to stockholders'
equity through plan participation. Approximately 25% of the Company's cash
dividends were reinvested in 1998 under this plan, and since inception,
approximately $3.7 million in additional equity has been added through plan
participation. Management anticipates continued future growth in equity through
the program.
State Bancorp, Inc. and its subsidiary are subject to various regulatory
capital requirements administered by the Federal Reserve Board and the Federal
Deposit Insurance Corporation. These regulatory authorities measure capital
adequacy on a risk-weighted assets basis. Their guidelines provide a method of
monitoring capital adequacy that is sensitive to the risk factors inherent in a
bank's asset base, including off-balance sheet exposures. The guidelines assign
various weights to different asset types depending upon their risk profile.
Generally speaking, assets with greater risk require more capital support than
do less risky assets. In addition, a leverage standard has been established to
supplement the risk-based ratios in assessing an institution's overall capital
adequacy. Failure to maintain the Bank's capital ratios in excess of minimum
regulatory guidelines requires bank regulatory authorities to take prompt
corrective action in accordance with the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations
arising from FDICIA established five categories of capitalization for depository
institutions: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized and (5) critically
undercapitalized. Based upon its December 31, 1998 capital position as outlined
in Table II, the Bank's capital ratios far exceed the minimums established for a
well-capitalized institution and exceed, by a significant margin, the minimum
requirements under FDICIA. Failure to meet minimum capital requirements can
initiate certain actions by regulators that could have a direct effect on the
Company's and the Bank's operations and financial statements. 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>
<CAPTION>
TABLE II Regulatory
Ratios as of December 31, Criteria for
------------------------------- Well
Regulatory Capitalized
Minimum 1998 1997 1996 Institution
====================================================================================================
<S> <C> <C> <C> <C> <C>
Leverage Ratio--Tier I Capital to
Total Adjusted Assets ................ 3.00-5.00% 7.98% 7.43% 7.01% 5.00%
Tier I Capital/Risk Weighted Assets .... 4.00% 12.64% 12.40% 11.11% 6.00%
Total Capital/Risk Weighted Assets ..... 8.00% 13.85% 13.58% 12.36% 10.00%
====================================================================================================
</TABLE>
34
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
LIQUIDITY
Liquidity management is defined as the Company's and its subsidiary's
ability to meet their financial obligations on a continuous basis without
material loss or disruption of normal operations. 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 and to take advantage of business opportunities as they arise.
Liquidity is composed of the maintenance of a strong base of core deposits,
maturing short-term assets including cash and due from banks, the ability to
sell marketable securities and access to lines of credit and the capital
markets. 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. These funds can be
obtained by converting liquid assets to cash or by attracting new deposits or
other sources of funding. Many factors affect the Company's ability to meet its
liquidity needs, including variations in the markets served, loan demand, its
asset/liability mix, its reputation and credit standing in its markets, and
general economic conditions.
The Funds Management Committee is responsible for oversight of the
Company's liquidity position and management of its asset/liability structure.
This Committee monitors the loan and investment portfolios while also examining
the maturity structure and volatility characteristics of the Company's
liabilities to develop an optimum asset/liability mix. Funding sources available
to the Company include retail, commercial and municipal deposits, purchased
liabilities and stockholders' equity. If needed for short-term liquidity
purposes, the Company has access to $16.5 million in unsecured lines of credit
extended by correspondent banks. In addition, the Company can utilize its line
of credit with FHLB to access up to $28.5 million in market rate-funds with
maturities of up to thirty years. The Company does not utilize brokered deposits
as a source of funds nor did it engage in any derivatives activities during 1998
or 1997 to manage its liquidity or interest rate risk.
Asset liquidity is provided by short-term investments and the
marketability of securities available for sale. At December 31, 1998, the
Company had $279 million in such liquid assets. The Company's loan portfolio and
investment securities held to maturity also provide an excellent source of
internal liquidity through maturities and periodic repayments of principal. At
year-end 1998, approximately $202 million of these assets, including
mortgage-backed securities, were due to mature or be repaid within one year.
Cash flows provided by the loan and investment port folios are typically
utilized to reduce the Company's borrowed funds position and/or to fund loan and
investment securities growth. The Company's operating, investing and financing
activities are conducted within the overall constraints of the Company's
liquidity management policy.
While past performance does not guarantee future results, management
believes that the Company's funding sources, including dividends from its
subsidiary, and the Bank's funding sources will be adequate to meet their future
liquidity requirements.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The process by which financial institutions manage interest- earning
assets and funding sources under different interest rate environments is called
asset/liability management. The primary goal of asset/liability management is to
increase net interest income within an acceptable range of overall risk
tolerance. Management must ensure that liquidity, capital, interest rate and
market risk are prudently managed. Asset/liability and interest rate risk
management are governed by policies reviewed and approved annually by the
Company's Board of Directors. The Board has delegated responsibility for
asset/liability and interest rate risk management to the Funds Management
Committee. The Funds Management Committee 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.
INTEREST RATE RISK
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. Risk is identified
by reviewing repricing characteristics of interest-earning assets and
interest-bearing liabilities. The Company's Funds Management Committee sets
forth guidelines that limit the level of interest rate risk within specified
tolerance ranges. Management must determine the appropriate level of risk which
will enable the Company to achieve its performance objectives within the
confines imposed by its business objectives and the external environment within
which it operates. Interest rate risk arises from repricing risk, basis risk,
yield curve risk or options risk and is measured using financial modeling
techniques, including quarterly interest rate shock simulations, to measure the
impact of changes in interest rates on earnings for periods 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. The Company's asset/liability and interest rate risk management
policy limits interest rate risk exposure to +/-12% of base case net income for
net earnings at risk and +/-15% for equity value at risk as a percentage of
market value of portfolio equity. Net earnings at risk is the potential adverse
change in net income arising from a +/-200 basis point change in interest rates,
measured over a one-year time horizon. Equity value at risk is the potential
35
<PAGE>
adverse change in the present value (market value) of total equity arising from
a +/-200 basis point change in interest rates. Simulation results 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, results will neither
precisely estimate net interest income nor precisely measure the impact of
higher or lower interest rates on net interest income.
