UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ____________________
Commission file number 0 - 20957
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SUN BANCORP, INC.
-----------------
(Exact name of registrant as specified in its charter)
New Jersey 52-1382541
--------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification)
226 Landis Avenue, Vineland, New Jersey 08360
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
(856) 691 - 7700
----------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes X No
---------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$ 1.00 Par Value Common Stock 11,780,023 November 14, 2003
- ----------------------------- ---------- -----------------
Class Number of shares outstanding Date
SUN BANCORP, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Financial Condition at
September 30, 2003 and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Income For the Three and
Nine Months Ended September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows For the Nine
Months Ended September 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
25
ITEM 4. CONTROLS AND PROCEDURES 27
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Changes in Securities and Use of Proceeds 27
ITEM 3. Defaults upon Senior Securities 27
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 27
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2003 2002
----------- -----------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 76,836 $ 65,476
Federal funds sold 86,114 138
----------- -----------
Cash and cash equivalents 162,950 65,614
Investment securities available for sale (amortized cost -
$694,438; 2003 and $714,962; 2002) 697,495 723,201
Loans receivable (net of allowance for loan losses -
$18,572; 2003 and $16,408; 2002) 1,284,602 1,217,008
Restricted equity investments 12,786 11,610
Bank properties and equipment, net 29,315 29,468
Real estate owned, net 502 904
Accrued interest receivable 11,128 11,012
Goodwill 19,672 19,672
Intangible assets, net 16,908 19,783
Deferred taxes, net 9,132 6,867
Other assets 30,046 7,033
----------- -----------
TOTAL $ 2,274,536 $ 2,112,172
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,808,894 $ 1,690,462
Advances from the Federal Home Loan Bank 168,662 142,260
Loans payable 1,160
Securities sold under agreements to repurchase 77,376 61,860
Other liabilities 7,427 11,533
----------- -----------
Total liabilities 2,062,359 1,907,275
----------- -----------
Guaranteed preferred beneficial interest in Company's subordinated debt 59,274 59,274
SHAREHOLDERS' EQUITY
Preferred stock, none issued
Common stock, $1 par value, 25,000,000 shares authorized,
Issued and outstanding: 11,869,269 in 2003 and 11,271,135 in 2002 11,869 11,271
Additional paid in capital 123,134 114,930
Retained earnings 16,928 15,030
Accumulated other comprehensive income 2,018 5,438
Treasury stock at cost, 90,562 shares (1,046) (1,046)
----------- -----------
Total shareholders' equity 152,903 145,623
----------- -----------
TOTAL $ 2,274,536 $ 2,112,172
=========== ===========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(restated) (restated)
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 20,558 $ 21,503 $ 62,662 $ 62,832
Interest on taxable investment securities 4,993 6,553 16,411 20,009
Interest on non-taxable investment securities 638 523 1,879 1,532
Interest on restricted equity investments 88 117 470 423
Interest on federal funds sold 106 275 135 408
------------ ------------ ------------ ------------
Total interest income 26,383 28,971 81,557 85,204
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 5,197 8,909 18,534 27,226
Interest on short-term borrowed funds 1,856 2,116 6,205 6,272
Interest on guaranteed preferred beneficial interest in
Company's subordinated debt 1,044 1,099 3,150 3,396
------------ ------------ ------------ ------------
Total interest expense 8,097 12,124 27,889 36,894
------------ ------------ ------------ ------------
Net interest income 18,286 16,847 53,668 48,310
PROVISION FOR LOAN LOSSES 2,275 1,000 3,660 3,185
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 16,011 15,847 50,008 45,125
------------ ------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 1,975 1,783 5,661 5,182
Other service charges 98 109 304 337
Gain (loss) on sale of bank properties and equipment 155 5 164 (9)
Gain on sale of investment securities 788 536 1,658 1,335
Gain on sale of branches 1,314 2,629
Other 1,157 826 2,930 2,472
------------ ------------ ------------ ------------
Total other income 5,487 3,259 13,346 9,317
------------ ------------ ------------ ------------
OTHER EXPENSES:
Salaries and employee benefits 8,659 7,164 24,840 20,754
Occupancy expense 2,123 1,990 6,734 5,854
Equipment expense 1,272 1,322 4,046 3,611
Data processing expense 821 1,015 2,450 2,634
Amortization of intangible assets 910 1,034 2,760 3,202
Other 2,874 2,537 7,747 7,539
------------ ------------ ------------ ------------
Total other expenses 16,659 15,062 48,577 43,594
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,839 4,044 14,777 10,848
INCOME TAXES 1,522 1,268 4,575 3,362
------------ ------------ ------------ ------------
NET INCOME $ 3,317 $ 2,776 $ 10,202 $ 7,486
============ ============ ============ ============
Less: Trust Preferred issuance costs write-off $ 777
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,317 $ 2,776 $ 10,202 $ 6,709
============ ============ ============ ============
Basic earnings per share $ 0.28 $ 0.24 $ 0.87 $ 0.57
============ ============ ============ ============
Diluted earnings per share $ 0.26 $ 0.23 $ 0.81 $ 0.55
============ ============ ============ ============
Weighted average shares - basic 11,767,855 11,743,116 11,754,504 11,723,346
============ ============ ============ ============
Weighted average shares - diluted 12,803,606 12,159,650 12,571,470 12,165,240
============ ============ ============ ============
- ---------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
4
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
----------------------
2003 2002
--------- ---------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 10,202 $ 7,486
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses 3,660 3,185
Provision for losses on real estate owned 117
Depreciation 1,964 1,770
Net amortization of investments securities 2,504 1,929
Amortization of intangible assets 2,875 5,686
Gain on sale of investment securities available for sale (1,658) (1,335)
(Gain) loss on sale of bank properties and equipment (164) 9
Gain on sale of branches (2,629)
Deferred income taxes (503) (100)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (116) (1,382)
Other assets (23,013) (4,178)
Other liabilities (4,106) 7,212
--------- ---------
Net cash (used in) provided by operating activities (10,984) 20,399
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (466,973) (498,035)
(Purchases) redemptions of restricted equity securities (1,176) 809
Proceeds from maturities, prepayments or calls of investment securities available for sale 393,265 404,855
Proceeds from sale of investment securities available for sale 93,386 40,688
Net increase in loans (71,531) (98,204)
Purchase of bank properties and equipment (2,395) (2,609)
Proceeds from the sale of bank properties and equipment 84 5
Proceeds from the sale of bank properties and equipment resulting from branch sales 664
Net proceeds from sale of real estate owned 679 866
--------- ---------
Net cash used in investing activities (53,997) (151,625)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 160,377 135,053
Decrease in deposits resulting from branch sale (39,316)
Net borrowings under line of credits, advances and repurchase agreements 41,918 61,716
Principal payments on loan payable (1,160)
Payments for other borrowings (25,000)
Proceeds from other borrowings 25,000
Proceeds from exercise of stock options 259 774
Payments for fractional interests resulting from stock dividend (7) (6)
Proceeds from the issuance of guaranteed preferred beneficial interest in subordinated debt 30,000
Redemption of guaranteed preferred beneficial interest in subordinated debt (28,040)
Treasury stock purchased (1,046)
Proceeds from issuance of common stock 246 301
--------- ---------
Net cash provided by financing activities 162,317 198,752
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 97,336 67,526
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 65,614 79,082
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 162,950 $ 146,608
========= =========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
5
SUN BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except per share amounts, are in
thousands.)
