-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4EMIkqa9xtYEEUffQdWvRyak7j/tFAPkT0yg8BVQ8tQxnKiHrtkT2xPa3VzcG+u SIYZhBToxlUX+7XP3Q47sw== 0001005477-99-001548.txt : 19990402 0001005477-99-001548.hdr.sgml : 19990402 ACCESSION NUMBER: 0001005477-99-001548 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE BANCORP INC CENTRAL INDEX KEY: 0000723458 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 112846511 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14783 FILM NUMBER: 99581063 BUSINESS ADDRESS: STREET 1: 699 HILLSIDE AVE CITY: NEW HYDE PARK STATE: NY ZIP: 11040 BUSINESS PHONE: 5164371000 MAIL ADDRESS: STREET 1: 699 HILLSIDE AVE CITY: NEW HYDE PARK STATE: NY ZIP: 11040 10-K 1 FORM 10-K 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. ------------------- (Exact name of registrant as specified in its charter) New York 11-2846511 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 699 Hillside Avenue New Hyde Park, N.Y. 11040 - ------------------- ----- (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. 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 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 1 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 2 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. 3 Statistical Information - ----------------------- 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 4 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. 5 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 -------------- ------------------------ 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. 6 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 7 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. 8 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. 9 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 10 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. 11 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 12 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 - ---------------- ------- Daniel T. Rowe s/Richard W. Merzbacher Vice Chairman 3/22/99 - ----------------------- ------- 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 - ------------- ------- Gary Holman s/J. Robert Blumenthal Director 3/22/99 - ---------------------- ------- J. Robert Blumenthal s/Carl R. Bruno Director 3/22/99 - --------------- ------- Carl R. Bruno s/Arthur Dulik, Jr. Director 3/22/99 - ------------------- ------- Arthur Dulik, Jr. s/Joseph F. Munson Director 3/22/99 - ------------------ ------- Joseph F. Munson s/Raymond M. Piacentini Director 3/22/99 - ----------------------- ------- Raymond M. Piacentini s/John F. Picciano Director 3/22/99 - ------------------ ------- John F. Picciano s/Suzanne H. Rueck Director 3/22/99 - ------------------ ------- Suzanne Rueck 13 EX-10.I) 2 1999 INCENTIVE STOCK OPTION PLAN 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 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 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 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 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. 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 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 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. 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, 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. 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 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, 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) EX-13 3 1998 ANNUAL REPORT EXHIBIT (13) ANNUAL REPORT TO STOCKHOLDERS STATE BANCORP, INC. [LOGO] 1998 ANNUAL REPORT WE ARE LONG ISLAND [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 STATE BANCORP, INC. AND SUBSIDIARY FINANCIAL HIGHLIGHTS (in thousands)
1998 % Change 1997 ========================================================================================= 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% ==========================================================================================
Net Income (dollars in millions) [GRAHPIC OMITTED] Shareholders' Equity (dollars in millions) [GRAHPIC OMITTED] Total Average Assets (dollars in millions) [GRAHPIC OMITTED] 1 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 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 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 [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 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 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 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 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 CONSOLIDATED BALANCE SHEETS STATE BANCORP, INC. AND SUBSIDIARY December 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------- Notes 1998 1997 =============================================================================================================================== ASSETS: 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 - -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 10 CONSOLIDATED STATEMENTS OF INCOME STATE BANCORP, INC. AND SUBSIDIARY For the Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------------- Notes 1998 1997 1996 ===================================================================================================================== 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 =====================================================================================================================
See Notes to Consolidated Financial Statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS STATE BANCORP, INC. AND SUBSIDIARY For the Years Ended December 31, 1998, 1997 and 1996
- ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ============================================================================================================================ 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 ============================================================================================================================
See Notes to Consolidated Financial Statements. 12 STATE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the Years Ended December 31, 1998, 1997 and 1996
Accumulated Other Common Retained Treasury Comprehensive Notes Stock Surplus Earnings Stock Income =========================================================================================================================== 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) =========================================================================================================================== Compre- Unearned hensive Compensation Total Income ======================================================================================== 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 ========================================================================================
See Notes to Consolidated Financial Statements. 13 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 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 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:
- ------------------------------------------------------------------------------------------------ December 31, 1998 - ------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ================================================================================================ 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 ================================================================================================ - ------------------------------------------------------------------------------------------------ December 31, 1997 - ------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ================================================================================================ 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 ================================================================================================
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 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 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:
- -------------------------------------------------------------------------------------------------- 1998 1997 1996 ================================================================================================== % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ================================================================================================== 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% ==================================================================================================
At December 31, 1998 and 1997, the deferred tax assets and liability are comprised of the following:
- ------------------------------------------------------------------------------------------------- 1998 1997 ================================================================================================= 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 =================================================================================================
18 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:
- --------------------------------------------------------------------------------------------------------------------------------- Option Price Weighted Average Number Number (Approximate Fair Exercise Price of Options of Shares Value at Date of Grant) Total Per Share ================================================================================================================================= 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 =================================================================================================================================
The following summarizes shares subject to purchase from options outstanding and exercisable as of December 31, 1998:
- -------------------------------------------------------------------------------------------------------------------- Weighted Average Shares Remaining Weighted Average Shares Weighted Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise price ===================================================================================================================== $5.52-$ 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 =====================================================================================================================
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 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 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 ================================================================================
For the years ended December 31, - -------------------------------------------------------------------------------- 1998 1997 1996 ================================================================================ 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 ================================================================================