To mitigate the impact of changes in interest rates, the balance sheet
must be structured so that repricing opportunities exist for both assets and
liabilities in approximately equivalent amounts at basically the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute an interest-sensitivity gap, which is the difference between
interest-sensitive assets and interest-sensitive liabilities. These static
measurements do not reflect the results of any projected activity and are best
utilized as early indicators of potential interest rate exposures. The primary
objectives of the Company's asset/ liability management are to continually
evaluate the interest rate risk inherent in the Company's balance sheet; to
determine the level and direction of risk appropriate given the Company's
strategic focus, operating environment, liquidity requirements and performance
objectives; and to manage this risk in a prudent manner consistent with approved
policy.
The accompanying table sets forth the amounts of assets and liabilities
outstanding as of December 31, 1998 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. The Company
bases its deposit decay rates on assumptions established by management which
reflect historical experience over the three years ended December 31, 1998.
Thus, the decay rates for deposit accounts, with the exception of CDs, for which
contractual maturities are readily available, were as follows: 20% per year for
savings deposits; 33% per year for money fund and NOW accounts of individuals,
partnerships and corporations; all money fund and NOW accounts of municipalities
are included in the 0-6 months time frame due to their seasonality and
volatility. Management feels that these decay assumptions reflect the historical
stability of the Company's core deposit base, which may or may not be indicative
of the industry average of its peers.
An asset-sensitive gap indicates an excess of interest-sensitive assets
over interest-sensitive liabilities, whereas a liability-sensitive gap indicates
the opposite. At December 31, 1998, the Company had a one-year cumulative
asset-sensitivity gap of $91 million. In a rising rate environment, an asset
sensitive gap position generally indicates that increases in income from
interest-earning assets will outpace increases in expenses associated with
funding those assets. In addition, the Company's net interest spread and net
income would also 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. This 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's goal is to manage the Company's cumulative
one-year gap such 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, management relies on simulation analysis to
manage the Company's asset/liability position on a dynamic repricing basis.
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 growth in a variety of interest rate
environments. Asset and liability management efforts also may involve the use of
off-balance sheet instruments such as interest rate swaps to minimize risk. The
Company does not utilize swaps or other derivative instruments to manage its
asset/liability position.
36
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
TABLE III SENSITIVITY TIME HORIZON
=================================================================================================================================
0-6 6-12 1-5 Over Noninterest-
Interest-sensitive Assets (1) Months Months Years 5 Years Sensitive Total
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans (net of unearned income) (2) ........... $ 257,766 $18,249 $ 70,574 $ 70,371 $ 3,676 $ 420,636
Securities Held to Maturity .................. 342 2,090 -- 84 -- 2,516
Securities Available for Sale (3) ............ 156,633 49,319 34,944 36,665 2,368 279,929
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets .............. 414,741 69,658 105,518 107,120 6,044 703,081
- ---------------------------------------------------------------------------------------------------------------------------------
Unrealized Net Loss on Securities Available
for Sale ................................... (590) -- -- -- -- (590)
Cash and Due from Banks ...................... 19,274 -- -- -- -- 19,274
All Other Assets (7) ......................... 5,292 1,776 -- -- 3,861 10,929
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets ............................... $ 438,717 $71,434 $105,518 $107,120 $ 9,905 $ 732,694
=================================================================================================================================
Interest-sensitive Liabilities (1)
Savings Accounts (4) ......................... $ 11,404 $11,404 $ 91,228 $ -- $ -- $ 114,036
Money Fund and NOW Accounts (5) .............. 42,256 7,770 31,552 -- -- 81,578
Time Deposits (6) ............................ 228,985 21,937 24,828 329 -- 276,079
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits ............ 282,645 41,111 147,608 329 -- 471,693
Securities Sold Under Agreements to Repurchase
and Other Short-term Borrowings ............ 69,529 -- -- -- -- 69,529
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities ......... 352,174 41,111 147,608 329 -- 541,222
All Other Liabilities, Equity and
Demand Deposits (7) ........................ 4,638 575 73 -- 186,186 191,472
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity ............... $ 356,812 $41,686 $147,681 $ 329 $186,186 $ 732,694
=================================================================================================================================
Cumulative Interest-Sensitivity Gap (8) ...... $ 62,567 $91,114 $ 49,024 $155,815 $161,859
=================================================================================================================================
Cumulative Interest-Sensitivity Ratio (9) .... 117.8% 123.2% 109.1% 128.8% 129.9%
Cumulative Interest-Sensitivity Gap
as a % of Total Assets ..................... 8.5% 12.4% 6.7% 21.3% 22.1%
=================================================================================================================================
</TABLE>
(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 non-interest sensitive category.
(3) Estimated principal reductions have been assumed for mortgage-backed
securities based upon their current constant prepayment rates.
(4) Savings deposits are assumed to decline at a rate of 20% per year over a
five-year period based upon the nature of their historically stable core
deposit relationships.
(5) Money Fund and NOW accounts of individuals, partnerships and corporations
are assumed to decline at a rate of 33% per year over a three-year period
based upon the nature of their historically stable core deposit
relationships. Money Fund and NOW accounts of municipalities 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.
(8) Total interest-earning assets minus total interest-bearing liabilities.
(9) Total interest-earning assets as a percentage of total interest-bearing
liabilities.