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Sun Capital
Trust ("SunTrust I") (liquidated in April 2002), Sun Capital Trust II
("SunTrust II"), Sun Capital Trust III ("SunTrust III"), Sun Capital
Trust IV ("SunTrust IV"), Sun National Bank (the "Bank") and the Bank's
wholly owned subsidiaries, Med-Vine, Inc., Sun Financial Services,
L.L.C. and 2020 Properties, L.L.C. All significant intercompany
balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with instructions to Form 10-Q, and
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted
in the United States of America. However, all normal recurring
adjustments that, in the opinion of management, are necessary for a
fair presentation of the financial statements, have been included.
These financial statements should be read in conjunction with the
audited financial statements and the accompanying notes thereto
included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2002. The results for the three and nine months
ended September 30, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2003 or
any other period.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. The
significant estimates include the allowance for loan losses, goodwill,
core deposit and other intangible assets, and deferred tax assets.
Actual results could differ from those estimates.
Bank Properties and Equipment - Bank properties and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed
by the straight-line method based on the estimated useful lives of the
assets, as follows:
Buildings 40 years
Leasehold improvements Remaining lease term, including renewals, if applicable
Equipment 2.5 to 10 years
6
Stock dividend - On March 19, 2003, the Company's Board of Directors
declared a 5% stock dividend paid on April 21, 2003 to shareholders of
record on April 7, 2003. Accordingly, per share data and equity
accounts have been adjusted for all periods presented.
Goodwill and Other Intangible Assets - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. However,
SFAS No. 142 did not change the accounting prescribed for certain
acquisitions by banking and thrift institutions, resulting in continued
amortization of the excess of cost over fair value of net assets
acquired under SFAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which allows financial institutions meeting
certain criteria to reclassify their unidentifiable intangible asset
balances to goodwill and retroactively cease amortization beginning as
of January 1, 2002. The Company adopted SFAS No. 147 on October 1,
2002, and as required by the standard, the Company restated earnings
for the quarterly periods ended March 31, 2002, June 30, 2002 and
September 30, 2002.
A reconciliation of previously reported net income and earnings per
share to the amounts adjusted for the exclusion of goodwill
amortization, net of tax, follows. The per share amounts have been
restated to retroactively give effect to stock dividends.
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
----------------------------------------------
Net income available to shareholders:
As previously reported $2,232 5,077
Add: goodwill amortization, net of tax 544 1,632
------ ------
As restated $2,776 $6,709
====== ======
Basic earnings per share:
As previously reported $0.19 $0.43
Add: goodwill amortization, net of tax 0.04 0.14
---- -----
As restated $0.24 $0.57
===== =====
Diluted earnings per share:
As previously reported $0.18 $0.42
Add: goodwill amortization, net of tax 0.05 0.13
----- -----
As restated $0.23 $0.55
===== =====
Accounting for Stock Options - The Company accounts for stock-based
compensation using the intrinsic value method that recognizes as
expense the difference between the market value of the stock and the
exercise price at grant date. The Company has not recognized any
compensation expense under this method. The Company discloses below the
pro forma effects of accounting for stock-based compensation using the
fair value method (using the Black-Scholes model) as described in SFAS
No. 123 issued by the FASB and the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results described in SFAS No. 148.
7
At September 30, 2003, the Company had three stock-based employee
compensation plans. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Reported net income available to shareholders $3,317 $2,776 $10,202 $6,709
Deduct: Total stock-based employee
compensation expense determined under
fair value method (net of tax) (262) (474) (968) (2,005)
------ ------ ------ ------
Pro forma net income available to shareholders $3,055 $2,302 $9,234 $4,704
====== ====== ====== ======
Earnings per share:
Basic - as reported $0.28 $0.24 $0.87 $0.57
Basic - pro forma $0.26 $0.20 $0.79 $0.40
Diluted - as reported $0.26 $0.23 $0.81 $0.55
Diluted - pro forma $0.24 $0.19 $0.73 $0.39
8
Recent Accounting Principles - In November 2002, the FASB issued FASB
Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This
Interpretation also incorporates, without change, the guidance in FIN
No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others,
which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantor's fiscal year-end. The adoption of
FIN No. 45 did not have a material impact on the consolidated financial
statements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
The guarantees are primarily issued to support private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. In the event of a draw by the beneficiary that complies with
the terms of the letter of credit, the Company would be required to
honor the commitment. The Company takes various forms of collateral,
such as real estate assets and customer business assets to secure the
commitment. Additionally, all letters of credit are supported by
indemnification agreements executed by the customer. The maximum
undiscounted exposure related to these commitments at September 30,
2003 was $39.0 million, and the portion of the exposure not covered by
collateral was approximately $10.5 million. We believe that the
utilization rate of these letters of credit will continue to be
substantially less than the amount of these commitments, as has been
our experience to date.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
The Company has participated in the issue of preferred trust securities
through various trusts established for such purpose. The Company is
currently assessing the trust preferred securities structure and the
continued consolidation of the related trusts pursuant to FIN 46.
Management does not believe the results of the assessment will result
in a material change to the Company's balance sheet or income statement
upon the adoption of FIN No. 46 in the fourth quarter 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This statement is effective for
contracts entered into or modified after June 30, 2003, except for the
provision of this statement that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters that began prior to
June 15, 2003 and for hedging relationships designated after June 30,
2003. All provisions are to be applied prospectively except for the
provisions of this statement that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters that began prior to
June 15, 2003. These provisions are to be applied in accordance with
their respective effective dates. The adoption of SFAS No. 149 did not
have an impact on the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement requires that certain financial instruments,
which previously could be designated as equity, now be classified as
liabilities on the statement of financial position. The Company
currently classifies its trust preferred securities after total
liabilities and before shareholders' equity on its statement of
financial position. Under the provisions of SFAS No. 150, these
securities would be reclassified as borrowed funds. The effective date
of SFAS No. 150 has been indefinitely deferred by the FASB when certain
criteria are met. As the structure of the Company's trust preferred
securities meets such criteria, the Company qualifies for this limited
deferral. Therefore, the Company will assess the classification of the
trust preferred securities in conjunction with adoption of FIN No. 46
in the fourth quarter of 2003, as noted above.