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 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:
December 31, - ----------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ==================================================================================== 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 ====================================================================================
22 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):
- ---------------------------------------------------------------------------------------------------------------------- To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions - ---------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ====================================================================================================================== 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% ======================================================================================================================
23 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 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 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 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 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 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 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 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 I Analysis of Nonperforming Assets at December 31, - -------------------------------------------------------------------------------------------------------------------- (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% - ---------------------------------------------------------------------------------------------------------------------
(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 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 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 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 II Regulatory Ratios as of December 31, Criteria for ------------------------------- Well Regulatory Capitalized Minimum 1998 1997 1996 Institution ==================================================================================================== 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% ====================================================================================================
34 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 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 STATE BANCORP, INC. AND SUBSIDIARY
TABLE III SENSITIVITY TIME HORIZON ================================================================================================================================= 0-6 6-12 1-5 Over Noninterest- Interest-sensitive Assets (1) Months Months Years 5 Years Sensitive Total ================================================================================================================================= (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% =================================================================================================================================
(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 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):
- ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1998 1997 1996 ==================================================================================================================================== Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
38 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):
- ------------------------------------------------------------------------------------------------------------------------------------ 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) ==================================================================================================================================== 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 ====================================================================================================================================
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):
December 31, - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 =================================================================================================================== Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------ 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 ===================================================================================================================
39 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.
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* ==================================================================================================================================== 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% ====================================================================================================================================
* 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):
December 31, - ----------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ========================================================================================= 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 =========================================================================================
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):
- ------------------------------------------------------------------------------------- One Year One Through Over or Less Five Years Five Years Total ===================================================================================== 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 =====================================================================================
The following table presents the Company's nonaccrual, past due and restructured loans for each reported period (in thousands):
December 31, - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 =========================================================================================================================== 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 ===========================================================================================================================
(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 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):
- ------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ================================================================================================================== 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% ==================================================================================================================
The following table presents the allocation of the Company's allowance for possible loan losses for each reported period (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------ 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 ==================================================================================================================================== 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% ====================================================================================================================================
41 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):
- ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 ==================================================================================================================================== Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
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 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):
- --------------------------------------------------------------------------------------------------------- 1998 1997 1996 ========================================================================================================= 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% -- -- =========================================================================================================
SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ 1st 2nd 3rd 4th 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ==================================================================================================================================== 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 ====================================================================================================================================
*Retroactive recognition has been given for stock dividends and splits. 43 MARKET DATA STATE BANCORP, INC. AND SUBSIDIARY The following is a three-year comparison of dividends and stock prices:
- ----------------------------------------------------------------------------------------------------- 1998 1997 1996 ===================================================================================================== Annual cash dividends* ................................................ $0.52 $0.42 $0.35 Annual stock dividends/stock split issued ............................. 5% 20% 8% =====================================================================================================
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:
- ----------------------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ===================================================================================================== 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 =====================================================================================================
FIVE YEAR SUMMARY OF OPERATIONS For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ==================================================================================================================================== 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% ====================================================================================================================================
*Retroactive recognition has been given for stock dividends and splits. 44 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 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 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 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 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 [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 EX-23 4 INDEPENDENT AUDITORS' CONSENT 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 EX-27 5 FINANCIAL DATA SCHEDULE 12/31/98 10-K
9 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 19,095,418 179,017 0 0 279,928,775 2,516,035 2,526,401 420,636,380 5,788,440 732,693,510 597,020,948 69,529,000 5,285,670 0 0 0 32,966,700 27,891,192 732,693,510 36,638,602 14,738,811 3,391,751 54,769,164 21,950,270 24,164,086 30,605,078 1,800,000 (63,771) 17,967,483 12,370,706 8,202,545 0 0 8,202,545 1.27 1.24 7.91 3,676,431 1,351,942 5,544,775 0 5,123,651 1,656,201 520,990 5,788,440 5,741,737 0 46,703
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