37
<PAGE>
STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY:
NET INTEREST INCOME AND RATES
The following table presents the average daily balances of the Bank's
assets, liabilities and stockholder's equity, together with an analysis of net
interest earnings and average rates, for each major category of interest-earning
assets and interest-bearing liabilities. Interest and average rates are computed
on a fully taxable-equivalent basis, adjusted for certain disallowed interest
expense deductions, using a tax rate of 34% in 1998, 1997 and 1996. Nonaccruing
loans are included in the average balances (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
====================================================================================================================================
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities held to maturity and
securities available for sale:
Taxable .......................... $ 200,384 $12,778 6.38% $ 185,763 $ 12,222 6.58% $ 168,826 $10,793 6.39%
Tax-exempt ....................... 55,279 2,567 4.64 56,569 2,746 4.85 41,316 2,172 5.26
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities ..................... 255,663 15,345 6.00 242,332 14,968 6.18 210,142 12,965 6.17
Federal funds sold, securities
purchased under agreements to
resell and interest-bearing
deposits ......................... 63,021 3,392 5.38 36,366 1,995 5.49 32,004 1,735 5.42
Loans (net of unearned income):
Taxable ............................ 377,095 36,026 9.55 353,244 33,782 9.56 306,646 28,560 9.31
Tax-exempt ......................... 8,513 917 10.77 7,929 842 10.62 7,116 752 10.57
--------------------------------------------------------------------------------------------
Total loans--net ..................... 385,608 36,943 9.58 361,173 34,624 9.59 313,762 29,312 9.34
Total interest-earning assets ........ 704,292 $55,680 7.91% 639,871 $ 51,587 8.06% 555,908 $44,012 7.92%
Allowance for loan losses ............ (5,489) (5,235) (5,114)
- ------------------------------------------------------------------------------------------------------------------------------------
698,803 634,636 550,794
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks .............. 26,607 29,667 24,434
Bank premises and equipment--net ..... 3,545 3,188 3,028
Other assets ......................... 11,463 10,859 10,154
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets ......................... $ 740,418 $ 678,350 $ 588,410
====================================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Savings and time deposits:
Savings ............................ $ 209,528 $ 4,795 2.29% $ 210,808 $ 5,257 2.49% $ 191,828 $ 4,825 2.52%
Time ............................... 312,900 17,155 5.48 273,402 15,187 5.55 230,559 12,490 5.42
- ------------------------------------------------------------------------------------------------------------------------------------
Total savings and time deposits ...... 522,428 21,950 4.20 484,210 20,444 4.22 422,387 17,315 4.10
Federal funds purchased .............. 996 55 5.52 2,620 154 5.88 3,578 207 5.79
Securities sold under
agreements to repurchase ........... 3,411 191 5.60 25,680 1,448 5.64 27,667 1,529 5.53
Other borrowed funds ................. 36,207 1,968 5.44 11,385 644 5.66 1,425 80 5.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ... 563,042 24,164 4.29 523,895 22,690 4.33 455,057 19,131 4.20
Demand deposits ...................... 115,533 99,251 87,136
Other liabilities .................... 3,136 2,622 1,803
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities .................... 681,711 625,768 543,996
Stockholder's equity ................. 58,707 52,582 44,414
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholder's Equity ............... $ 740,418 $678,350 $ 588,410
====================================================================================================================================
Net interest income/rate-
tax-equivalent basis ............... 31,516 4.47% 28,897 4.52% 24,881 4.48%
Less tax-equivalent basis
adjustment ......................... 911 923 833
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income .................. $30,605 $ 27,974 $24,048
====================================================================================================================================
</TABLE>
38
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents a comparative analysis of the changes in the
Bank's interest income and interest expense due to the changes in the average
volume and the average rates earned on interest-earning assets and due to the
changes in the average volume and the average rates paid on interest-bearing
liabilities. Interest and average rates are computed on a fully
taxable-equivalent basis, adjusted for certain disallowed interest expense
deductions, using a tax rate of 34% in 1998, 1997 and 1996. Variances in
rate/volume relationships have been allocated proportionately to average volume
and average rate as they compare to each other (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year 1998 over 1997 Year 1997 over 1996
--------------------------------------------------------------------------
Due to Change in: Due to Change in:
------------------- --------------------
Net Net
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Securities held to maturity and
securities available for sale:
Taxable .......................................... $ 941 $(385) $ 556 $ 1,107 $ 322 $ 1,429
Tax-exempt ....................................... (62) (117) (179) 751 (177) 574
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities ................................... 879 (502) 377 1,858 145 2,003
Federal funds sold, securities
purchased under agreements
to resell and interest-bearing deposits .......... 1,435 (38) 1,397 239 21 260
Loans (net of unearned income):
Taxable .......................................... 2,279 (35) 2,244 4,439 783 5,222
Tax-exempt ....................................... 63 12 75 86 3 89
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans--net ................................... 2,342 (23) 2,319 4,525 786 5,311
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income .............................. 4,656 (563) 4,093 6,622 952 7,574
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings and time deposits:
Savings .......................................... (32) (430) (462) 474 (42) 432
Time ............................................. 2,168 (200) 1,968 2,373 324 2,697
- ------------------------------------------------------------------------------------------------------------------------------------
Total savings and time deposits .................... 2,136 (630) 1,506 2,847 282 3,129
Federal funds purchased ............................ (90) (9) (99) (56) 3 (53)
Securities sold under agreements
to repurchase ...................................... (1,247) (10) (1,257) (112) 30 (82)
Other borrowed funds ............................... 1,350 (26) 1,324 563 1 564
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense ............................. 2,149 (675) 1,474 3,242 316 3,558
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income
(Tax-Equivalent Basis) ........................... $ 2,507 $ 112 $ 2,619 $ 3,380 $ 636 $ 4,016
====================================================================================================================================
</TABLE>
INVESTMENT PORTFOLIO
The following table presents the amortized cost of held to maturity and
available for sale securities held by the Company for each reported period (in
thousands):
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
===================================================================================================================
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TYPE
Obligations of states and political
subdivisions $ 24,161 $ 24,167 $ 70,517 $ 70,458 $ 48,632 $ 48,654
Mortgage-backed securities and
collateralized mortgage obligations 42,642 42,307 62,517 62,108 93,598 92,411
Government Agency securities 213,274 213,023 153,177 153,288 44,785 44,382
Corporate securities 2,368 2,368 2,368 2,368 1,971 1,971
- ------------------------------------------------------------------------------------------------------------------
Total $282,445 $281,865 $288,579 $288,222 $188,986 $187,418
===================================================================================================================
</TABLE>
39
<PAGE>
STATISTICAL INFORMATION
(continued)
The following table presents the maturity distribution and the weighted
average yield of the Company's investment portfolio at December 31, 1998 (in
thousands). The yield information does not give effect to changes in estimated
fair value of investments available for sale that are reflected as a component
of stockholders' equity.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
----------------- ----------------- ---------------- --------------
Amount Yield* Amount Yield* Amount Yield* Amount Yield*
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Type
Obligations of states and
political subdivisions ............................. $ 23,973 4.75% $ -- --% $ 184 8.35% $ -- --%
Mortgage-backed securities and
collateralized mortgage obligations** ............ 15,180 6.81 17,066 5.54 10,061 6.78 -- --
Government Agency securities*** .................... 192,985 6.57 20,038 6.44 -- --
Corporate securities ............................... 2,368 7.19
- ------------------------------------------------------------------------------------------------------------------------------------
Total .............................................. $232,138 6.40% $37,104 6.02% $10,245 6.81% $2,368 7.19%
====================================================================================================================================
</TABLE>
* Fully tax-equivalent basis using a tax rate of 34%.