9
(2) Acquisition
The Company announced on September 3, 2003, that it has reached a
definitive agreement to acquire from New York Community Bank ("NYCB")
the eight branches of its South Jersey bank division located in
Atlantic, Camden and Gloucester Counties in New Jersey. The branch
acquisition includes approximately $360 million in deposits and
approximately $14 million in commercial and consumer loans. In
connection with this branch acquisition, the Company will pay a
premium of approximately $40 million. On November 4, 2003, the Office
of the Comptroller of the Currency approved the Company's application
for this acquisition. This acquisition is expected to be completed
before December 31, 2003.
(3) Common Stock Offering
The Company has filed with the Securities and Exchange Commission a
Registration Statement relating to the proposed public offering of
1,300,000 shares of its common stock, par value $1.00 per share. The
shares will be offered in a firm commitment underwritten offering. The
Company has granted the underwriters a 30 day option to purchase up to
195,000 additional shares of common stock at the same price and on the
same terms, solely to cover over-allotments, if any. The Company
intends to contribute substantially all of the proceeds from this
offering to Sun Bank to provide it with capital to support the NYCB
branch acquisition and any remaining proceeds will be used for our
general corporate purposes. It is anticipated that the offering will
commence in December 2003.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes
effective. This Quarterly Report shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of
these securities in any state in which such offer, solicitation or sale
would be unlawful prior to the registration or qualification under the
securities laws of any such state. The offering is being made only by
means of a written prospectus.
(4) Loans
The components of loans as of September 30, 2003 and December 31, 2002
were as follows:
September 30, 2003 December 31, 2002
------------------ -----------------
Commercial and industrial $1,093,170 $1,043,885
Home equity 71,827 44,603
Second mortgages 52,879 47,458
Residential real estate 33,233 43,375
Installment 52,065 54,095
---------- ----------
Total gross loans 1,303,174 1,233,416
Allowance for loan losses (18,572) (16,408)
---------- ----------
Net Loans $1,284,602 $1,217,008
========== ==========
Non-accrual loans $25,137 $9,963
======= ======
During the current quarter, two credit relationships aggregating $16.3
million, of which $13.5 million was previously carried as restructured
performing loans since September 30, 2002, were transferred to
non-accrual loans. The provision for loan losses for the current
quarter was $2.3 million, which reflects an increased reserve for these
credits. The Company believes that these credits are adequately
reserved and are being carried at net realizable value as of quarter
end.
10
(5) Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
For the nine month
period ended For the year ended
September 30, 2003 December 31, 2002
------------------ -----------------
Balance, beginning of period $16,408 $13,332
Charge-offs (1,850) (1,609)
Recoveries 354 510
------- -------
Net charge-offs (1,496) (1,099)
Provision for loan losses 3,660 4,175
------- -------
Balance, end of period $18,572 $16,408
======= =======
The provision for loan losses charged to expense is based upon past
loan loss experience and an evaluation of estimated losses in the
current loan portfolio, including the evaluation of impaired loans
under SFAS Nos. 114 and 118. A loan is considered to be impaired when,
based upon current information and events, it is probable that the
Company will be unable to collect all amounts due according to the
contractual terms of the loan.
An insignificant delay or insignificant shortfall in amount of payments
does not necessarily result in a loan being identified as impaired. For
this purpose, delays less than 90 days are considered to be
insignificant.
Impairment losses are included in the provision for loan losses. Large
groups of smaller balance, homogeneous loans are collectively evaluated
for impairment, except for those loans restructured under a troubled
debt restructuring. Loans collectively evaluated for impairment include
consumer loans and residential real estate loans, and are not included
in the data that follow:
September 30, 2003 December 31, 2002
------------------ -----------------
Impaired loans with related reserve for loan
losses calculated under SFAS No. 114 $33,242 $25,511
Impaired loans with no related reserve for loan
losses calculated under SFAS No. 114 2,817 4,051
------- -------
Total impaired loans $36,059 $29,562
======= =======
For the nine
months ended For the year ended
September 30, 2003 December 31, 2002
------------------ -----------------
Average impaired loans $36,356 $13,471
======= =======
Interest income recognized on impaired loans $1,372 $1,936
====== ======
Cash basis interest income recognized on impaired loans $1,478 $2,013
====== ======
The increase in average impaired loans from the year ended December 31,
2002 to the nine months ended September 30, 2003 is primarily two
credits aggregating $13.5 million that were classified in September
2002 as restructured loans within the definition of SFAS No. 15. The
total of these two credit relationships, aggregating $16.3 million,
were transferred to non-accrual loans during the quarter ended
September 30, 2003. The provision for loan losses for the current
quarter was $2.3 million, which reflects an increased reserve for these
credits. The Company believes that these credits are adequately
reserved and are being carried at net realizable value as of quarter
end. In addition, the increase in average impaired loans was also due
to an $8.0 million commercial loan that was classified as impaired
during the nine months ended September 30, 2003. At September 30, 2003,
this loan was accruing and fully performing.
11
(6) Deposits
Deposits consist of the following major classifications:
September 30, 2003 December 31, 2002
------------------ -----------------
Demand deposits - interest bearing $ 691,179 $ 627,394
Demand deposits - non-interest bearing 382,867 322,433
Savings deposits 320,698 328,508
Time certificates under $100,000 276,413 306,622
Time certificates $100,000 or more 137,737 105,505
---------- ----------
Total $1,808,894 $1,690,462
========== ==========
(7) Advances from the Federal Home Loan Bank
Federal Home Loan Bank ("FHLB") advances are collateralized under a
blanket collateral lien agreement. Advances were as follows:
September 30, 2003 December 31, 2002
------------------ -----------------
Convertible rate advances $ 25,000 $ 45,000
Term amortizing advances 85,462 89,060
Term non-amortizing advances 58,200 8,200
-------- --------
Total $168,662 $142,260
======== ========
Convertible rate advances - On June 27, 2003 and June 29, 2003 two
$10,000,000 convertible rate advances matured. The interest rates on
these advances were 6.93% and 6.87% respectively.
Term amortizing advances - On February 21, 2003, the Company executed a
$10.0 million term advance, at a rate of 3.78%, maturing on February
21, 2013. Principal and interest monthly payments are $100,200 during
the term of the advance.