** Assumes maturity dates pursuant to average lives as determined by constant
prepayment rates.
*** Assumes coupon yields for securities past their call dates and not bought
at a discount; yields to call for securities not past their call dates and
not bought at a discount; and yields to maturity for securities purchased
at a discount.
LOAN PORTFOLIO
The following table categorizes the Company's loan portfolio for each
reported period (in thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
=========================================================================================
<S> <C> <C> <C> <C> <C>
Commercial and industrial ... $197,601 $172,524 $163,780 $130,617 $112,286
Real estate--mortgage ....... 187,740 174,480 160,104 137,067 126,107
Real estate--construction ... 17,165 14,713 13,132 7,798 3,349
Loans to individuals ........ 7,749 7,077 7,526 6,323 6,746
Tax-exempt and other ........ 10,461 8,920 8,841 5,838 6,742
- -----------------------------------------------------------------------------------------
Gross loans ................. 420,716 377,714 353,383 287,643 255,230
Less: unearned income ....... 80 80 80 64 85
- -----------------------------------------------------------------------------------------
Loans--net of unearned income $420,636 $377,634 $353,303 $287,579 $255,145
=========================================================================================
</TABLE>
The following table presents the maturities of selected loans and the
sensitivities of those loans to changes in interest rates at December 31, 1998
(in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
=====================================================================================
<S> <C> <C> <C> <C>
Commercial and industrial ......... $130,068 $54,944 $12,589 $197,601
Real estate--construction ......... 9,537 7,628 -- 17,165
- -------------------------------------------------------------------------------------
Total ............................. $139,605 $62,572 $12,589 $214,766
- -------------------------------------------------------------------------------------
Loans maturing after one year with:
Fixed interest rate ............. $19,592 $ 4,029 $ 23,621
Variable interest rate .......... $42,980 $ 8,560 $ 51,540
=====================================================================================
</TABLE>
The following table presents the Company's nonaccrual, past due and
restructured loans for each reported period (in thousands):
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ............................................... $3,676 $4,258 $5,869 $8,247 $6,707
Loans 90 days or more past due and still accruing interest ..... $1,352 $1,590 $1,228 $ 337 $1,162
Restructured, accruing loans ................................... $5,545(1) $7,289(1) $6,524(1) $3,344 $3,608
Interest income on nonaccrual and restructured loans which would
have been recorded under original loan terms ................. $ 910 $1,192 $1,265 $ 837 $ 571
Interest income on nonaccrual and restructured
loans recorded during the period ............................. $ 400 $ 476 $ 263 $ 260 $ 124
===========================================================================================================================
</TABLE>
(1) Includes one credit totaling $5.0 million in 1998 and 1997 and $4.7
million in 1996 which is collateralized by commercial real estate with a
current appraised value in excess of the carrying value of the credit. The
restructured rate on this credit will remain below the contractual rate
until cash flows are again sufficient to support a market rate of
interest.
40
<PAGE>
STATE BANCORP. INC. AND SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
The determination of the balance of the allowance for possible loan losses
is based upon a review and analysis of the Company's loan portfolio and reflects
an amount which, in management's judgement, is adequate to provide for possible
future losses. Management's review includes monthly analysis of past due and
nonaccrual loans and detailed, periodic loan by loan analyses.
The principal factors considered by management in determining the adequacy
of the allowance are the growth and composition of the loan portfolio,
historical loss experience, the level of nonperforming loans, economic
conditions, the value and adequacy of collateral and the current level of the
allowance. While management utilizes all available information to estimate the
adequacy of the allowance for loan losses, the ultimate collectibility of a
substantial portion of the loan portfolio and the need for future additions to
the allowance will be based upon changes in economic conditions and other
relevant factors.
The following table presents an analysis of the Company's allowance for
possible loan losses for each reported period (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, January 1 ........................................ $5,124 $5,009 $5,004 $4,929 $4,725
- ------------------------------------------------------------------------------------------------------------------
Charge-offs:
Commercial and industrial ............................... 1,332 1,509 1,018 777 1,175
Real estate--mortgage ................................... 197 379 445 239 694
Loans to individuals .................................... 128 169 132 133 45
Loans to others ......................................... -- -- -- 45 --
- ------------------------------------------------------------------------------------------------------------------
Total charge-offs ......................................... 1,657 2,057 1,595 1,194 1,914
- ------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and industrial ............................... 214 189 79 52 119
Real estate--mortgage ................................... 297 23 14 6 47
Loans to individuals .................................... 10 10 7 11 2
- ------------------------------------------------------------------------------------------------------------------
Total recoveries .......................................... 521 222 100 69 168
- ------------------------------------------------------------------------------------------------------------------
Net charge-offs ........................................... 1,136 1,835 1,495 1,125 1,746
Additions charged to operations ........................... 1,800 1,950 1,500 1,200 1,950
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period .................................. $5,788 $5,124 $5,009 $5,004 $4,929
==================================================================================================================
Ratio of net charge-offs during the period to average loans
outstanding during the period ........................... 0.29% 0.51% 0.48% 0.43% 0.74%
==================================================================================================================
</TABLE>
The following table presents the allocation of the Company's allowance for
possible loan losses for each reported period (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
1998 Loans 1997 Loans 1996 Loans 1995 Loans 1994 Loans
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Industrial .. $3,320 47.0% $2,210 45.7% $2,452 46.4% $1,972 45.4% $2,004 44.0%
Real estate--mortgage ...... 1,633 44.6 1,790 46.2 1,658 45.3 1,746 47.7 1,503 49.4
Real estate--construction .. 675 4.1 499 3.9 423 3.7 43 2.7 19 1.3
Loans to individuals ....... 47 1.8 82 1.9 143 2.1 158 2.2 54 2.7
Tax exempt and other ....... 67 2.5 50 2.3 51 2.5 70 2.0 39 2.6
Unallocated ................ 46 -- 493 -- 282 -- 1,015 -- 1,310 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total ...................... $5,788 100.0% $5,124 100.0% $5,009 100.0% $5,004 100.0% $4,929 100.0%
====================================================================================================================================
</TABLE>
41
<PAGE>
STATISTICAL INFORMATION
(continued)
DEPOSITS
The following table presents the average balance and the average rate paid on
the Company's deposits for each reported period (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
====================================================================================================================================
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits ................................... $115,533 $ 99,251 $ 87,136
Interest-bearing transaction accounts ............. 34,269 1.66% 38,033 2.00% 26,545 1.81%
Money market deposit accounts ..................... 67,096 1.93 64,746 2.15 56,636 2.18
Savings deposits .................................. 108,163 2.71 108,029 2.88 108,647 2.86
Time certificates of deposit of $100,000 or more .. 223,749 5.41 181,856 5.58 134,837 5.35
Other time deposits ............................... 89,151 5.46 91,546 5.50 95,722 5.51
- -----------------------------------------------------------------------------------------------------------------------------------
Total ............................................. $637,961 3.41 $583,461 3.50 $509,523 3.40
====================================================================================================================================
</TABLE>
The following table sets forth, by time remaining to maturity, the
Company's certificates of deposit of $100,000 or more, at December 31, 1998 (in
thousands):
- --------------------------------------------------------------------------------
3 months or less ................................................ $180,822
Over 3 months through 6 months .................................. 12,187
Over 6 months through 12 months ................................. 3,856
Over 12 months .................................................. 4,074
- --------------------------------------------------------------------------------
Total ........................................................... $200,939
================================================================================
RETURN ON EQUITY AND ASSETS
The following table presents the Company's return on average stockholders'
equity and assets, the dividend payout ratio and the average equity to average
assets ratio for each reported period. The calculations are based on recorded
assets and give effect to the changes in fair value of securities available for
sale.
- --------------------------------------------------------------------------------
1998 1997 1996
================================================================================
Return on average assets ................... 1.11% 1.05% 0.97%
Return on average stockholders' equity ..... 14.16% 13.76% 12.98%
Dividend payout ratio ...................... 40.77% 37.56% 37.37%
Average equity to average assets ........... 7.83% 7.61% 7.47%
================================================================================
42
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
SHORT-TERM BORROWINGS
The following information is provided on the Bank's short-term borrowings
for each reported period (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
=========================================================================================================
<S> <C> <C> <C>
Balance, December 31--
Securities sold under agreements to repurchase ................... $34,529 $14,818 $74,079
Federal funds purchased .......................................... $ -- $ 6,000 $ 3,600
Federal Home Loan Bank advances .................................. $25,000 $47,000 $12,000
Term borrowing--broker ........................................... $10,000 $ -- $ --
- ---------------------------------------------------------------------------------------------------------
Weighted average interest rate on Balance, December 31--
Securities sold under agreements to repurchase ................... 6.09% 6.29% 5.62%
Federal funds purchased .......................................... -- 7.00% 9.00%
Federal Home Loan Bank advances .................................. 5.49% 6.08% 6.88%
Term borrowing--broker ........................................... 4.85% -- --
- ---------------------------------------------------------------------------------------------------------
Maximum outstanding at any month end--
Securities sold under agreements to repurchase ................... $34,529 $79,680 $74,079
Federal funds purchased .......................................... $ 8,000 $15,500 $14,500
Federal Home Loan Bank advances .................................. $45,000 $47,000 $12,000
Term borrowing--broker ........................................... $10,000 $ -- $ --
- ---------------------------------------------------------------------------------------------------------
Average daily amount outstanding--
Securities sold under agreements to repurchase ................... $ 3,411 $25,680 $27,667
Federal funds purchased .......................................... $ 996 $ 2,620 $ 3,578
Federal Home Loan Bank advances .................................. $27,393 $11,385 $ 1,425
Term borrowing--broker ........................................... $ 8,712 $ -- $ --
- ---------------------------------------------------------------------------------------------------------
Weighted average interest rate on average daily amount outstanding--
Securities sold under agreements to repurchase ................... 5.60% 5.64% 5.53%
Federal funds purchased .......................................... 5.52% 5.88% 5.79%
Federal Home Loan Bank advances .................................. 5.50% 5.66% 5.61%
Term borrowing--broker ........................................... 4.85% -- --
=========================================================================================================
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income ............................ $13,920 $13,367 $13,365 $14,117 $11,524 $13,232 $12,344 $13,564
Interest expense ........................... 6,734 5,810 6,170 5,450 4,932 5,939 5,506 6,313
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income ........................ 7,186 7,557 7,195 8,667 6,592 7,293 6,838 7,251
Provision for possible loan losses ......... 450 450 450 450 450 600 450 450
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses ................. 6,736 7,107 6,745 8,217 6,142 6,693 6,388 6,801
Other income ............................... 407 352 373 401 415 374 365 480
Operating expenses ......................... 4,490 4,457 4,446 4,574 3,906 4,146 4,236 4,435
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ................. 2,653 3,002 2,672 4,044 2,651 2,921 2,517 2,846
Provision for income taxes ................. 918 1,048 880 1,322 937 1,022 895 976
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ................................. $ 1,735 $ 1,954 $ 1,792 $ 2,722 $ 1,714 $ 1,899 $ 1,622 $ 1,870
====================================================================================================================================
Basic earnings per common share* ........... $ 0.27 $ 0.30 $ 0.28 $ 0.42 $ 0.27 $ 0.30 $ 0.25 $ 0.29
====================================================================================================================================
Diluted earnings per common share* ......... $ 0.27 $ 0.29 $ 0.27 $ 0.41 $ 0.27 $ 0.28 $ 0.25 $ 0.29
====================================================================================================================================
</TABLE>
*Retroactive recognition has been given for stock dividends and splits.