Term non-amortizing advances - On February 14, 2003, the Company
executed a $15.0 million term advance, at a rate of 3.39%, maturing on
February 14, 2008. On April 24, 2003, the Company executed a $10.0
million term advance, at a rate of 1.88%, maturing on April 25, 2005.
On April 25, 2003, the Company executed a $15.0 million term advance,
at a rate of 3.30%, maturing on April 25, 2008. On September 5, 2003,
the Company executed a $15.0 million term advance, at a rate of 3.90%,
maturing on September 5, 2008. Monthly payments are interest only
during the terms of these advances.
(8) Comprehensive Income
The Company classifies items of other comprehensive income by their
nature and displays the accumulated balance of other comprehensive
income separately from retained earnings and additional paid in capital
in the equity section of the statement of financial position. Amounts
categorized as other comprehensive income represent net unrealized
gains or losses on investment securities available for sale, net of
income taxes. Total comprehensive (loss) income for the three-months
ended September 30, 2003 and 2002 amounted to ($3,437,000) and
$6,302,000, respectively. Total comprehensive income for the
nine-months ended September 30, 2003 and 2002 amounted to $6,782,000
and $13,547,000, respectively.
12
(9) Earnings Per Share
Basic earnings per share is computed by dividing income available to
shareholders (net income), by the weighted average number of shares of
common stock net of treasury shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock net of treasury
shares outstanding increased by the number of common shares that are
assumed to have been purchased with the proceeds from the exercise of
the options (treasury stock method) along with the assumed tax benefit
from the exercise of non-qualified options. These purchases were
assumed to have been made at the average market price of the common
stock, which is based on the daily closing price. Retroactive
recognition has been given to market values, common stock outstanding
and potential common shares for periods prior to the date of the
Company's stock dividends. Net income for the 2002 periods have been
restated from amounts previously reported due to the adoption of SFAS
No. 147.
For the For the
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 3 ,317 $ 2,776 $ 10,202 $ 7,486
Less: Trust Preferred issuance costs write-off 777
----------- ---------- ---------- ----------
Net income available to common shareholders $ 3,317 $ 2,776 $ 10,202 $ 6,709
=========== ========== ========== === ======
Dilutive stock options outstanding 2,738,814 2,283,263 2,732,383 2,261,118
Average exercise price per share $10.20 $9.10 $10.17 $8.96
Average market price $21.38 $12.12 $17.31 $12.19
Average common shares outstanding 11,767,855 11,743,116 11,754,504 11,723,346
Increase in shares due to exercise of
options - diluted basis 1,035,751 416,534 816,966 441,894
---------- ---------- ---------- ----------
Adjusted shares outstanding - diluted 12,803,606 12,159,650 12,571,470 12,165,240
========== ========== ========== ==========
Net earnings per share - basic $0.28 $0.24 $0.87 $0.57
Net earnings per share - diluted $0.26 $0.23 $0.81 $0.55
Options that could potentially dilute basic
EPS in the future that were not included in
the computation of diluted EPS because to
do so would have been antidilutive for the
period presented 0 438,920 5,494 449,302
========== ========== ========== ==========
(10) Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
Guaranteed preferred beneficial interest in Company's subordinated debt
consists of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Sun Trust II $29,274 $29,274
Sun Trust III 20,000 20,000
Sun Trust IV 10,000 10,000
------- -------
$59,274 $59,274
======= =======
13
The sole asset of Sun Trust II is $29.9 million original principal
amount of 8.875% Junior Subordinated Debentures issued by the Company.
The Company has the right to optionally redeem Sun Trust II Debentures
prior to the maturity date of December 31, 2028, on or after December
31, 2003, at 100% of the stated liquidation amount, plus accrued and
unpaid distributions, if any, to the redemption date. At September 30,
2003 and December 31, 2002, the Company had repurchased 61,300 shares.
The sole asset of Sun Trust III is $20.0 million of Floating Rate
Junior Subordinated Debentures issued by the Company. The Coupon Rate
at September 30, 2003 was 4.99%. The Company has the right to
optionally redeem Sun Trust III Debentures prior to the maturity date
of April 22, 2032, on or after April 22, 2007, at 100% of the stated
liquidation amount, plus accrued and unpaid distributions, if any, to
the redemption date.
The sole asset of Sun Trust IV is $10.0 million of Floating Rate Junior
Subordinated Debentures issued by the Company. The Coupon Rate at
September 30, 2003 was 4.76%. The Company has the right to optionally
redeem Sun Trust IV Debentures prior to the maturity date of October 7,
2032, on or after July 7, 2007, at 100% of the stated liquidation
amount, plus accrued and unpaid distributions, if any, to the
redemption date.
14
THE COMPANY MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING
STATEMENTS," INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS QUARTERLY REPORT ON FORM 10-Q
AND THE EXHIBITS THERETO), IN ITS REPORTS TO SHAREHOLDERS AND IN OTHER
COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES'
LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, RISK-BASED
CAPITAL GUIDELINES AND REPORTING INSTRUCTIONS, SECURITIES AND INSURANCE);
TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING
HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE
FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of the financial condition and results of
operations are based on the Consolidated Financial Statements, which are
prepared in conformity with generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenue
and expenses. Management evaluates these estimates and assumptions on an ongoing
basis, including those related to the allowance for loan losses, income taxes
and goodwill. Management bases its estimates on historical experience and
various other factors and assumptions that are believed to be reasonable under
the circumstances. These form the bases for making judgments on the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Allowance for loan losses. Through the Bank, the Company
originates loans that it intends to hold for the foreseeable future or until
maturity or repayment. The Bank may not be able to collect all principal and
interest due on these loans. Allowance for loan losses represents management's
estimate of probable credit losses inherent in the loan portfolio as of the
balance sheet date. Management performs regular reviews in order to identify
inherent losses and to assess the overall credit risk of the portfolio. The
allowance for loan losses is determined by management based upon past
experience, evaluation of estimated loss and impairment in the loan portfolio,
current economic conditions and other pertinent factors. The allowance for loan
losses is maintained at a level that management considers adequate to provide
for estimated losses and impairment based upon an evaluation of known and
inherent risk in the loan portfolio. Loan impairment is evaluated based on the
fair value of collateral or estimated net realizable value. While management
uses the best information available to make such evaluations, future adjustments
to the allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluations. The determination of the
allowance for loan losses involves the monitoring of delinquency, default and
historical loss experience. Management makes estimates and assumptions regarding
existing but yet unidentified losses caused by current economic conditions and
other factors. If the Bank does not adequately reserve for these uncollectible
loans, it may incur additional charges to loan losses in the consolidated
financial statements.
In determining our allowance for loan losses, management has
established both specific and general pooled allowances. The amount of the
specific allowance is determined through a loan-by-loan analysis of certain
large dollar commercial loans. Loans not individually reviewed are evaluated as
a group using expected loss ratios, which are based on our historical charge-off
experience and current market and economic conditions. In determining the
appropriate level of the general pooled allowance and projecting losses
management makes estimates based on internal risk ratings, which take into
account such factors as debt service coverage, loan to value ratios and cost and
timing of collateral repossession and disposal. Estimates are periodically
measured against actual loss experience. Adjustments are made to future
projections as assumptions are revised.
The determination of the allowance for loan losses requires management
to make significant estimates with respect to the amounts and timing of losses
and market and economic conditions. Accordingly, a decline in the national
economy or the local economies of the areas in which the Bank's loans are
concentrated could result in an increase in loan delinquencies, foreclosures or
repossessions resulting in increased charge-off amounts and the need for
additional loan loss allowances in future periods. The Bank will continue to
monitor its allowance for loan losses and make future adjustments to the
allowance through the provision for loan losses as economic conditions and other
factors dictate. Although the Bank maintains its allowance for loan losses at
levels considered adequate to provide for the inherent risk of loss in its loan
portfolio, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods. In addition, the Bank's determination as to the
amount of its allowance for loan losses is subject to review by its primary
regulator, the Office of the Comptroller of the Currency (the "OCC"), as part of
its examination process, which may result in the establishment of an additional
allowance based upon the judgment of the OCC after a review of the information
available at the time of the OCC examination.
16
In July 2001, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB No. 102 expresses the SEC staff's
views on the development, documentation and application of a systematic
methodology for determining the allowance for loan losses in accordance with
accounting principles generally accepted in the United States of America. In
addition, in July 2001, the federal banking agencies issued guidance on this
topic through the Federal Financial Institutions Examination Council interagency
guidance, Policy Statement on Allowance for Loan and Lease Losses Methodologies
and Documentation for Banks and Savings Institutions. In management's opinion,
the Bank's methodology and documentation of the allowance for loan losses meets
the guidance issued.
Accounting for income taxes. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
which requires the recording of deferred income taxes that reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Management exercises significant judgment in the evaluation of the
amount and timing of the recognition of the resulting tax assets and liabilities
and the judgments and estimates required for the evaluation are periodically
updated based upon changes in business factors and the tax laws.
Valuation of goodwill. The Company assesses the impairment of goodwill
at least annually, and whenever events or significant changes in circumstance
indicate that the carrying value may not be recoverable. Factors that the
Company considers important in determining whether to perform an impairment
review include significant under performance relative to forecasted operating
results and significant negative industry or economic trends. If the Company
determines that the carrying value of goodwill may not be recoverable, then the
Company will assess impairment based on a projection of undiscounted future cash
flows and measure the amount of impairment based on fair value. In the fourth
quarter 2002, the Company performed, with the assistance of an independent third
party other than its independent auditors, its annual impairment test of
goodwill as required under the SFAS Nos. 142 and 147. Such testing is based upon
a number of factors, which are based upon assumptions and management judgments.
These factors include among other things, future growth rates, discount rates
and earnings capitalization rates. The test indicated that no impairment charge
was necessary for the year ending December 31, 2002.
Financial Condition
Total assets at September 30, 2003 increased by $162.4 million, or 7.7%
to $2.27 billion as compared to $2.11 billion at December 31, 2002. The increase
was primarily due to an increase in loans receivable of $67.6 million, in other
assets, consisting of the Company's $25.6 million BOLI investment, and in cash
and cash equivalents of $97.3 million, partially offset by a decrease in
investment securities of $25.7 million. The overall increase in total assets
continues to reflect the Company's focus on growth of its core businesses, with
emphasis on commercial lending and retail banking, while sustaining adequate
liquidity, managing interest rate risk and maintaining strong capital.
The Company completed a portion of its branch franchise strategy.
Through September 30, 2003, four branches had been sold and one branch was
consolidated into an existing office. The Company expects a further reduction,
through sales and consolidations, of seven additional branches by early 2004.
This strategy is part of the Company's overall strategy to enhance the
geographic coverage and market penetration of its branch network. This strategy
could result in the addition of new branches or further divestiture of existing
branches that compliment the Company's strategic objectives of profitable growth
of its core business. The Company announced on September 3, 2003, that it has
reached a definitive agreement to acquire from New York Community Bank eight
branches which comprised its South Jersey bank division located in Atlantic,
Camden and Gloucester Counties in New Jersey. The acquisition includes
approximately $360 million in deposits and approximately $14 million in
commercial and consumer loans. On November 4, 2003, the Office of the
Comptroller of the Currency approved the Company's application for this
acquisition. This transaction is expected to be completed before December 31,
2003.
Cash and cash equivalents increased $97.3 million, from $65.6 million
at December 31, 2002 to $163.0 million at September 30, 2003, resulting
primarily from the increase of federal funds sold of $86.0 million. Investment
securities available for sale decreased $25.7 million or 3.6%, from $723.2
million at December 31, 2002 to $697.5 million at September 30, 2003. The
increase of federal funds sold together with the decrease in investment
securities during the first nine months of 2003 was consistent with the
Company's asset and liability management goals which are designed to maintain a
portfolio of high quality investments which optimizes interest income within
acceptable limits of safety and liquidity.
17
Net loans receivable at September 30, 2003 were $1.28 billion, an
increase of $67.6 million from $1.22 billion at December 31, 2002. The increase,
net of loan prepayments, was primarily in commercial and industrial loans and
home equity consumer loans. The ratio of allowance for loan losses to total
loans was 1.43% at September 30, 2003 compared to 1.33% at September 30, 2002
and 1.33% at December 31, 2002.
Non-performing loans were $25.4 million at September 30, 2003 compared
to $8.1 million at September 30, 2002 and $12.5 million at December 31, 2002.
The increase in non-performing loans from the year ended December 31, 2002 to
the nine months ended September 30, 2003 is primarily due to two credits
aggregating $13.5 million that were classified in September 2002 as restructured
loans within the definition of SFAS No. 15. The total of these two credit
relationships, aggregating $16.3 million, was transferred to non-accrual loans
during the quarter ended September 30, 2003. The provision for loan losses for
the current quarter was $2.3 million, which reflects an increased reserve
allocation for these credits. The Company believes that these credits are
adequately reserved and are being carried at net realizable value as of quarter
end. The ratio of non-performing assets to total loans and other real estate was
1.99% at September 30, 2003 compared to 0.72% at September 30, 2002 and 1.08% at
December 31, 2002. The ratio of allowance for loan losses to total
non-performing loans was 73.12% at September 30, 2003 compared to 197.05% at
September 30, 2002 and 131.6% at December 31, 2002.