43
<PAGE>
MARKET DATA STATE BANCORP, INC. AND SUBSIDIARY
The following is a three-year comparison of dividends and stock prices:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
=====================================================================================================
<S> <C> <C> <C>
Annual cash dividends* ................................................ $0.52 $0.42 $0.35
Annual stock dividends/stock split issued ............................. 5% 20% 8%
=====================================================================================================
</TABLE>
Effective January 28, 1999, the Company's common stock began trading on
the American Stock Exchange under the symbol STB. For the years ended December
31, 1998, 1997 and 1996, the Company's common stock traded on the NASDAQ
Small-Cap market under the symbol STBC. As quoted by the National Association of
Securities Dealers, Inc., the approximate high and low closing bid prices for
the years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
=====================================================================================================
<S> <C> <C> <C> <C>
1998
High Bid ................................................ 25 3/4 22 3/4 21 18
Low Bid ................................................. 22 19 1/2 18 15 1/2
1997
High Bid ................................................ 16 1/2 18 1/2 20 5/8 26 7/8
Low Bid ................................................. 12 1/2 14 15 20 1/8
1996
High Bid ................................................ 14 1/4 14 1/8 12 1/4 12 5/8
Low Bid ................................................. 14 1/8 12 11 1/2 11 7/8
=====================================================================================================
</TABLE>
FIVE YEAR SUMMARY OF OPERATIONS
For the Years Ended December 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest income .................................... $ 54,769,164 $ 50,664,182 $ 43,178,725 $ 39,426,356 $ 31,267,004
Interest expense ................................... 24,164,086 22,690,197 19,130,627 18,669,569 11,977,716
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................ 30,605,078 27,973,985 24,048,098 20,756,787 19,289,288
Provision for possible loan losses ................. 1,800,000 1,950,000 1,500,000 1,200,000 1,950,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses .......................... 28,805,078 26,023,985 22,548,098 19,556,787 17,339,288
Other income ....................................... 1,533,111 1,634,299 1,858,131 1,424,147 1,265,230
Operating expenses ................................. 17,967,483 16,722,436 15,536,513 13,483,056 12,733,176
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ......................... 12,370,706 10,935,848 8,869,716 7,497,878 5,871,342
Provision for income taxes ......................... 4,168,161 3,830,358 3,167,704 2,459,213 1,852,709
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ......................................... $ 8,202,545 $ 7,105,490 $ 5,702,012 $ 5,038,665 $ 4,018,633
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share* ................... $ 1.27 $ 1.11 $ 0.95 $ 0.89 $ 0.72
====================================================================================================================================
Diluted earnings per common share* ................. $ 1.24 $ 1.09 $ 0.94 $ 0.87 $ 0.71
Stock dividends/split .............................. 5% 20% 8% 10% 10%
Cash dividends per common share* ................... $ 0.52 $ 0.42 $ 0.35 $ 0.41 $ 0.21
Weighted average number of shares
outstanding* ...................................... 6,477,600 6,372,748 6,002,625 5,676,610 5,587,392
Total assets ....................................... $732,693,510 $738,088,937 $615,417,655 $650,950,468 $505,360,719
Total deposits ..................................... $597,020,948 $611,227,920 $474,450,489 $497,739,954 $377,324,602
Total stockholders' equity ......................... $ 60,857,892 $ 54,930,263 $ 48,569,471 $ 40,587,552 $ 36,170,470
Return on total average assets ..................... 1.11% 1.05% 0.97% 0.94% 0.83%
Return on total average stockholders' equity ....... 14.16% 13.76% 12.98% 13.11% 11.45%
====================================================================================================================================
</TABLE>
*Retroactive recognition has been given for stock dividends and splits.
44
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS STATE BANCORP, INC. AND SUBSIDIARY
Effective February 1, 1999
STATE BANCORP, INC. AND
STATE BANK OF LONG ISLAND
Board of Directors
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
State Bancorp, Inc. and State Bank of
Long Island
Gary Holman
Vice Chairman of the Board
State Bancorp, Inc. and State Bank of
Long Island
Partner, Lamb & Barnosky, LLP
J. Robert Blumenthal
President, Harwyn Enterprises, Inc.
Carl R. Bruno
Chief Financial Officer, DiFazio Electric, Inc.
Arthur Dulik, Jr.
Chief Financial Officer, Altana, Inc.
Richard W. Merzbacher
President, State Bank of Long Island
Vice Chairman, State Bancorp, Inc.
Joseph F. Munson
Chairman, TRM International, Inc.
Raymond M. Piacentini
Vice President
Donaldson, Lufkin & Jenrette
Investment Services, Inc.
John F. Picciano
Attorney
Daniel T. Rowe
President, State Bancorp, Inc.