Other assets at September 30, 2003 were $30.0 million, an increase of
$23.0 million from $7.0 million at December 31, 2002. The increase was primarily
from the purchase of $25.6 million BOLI. The Company anticipates using BOLI
income to offset the costs of existing employee benefits.
Total deposits were $1.81 billion at September 30, 2003, reflecting a
$118.4 million increase over December 31, 2002. During the nine months ended
September 30, 2003, deposits decrease $39.3 million resulting from the sale of
four branches. The Company's core deposits, (demand and savings deposits)
increased $116.4 million, or 9.1% while the non-core deposits (time deposits)
increased $2.0 million, or 0.5%. The Company's deposit strategy stresses the
importance of building customer relationships. During the third quarter, the
Company continued to maintain its relationship pricing strategy which has
enabled the Company to increase the deposit mix to a higher concentration of
lower costing core deposits.
Advances from the Federal Home Loan Bank at September 30, 2003 were
$168.7 million, a net increase of $26.4 million from $142.3 million at December
31, 2002. This net increase reflects the origination of five advances
aggregating $60.0 million with varying terms and interest rates ranging from
1.88% to 3.90%, offset by the maturing of two $10.0 million convertible rate
advances, interest rates on these advances were 6.93% and 6.87%, and normal
principal scheduled reductions. This activity is in line with the Company's ALCO
interest rate sensitivity and liquidity policies.
Total shareholders' equity increased by $7.3 million, from $145.6
million at December 31, 2002, to $152.9 million at September 30, 2003. The
increase was primarily the result of the nine months ended net income amounting
to $10.2 million partially offset by a $3.4 million decrease in accumulated
other comprehensive income, resulting from a decreased unrealized net gain on
available for sale securities.
Liquidity and Capital Resources
Liquidity management is a daily and long-term business function. The
Company's liquidity, represented in part by cash and cash equivalents, is a
product of its operating, investing and financing activities. Proceeds from
repayment and maturities of loans, sales and maturities of investment
securities, net income and increases in deposits and borrowings are the primary
sources of liquidity of the Company.
The Company anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for the Company's future operating, investing and financing needs. In
addition to cash and cash equivalents of $163.0 million at September 30, 2003,
the Company had additional secured borrowing capacity with the FHLB of
approximately $42 million and other sources of approximately $57 million. As
noted above, the Company has reached a definitive agreement to acquire from New
York Community Bank the eight branches of its South Jersey bank division located
in Atlantic, Camden and Gloucester Counties in New Jersey. The acquisition
includes approximately $360 million in deposits and approximately $14 million in
commercial and consumer loans. This transaction is expected to be completed
before December 31, 2003.
18
The Company's largest cash flows are both investing and financing
activities. During the nine months ended September 30, 2003, the Company's
primary source of cash from investing activities was the proceeds from the sale,
maturities, prepayments or calls of investment securities. The primary use of
cash from investing activities was the purchase of investment securities and the
increase in loans. Financing activities, which provided $162.4 million of net
cash, was primarily the result of the net increase in deposits, after branch
sales, and net borrowings under lines of credit, advances and repurchase
agreements. The activity during this period reflects the Company's continued
focus on overall balance sheet and capital management, concentrating on growth
of its core businesses, with emphasis on commercial lending and retail banking,
while managing the Company's liquidity, interest-rate risk and capital
resources.
Management has developed a capital plan for the Company and the Bank
that should allow the Company and the Bank to grow capital internally at levels
sufficient for achieving its internal growth projections while managing its
operating and financial risks. The Company has also considered a contingent
capital plan, and when appropriate, the Company's Board of Directors may
consider various capital raising alternatives. The principle components of the
capital plan are to generate additional capital through retained earnings from
internal growth, access the capital markets for external sources of capital,
such as common equity or trust preferred securities, when necessary or
appropriate, redeem existing capital instruments and refinance such instruments
at lower rates when conditions permit and maintain sufficient capital for safe
and sound operations. The capital plan is not expected to have a material impact
on our liquidity. It is the Company's intention to maintain "well-capitalized"
risk-based capital levels. In keeping with this intention and in connection with
the previously announced purchase of the eight NYCB branches, on October 10,
2003, the Company filed a registration statement with the Securities and
Exchange Commission related to the proposed public offering of 1,300,000 shares
of its common stock.
As part of its capital plan, the Company issued trust preferred
securities that qualify as Tier 1 or core capital of the Company, subject to a
25% capital limitation under risk-based capital guidelines developed by the
Federal Reserve Board. The portion that exceeds the 25% capital limitation
qualifies as Tier 2, or supplementary capital of the Company. At September 30,
2003, of the Company's $59.3 million trust preferred securities, $50.3 million
qualify as Tier 1 capital and $9.0 million qualify as Tier 2 capital.
Comparison of Operating Results for the Three Months Ended September 30, 2003
and 2002
Net income increased by $541,000, or 19.5% for the three months ended
September 30, 2003 to $3.3 million from $2.8 million for the three months ended
September 30, 2002. As more fully described below, the increase in net income
was due to an increase of $1.4 million in net interest income, an increase of
$2.2 million in non-interest income, partially offset by an increase in the
provision for loan losses of $1.3 million and in non-interest expenses of $1.6
million.
Net Interest Income. The interest rate spread and margin for the three
months ended September 30, 2003 was 3.29% and 3.61%, respectively, compared to
3.04% and 3.50%, respectively, for the same period 2002. The yield on the
average interest-earning assets declined 80 basis points from 5.98% for the
three months ended September 30, 2002 to 5.18% for the same period in 2003,
while the cost of funds on average interest-bearing liabilities decreased 105
basis points from 2.94% for the three months ended September 30, 2002 to 1.89%
for the same period in 2003.
19
The following table sets forth a summary of average balances with corresponding
interest income (on a tax-equivalent basis) and interest expense as well as
average yield and cost information for the periods presented. Average balances
are derived from daily balances.
At or For the Three Months ended At or For the Three Months ended
September 30, 2003 September 30, 2002
--------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,086,150 $17,344 6.39 % $1,005,524 $18,012 7.17 %
Home equity 67,293 637 3.79 35,301 441 5.00
Second mortgage 53,685 874 6.51 53,469 1,008 7.54
Residential real estate 36,944 665 7.20 49,836 849 6.81
Installment 51,746 1,038 8.02 55,175 1,193 8.65
---------- ------- ---------- -------
Total loans receivable 1,295,818 20,558 6.35 1,199,305 21,503 7.17
Investment securities (3) 712,315 6,028 3.39 683,754 7,442 4.35
Interest-bearing deposit with banks 6,299 11 0.68 9,131 18 0.77
Federal funds sold 45,736 106 0.93 64,676 275 1.70
---------- ------- ---------- -------
Total interest-earning assets 2,060,168 26,703 5.18 1,956,866 29,238 5.98
---------- ------- ---------- -------
Cash and due from banks 69,294 61,484
Bank properties and equipment 29,336 28,833
Goodwill and intangible assets 37,189 39,116
Other assets 49,327 30,294
---------- ----------
Non-interest-earning assets 185,146 159,727
---------- ----------
Total Assets $2,245,314 $2,116,593
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 678,879 1,566 0.92 % $ 606,515 2,974 1.96 %
Savings deposits 324,434 824 1.02 320,928 1,842 2.30
Time deposits 412,107 2,807 2.72 441,936 4,093 3.70
---------- ------- ---------- -------
Total interest-bearing deposit accounts 1,415,420 5,197 1.47 1,369,379 8,909 2.60
---------- ------- ---------- -------
Borrowed money:
Repurchase agreements with customers 77,782 77 0.39 74,409 210 1.13
FHLB advances 163,075 1,772 4.35 148,086 1,893 5.11
Federal funds purchased 1,424 7 1.95
Other borrowed money 1,703 13 2.95
---------- ------- ---------- -------
Total borrowed money 242,281 1,856 3.06 224,198 2,116 3.77
---------- ------- ---------- -------
Guaranteed preferred beneficial
interest in Company's subordinated debt 59,274 1,044 7.05 58,200 1,099 7.55
---------- ------- ---------- -------
Total interest-bearing liabilities 1,716,975 8,097 1.89 1,651,777 12,124 2.94
---------- ------- ---------- -------
Non-interest-bearing demand deposits 355,810 301,345
Other liabilities 18,317 23,811
---------- -----------
Non-interest-bearing liabilities 374,127 325,156
---------- -----------
Total liabilities 2,091,102 1,976,933
Shareholders' equity 154,212 139,660
---------- ----------
Total liabilities and shareholders' equity $2,245,314 $2,116,593
========== ==========
Net interest income $18,606 $17,114
======= =======
Interest rate spread (4) 3.29 % 3.04 %
==== ====
Net yield on interest-earning assets (5) 3.61 % 3.50 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.99 % 118.47 %
====== ======
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans.
(2) Loan fees are included in interest income and the amount is not material
for this analysis.
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
20
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Three Months Ended September 30,
2003 vs. 2002
-----------------------------
Increase (Decrease)
Due to
-----------------------------
Volume Rate Net
------- ------- -------
Interest income
Loans receivable:
Commercial and industrial $ 1,378 $(2,046) $ 668
Home equity 323 (127) 196
Second mortgage 4 (138) (134)
Residential real estate (230) 46 (184)
Installment (72) (83) (155)
------- ------- -------
Total loans receivable 1,403 (2,348) 945
Investment securities 300 (1,714) (1,414)
Interest-bearing deposits accounts (5) (2) (7)
Federal funds sold (66) (103) (169)
------- ------- -------
Total interest-earning assets $ 1,632 $(4,167) $(2,535)
------- ------- -------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 320 $(1,728) $(1,408)
Savings deposits 20 (1,038) (1,018)
Time deposits (261) (1,025) (1,286)
------- ------- -------
Total interest-bearing deposit accounts 79 (3,791) (3,712)
Borrowed money:
Repurchase agreements with customers 9 (142) (133)
FHLB advances 180 (301) (121)
Federal funds purchased 7 7
Other borrowed money (13) (13)
------- ------- -------
Total borrowed money 183 (443) (260)
Guaranteed preferred beneficial interest
in Company's subordinated debt 20 (75) (55)
------- ------- -------
Total interest-bearing liabilities $ 282 $(4,309) $(4,027)
------- ------- -------
Net change in net interest income $ 1,350 $ 142 $ 1,492
======= ======= =======
Net interest income (on a tax-equivalent basis) increased $1.5 million,
or 8.6% to $18.6 million for the quarter ended September 30, 2003 compared to
$17.1 million for the same period in 2002. This increase is primarily due to the
change in the volume of interest-earning assets and interest-bearing
liabilities, as well as the market rate decreases between periods. From the
volume component, net interest income (on a tax-equivalent basis) increased $1.4
million, due to an increase in the average balance of interest-earning assets
which increased interest income by $1.6 million, offset by an increase in the
average balance of interest-bearing liabilities which decreased interest income
by $282,000. The change in the average balances of the interest-earning assets
and the interest-bearing liabilities reflects the Company's continued focus on
overall balance sheet management, concentration on the growth of its core
businesses, and continued focus on liquidity management. The rate component
increased net interest income by $142,000.
21
Interest income (on a tax-equivalent basis) decreased $2.5 million, to
$26.7 million for the three months ended September 30, 2003 compared to $29.2
million for the same period in 2002. The decrease in interest income was due to
the continued drop in interest rates, which lowered the yield on average
interest-earning assets by 80 basis points or $4.2 million, offset by the
combined 6.6% increase in the average balance of loans receivable and investment
securities which produced an increase in interest income of $1.7 million.
Interest expense decreased $4.0 million, or 33.2%, to $8.1 million for
the three months ended September 30, 2003 from $12.1 million for the same period
in 2002. The decrease in interest expense was due primarily to the overall
decrease in market interest rates, which lowered the rate on average
interest-bearing liabilities by 105 basis points or $4.3 million, of which $3.8
million was a reduction of interest expense on deposits. The decreased interest
expense on deposits is also the result of the Company's relationship pricing
strategy that has increased the lower cost core deposits and reduced higher cost
time deposits. The average balance of time deposits decreased from $441.9
million at September 30, 2002 to $412.1 million at September 30, 2003, while the
average balance of core deposits increased from $927.4 million at September 30,
2002 to $1.003 billion at September 30, 2003.
Provision for Loan Losses. For the three months ended September 30,
2003, the provision for loan losses was $2.3 million, an increase of $1.3
million, compared to $1.0 million for the same period in 2002. During the
current quarter two credit relationships aggregating $16.3 million, of which
$13.5 million was previously carried as restructured performing loans since
September 30, 2002, were transferred to non-performing loans. The provision for
loan losses for the quarter ended September 30, 2003 reflects an increased
reserve for these credits. Management regularly performs an analysis to identify
the inherent risk of loss in the Company's loan portfolio. This analysis
includes evaluations of concentrations of credit, past loss experience, current
economic conditions, amount and composition of the loan portfolio, estimated
fair value of underlying collateral, loan commitments outstanding, delinquencies
and other factors. The allowance for loan losses at September 30, 2003 was $18.6
million or 1.43% of loans. This compares to the allowance for loan losses of
$16.0 million at September 30, 2002, or 1.33% of loans.