Vice Chairman, State Bank of Long Island
Suzanne H. Rueck
Manager, New Hyde Park Inn
STATE BANCORP, INC.
Officers
Office of the Chairman
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
Daniel T. Rowe
President
Richard W. Merzbacher
Vice Chairman
Brian K. Finneran
Secretary/Treasurer
STATE BANK OF LONG ISLAND
Executive Officers
Office of the Chairman
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
Richard W. Merzbacher
President
Daniel T. Rowe
Vice Chairman
Frederick C. Braun, III
Executive Vice President and
Senior Lending Officer
Brian K. Finneran
Executive Vice President and
Chief Financial Officer
45
<PAGE>
STATE OF BANK OF LONG ISLAND OFFICERS
Effective February 1, 1999
Financial Group
Theresa DiVittorio, C.P.A.
First Vice President & Comptroller
Philip J. Nardella, C.P.A.
Vice President
Thomas C. Padden
Vice President
Carol J. Bergmann
Assistant Vice President and
Assistant Secretary
Mary Ann DiLorenzo
Assistant Vice President
Steven Karaman
Administrative Assistant
Bank Operations/Facilities
Raymond D. Wagner
First Vice President
Maureen McTiernan
Assistant Vice President
Jennie DiFilippi
Assistant Manager
Valerie Stewart
Assistant Manager
Management Information
Systems and Data Processing
Susanne Pheffer
Senior Vice President
Diane T. Beck
Vice President
Joseph M. McNeill
Vice President
Janine M. Specht
Manager
Jon Montana
Assistant Manager
Human Resources
Mary E. Durkin
Vice President and Director of
Human Resources and Training
Marketing
John McWhirk
Vice President and Director of
Marketing and Product Development
Branch Administration
Thomas A. Arnone
Senior Vice President
Douglas W. Vergith
Vice President
Kevin J. Carroll
Assistant Vice President
Elizabeth A. Zona
Manager
Debbie A. Hartman
Assistant Manager
Cara Maloney
Assistant Manager
Robert Burke, Jr.
Administrative Assistant
Farmingdale Branch
Peter J. Yovine
Assistant Vice President
Catherine R. Lingstuyl
Assistant Manager
Denise Cummings
Administrative Assistant
Garden City South Branch
Paul R. Cronen
Manager
Lisa A. Pandolfo
Assistant Manager
Hauppauge Branch
John J. Kurek
Vice President
Rocco Reda
Vice President
Stephen N. Pedersen
Manager
Huntington Branch
Karen M. Williams
Assistant Vice President
Karen Papsidero
Manager
Helen M. Gilfedder
Assistant Manager
Jericho Branch
Blanche E. Stanford
Manager
Robert Insalaco
Assistant Manager
Eftihia Karachalios
Administrative Assistant
MacArthur Branch
Iris Taibbi
Manager
Clare M. O'Shaughnessy
Assistant Manager
Sharon Klinkhardt
Administrative Assistant
New Hyde Park Branch
Edward L. Kelly
Vice President
Lucille N. Jessen
Manager
Rosemary A. DiMario
Assistant Manager
Rina Miletic
Assistant Manager
Oyster Bay Branch
Robert J. Connors
Vice President
Diane E. Grochocki
Assistant Manager
Rockville Centre Branch
Ann Goulding
Manager
Lisa Ramos-Lopez
Assistant Manager
Municipal Finance
Robert J. Valli
Senior Vice President and Director of
Municipal Finance and Community Relations
Kenneth A. Messina
First Vice President
John P. Rom
Vice President
Hazel F. McCord
Administrative Assistant
46
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
Commercial Lending Group
Charles A. Hoffman
Senior Vice President
Robert J. Nicols
Senior Vice President
Kenneth M. Scheriff
Senior Vice President
William H. Tucker
Senior Vice President
Jean-ann Yngstrom
Senior Vice President
George K. DeHaven
First Vice President
Fred A. Heruth
First Vice President
Jeffrey N. Barber
Vice President
James T. Burns
Vice President
Patrick M. Demery
Vice President
Kevin T. Hennessy
Vice President
Kevin R. McHale
Vice President
Stephen B. Mischo
Vice President
Richard J. O'Brien
Vice President
Michael O'Leary
Vice President
Michael P. Sabala
Vice President
Thomas Scott Swain
Vice President
Geraldine L. Harden
Assistant Vice President
Lori D. Keller
Assistant Vice President
Jeffrey B. Reid
Assistant Vice President
Karyn F. Rodriguez
Assistant Vice President
Maria Billiris
Assistant Manager
Anne N. Dragovcic
Assistant Manager
Daniel Lehan
Assistant Manager
Christopher Van Bell
Assistant Manager
Carol Golde
Administrative Assistant
Consumer Loan Department
Jean M. Cassese
Vice President
John J. McEniry
Assistant Vice President
Loan Operations Group
Siu Chan
Manager
Patricia Salvatore
Administrative Assistant
47
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY STATE BANCORP. AND SUBSIDIARY
ADVISORY BOARD
Henry Alpert, Secretary
Spartan Petroleum Corp.
Andrew C. Andron, President
Century 21 Andron Realty
Maureen Appel, Headmistress
Connelly School of the Holy Child
Marvin Buchner, President
Council Commerce Corp.
Salvatore Catania, Secretary
Murray M. Braunstein, Inc.
Angelo Francis Corva, President
Angelo Francis Corva & Associates
Anthony J. Demasco, CPA, Partner
Demasco, Sena & Jahelka
Monroe Diefendorf, Jr., President
Diefendorf Capital Planning Associates
Debbie C. Eichen, CPA Eichen & DiMeglio, P.C.
Joseph Farber
Previte, Farber & Rosen, PC
Fred H. Fellows, President
Fibre Materials Co., Inc.
Ronald F. Friedenthal
Independent Insurance Broker
Frank Giorgio, Jr., Esq.
Giorgio & DePoto
George Goettelmann, Jr., President
A. E. Goettelmann & Co.
Kermit Gordon
Kermit Enterprises
Henry P. Greve, CPA
Greve, Schmidt & Trageser, P.C.
Joan Griesmeyer, Consultant
Bradley & Parker
Joseph M. Gunning, President
Gunning Business Machines
Anne S. Hadlock, CPA, Partner
Stanley, Marks & Co., LLP
Jean A. Hegler, Attorney
Brosnan & Hegler, Attorneys
Edward Heil
Independent Network Group
Conrad P. Homler, CPA
Seymour Katchen, CPA
Palmetto, Mollo & Co.
Michael Katz, President
Decor Moulding & Supply
Robert F. Kearns, Executive Vice President
B. H. Aircraft Company, Inc.
Owen Kilgannon, CPA
Kilgannon, Furey, Dufek & Company
Carol Konner, President
Konner Development Corp.
Patrick McAllister
Great Eastern Printing Co.
Gerard J. McKeon, Retired
The New York Racing Association
Frederick J. Meyer, Chairman
Mariculture Technologies, Inc.
Robert E. Meyer
Robert E. Meyer Real Estate Appraisals
Donald Monti, President
Concorde Management
Dominick Nuzzi
Allegiance Van Lines, Inc.
John J. Nuzzi
Nuzzi Fuel Co.
Peter N. Paternostro, CPA, Partner
Rynkar, Paternostro & Co., LLP
Charles Peluso, CPA
Margolin, Winer & Evens
Joseph Provenzano, President
Long Island Floors, Inc.
Charles W. Schwing, Consultant
Schwing Electrical Supply Corp.
Fred Scott, Chairman
State Bank of Long Island
Advisory Board
Ralph Somma, Executive Vice President
Brueton Industries, Inc.
Charles I. Steinberg, President
Financial Pacesetters, Inc.
Jerome Stubenhaus, CLU
Nassau Radiologic Group, P.C.
Jeffrey S. Wilks
Spiegel Associates
48
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARIES
CORPORATE INFORMATION
EXECUTIVE OFFICES
699 Hillside Avenue
New Hyde Park, NY 11040-2512
Tel: (516) 437-1000
Fax: (516) 437-1032
2 Jericho Plaza
Jericho, NY 11753-1683
Tel: (516) 465-2300
Fax: (516) 465-6700
ANNUAL MEETING OF STOCKHOLDERS
State Bancorp, Inc.'s Annual Stockholders' Meeting will be held on Tuesday,
April 27, 1999 at 10:00 a.m. at the New Hyde Park Inn, New Hyde Park, NY.
INVESTOR RELATIONS
Stockholders, security analysts and others seeking information about State
Bancorp, Inc. should contact Brian K. Finneran, Executive Vice President and
Chief Financial Officer at (516) 465-2251.
Copies of the Company's earnings releases and other financial publications,
including the Annual Report on Form 10-K filed with the Securities and Exchange
Commission, are available without charge upon written request to:
Theresa DiVittorio
First Vice President & Comptroller
State Bank of Long Island
699 Hillside Avenue
New Hyde Park, NY 11040-2512
STOCK LISTING
State Bancorp, Inc. is traded on the American Stock Exchange under the symbol
STB. Price information appears in the Wall Street Journal, New York Times and
other news papers under StateBcp.
STOCKHOLDER ACCOUNT INQUIRIES
To expedite changes of address or registration, consolidation of accounts and
the replacement of stock certificates or dividend checks, stockholders should
contact the Company's registrar and transfer agent directly:
Norwest Shareowner Services
161 North Concord Exchange
South St. Paul, MN 55075
(800) 468-9716
FDIC RULES AND REGULATIONS, 350.4(D)
This statement has not been reviewed, or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1700 Market Street
Philadelphia, PA 19103-3984
COUNSEL
Lamb & Barnosky, LLP
534 Broadhollow Road
Melville, NY 11747-9034
<PAGE>
[LOGO] STATE BANK OF LONG ISLAND
Branch Locations
MAIN OFFICE
699 Hillside Avenue
New Hyde Park, NY 11040-2512
(516) 437-1000
(516) 465-2200
135 South Street
Oyster Bay, NY 11771-2283
(516) 922-0200
339 Nassau Boulevard
Garden City South, NY 11530-5313
(516) 481-3900
Lincoln Plaza
2 Lincoln Avenue
Rockville Centre, NY 11570-5724
(516) 678-6000
501 North Broadway
Jericho, NY 11753-2107
(516) 822-4000
580 East Jericho Turnpike
Huntington Station, NY 11746-7378
(516) 271-5900
740 Veterans Memorial Highway
Hauppauge, NY 11788-1231
(516) 979-0700
4250 Veterans Memorial Highway
Holbrook, NY 11741-4001
(516) 630-0500
27 Smith Street
Farmingdale, NY 11735-1022
(516) 847-3900
Lending Facility
Two Jericho Plaza
Jericho, NY 11753-1683
(516) 465-2300
Internet Address
www.statebankofli.com
Touch 24
(516) 421-7900
Subsidiary Locations
SBPortfolio Management Corp.
1403 Foulk Road, Suite 102
Wilmington, DE 19803
(302) 479-5936
SB Financial Services Corp.
1403 Foulk Road, Suite 102
Wilmington, DE 19803
(302) 479-7534
SBORE Corp.
699 Hillside Avenue
New Hyde Park, NY11040
(516) 465-2200
New Hyde Park Leasing Corporation
699 Hillside Avenue
New Hyde Park, NY11040
(516) 465-2200
WE ARE LONG ISLAND
EXHIBIT (23)
INDEPENDENT AUDITORS' CONSENT
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements No. 33-15167 and No. 33-82172 of State Bancorp, Inc. on
Forms S-8 of our report dated January 21, 1999, appearing in this
Annual Report on Form 10-K of State Bancorp, Inc. for the year ended
December 31, 1998.
s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Philadelphia, PA
March 25, 1999
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<PERIOD-START> JAN-1-1998
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