Non-Interest Income. Non-interest income increased $2.2 million, or
68.4% for the three-months ended September 30, 2003 compared to the three-months
ended September 30, 2002. The increase was the result of a gain on the sale of
three branches of $1.3 million, an increase in the gain on sale of investment
securities of $252,000, an increase in service charges on deposit accounts of
$192,000 primarily resulting from the Company's overdraft privilege program and
an increase of $331,000 of other income, of which $338,000 was BOLI income.
Non-Interest Expenses. Non-interest expenses increased $1.6 million, or
10.6% to $16.7 million for the three months ended September 30, 2003 as compared
to $15.1 million for the same period in 2002. Of the increase, $1.5 million was
due to salaries and employee benefits resulting from an increase in staffing
during 2002.
Income Taxes. Income taxes increased $254,000 for the three months
ended September 30, 2003 as compared to the same period in 2002. The increase
resulted from higher pre-tax earnings.
Comparison of Operating Results for the Nine Months Ended September 30, 2003 and
2002
Net income increased by $2.7 million, or 36.3% for the nine months
ended September 30, 2003 to $10.2 million from $7.5 million for the nine months
ended September 30, 2002. As more fully described below, the increase in net
income was due to an increase of $5.4 million in net interest income and an
increase of $4.0 million in non-interest income, partially offset by an increase
in the provision for loan losses of $475,000 and in non-interest expenses of
$5.0 million.
Net Interest Income. The increase in the interest rate spread and
margin for the nine months ended September 30, 2003 was 3.21% and 3.56%,
respectively, compared to 3.01% and 3.46%, respectively, for the same period
2002. The yield on the average interest-earning assets declined 68 basis points
from 6.07% for the nine months ended September 30, 2002 to 5.39% for the same
period in 2003, while the cost of funds on average interest-bearing liabilities
decreased 88 basis points from 3.06% for the nine months ended September 30,
2002 to 2.18% for the same period in 2003.
22
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances.
At or For the Nine Months ended At or For the Nine Months ended
September 30, 2003 September 30, 2002
--------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,072,293 $52,995 6.59 % $ 980,312 $52,445 7.13 %
Home equity 57,322 1,722 4.01 29,736 1,164 5.22
Second mortgage 49,560 2,531 6.81 52,413 2,956 7.52
Residential real estate 39,410 2,192 7.42 52,496 2,643 6.71
Installment 52,612 3,222 8.16 56,112 3,624 8.61
---------- ------- ---------- -------
Total loans receivable 1,271,197 62,662 6.57 1,171,069 62,832 7.15
Investment securities (3) 736,408 19,354 3.50 678,013 22,684 4.46
Interest-bearing deposit with banks 7,305 39 0.71 7,969 64 1.07
Federal funds sold 18,654 134 0.96 32,250 408 1.69
---------- ------- ---------- -------
Total interest-earning assets 2,033,564 82,189 5.39 1,889,301 85,988 6.07
---------- ------- ---------- -------
Cash and due from banks 64,552 60,784
Bank properties and equipment 29,445 28,430
Goodwill and intangible assets 38,152 41,009
Other assets 48,171 18,059
---------- ----------
Non-interest-earning assets 180,320 148,282
---------- ----------
Total Assets $2,213,884 $2,037,583
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 667,985 5,817 1.16 % $ 563,083 8,234 1.95 %
Savings deposits 323,878 3,244 1.34 308,079 5,325 2.30
Time deposits 406,036 9,473 3.11 454,442 13,667 4.01
---------- ------- ---------- -------
Total interest-bearing deposit
accounts 1,397,899 18,534 1.77 1,325,604 27,226 2.74
---------- ------- ---------- -------
Borrowed money:
Repurchase agreements with customers 72,132 283 0.52 75,486 591 1.04
FHLB advances 172,622 5,843 4.51 148,281 5,500 4.95
Federal funds purchased 6,029 79 1.74 912 15 2.13
Other borrowed money 3,944 166 5.60
---------- ------- ---------- -------
Total borrowed money 250,783 6,205 3.30 228,623 6,272 3.66
---------- ------- ---------- -------
Guaranteed preferred beneficial
interest in Company's subordinated debt 59,274 3,150 7.09 54,274 3,396 8.34
---------- ------- ---------- -------
Total interest-bearing liabilities 1,707,956 27,889 2.18 1,608,501 36,894 3.06
---------- ------- ---------- -------
Non-interest-bearing demand deposits 326,193 281,096
Other liabilities 28,610 13,959
---------- ----------
Non-interest-bearing liabilities 354,803 295,055
---------- ----------
Total liabilities 2,062,759 1,903,556
Shareholders' equity 151,125 134,027
---------- ----------
Total liabilities and shareholders' equity $2,213,884 $2,037,583
========== ==========
Net interest income $54,300 $49,094
======= =======
Interest rate spread (4) 3.21 % 3.01 %
==== ====
Net yield on interest-earning assets (5) 3.56 % 3.46 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities
119.06 % 117.46 %
====== ======
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans.
(2) Loan fees are included in interest income and the amount is not material
for this analysis.
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
23
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Nine Months Ended September 30,
2003 vs. 2002
------------------------------
Increase (Decrease)
Due to
------------------------------
Volume Rate Net
------- -------- --------
Interest income
Loans receivable:
Commercial and industrial $ 6,184 $(5,634) $ 550
Home equity 1,023 (465) 558
Second mortgage (155) (270) (425)
Residential real estate (837) 386 (451)
Installment (219) (183) (402)
------- -------- -------
Total loans receivable 5,996 (6,166) (170)
Investment securities 2,763 (6,092) (3,329)
Interest-bearing deposits accounts (5) (20) (25)
Federal funds sold (136) (138) (274)
------- -------- -------
Total interest-earning assets $ 8,618 $(12,416) $(3,798)
------- -------- -------
Interest expense
Interest-bedeposit accounts:
Interest-bearing demand deposit $ (62) $(2,354) $(2,416)
Savings deposits (64) (2,017) (2,081)
Time deposits (1,351) (2,843) (4,194)
------- -------- -------
Total interest-bearing deposit accounts (1,477) (7,214) (8,691)
Borrowed money:
Repurchase agreements with customers (25) (283) (308)
FHLB advances 433 (90) 343
Federal funds purchased 64 64
Other borrowed money (83) (83) (166)
------- -------- -------
Total borrowed money 389 (456) (67)
Guaranteed preferred beneficial interest
in Company's subordinated debt 36 (282) (246)
------- -------- -------
Total interest-bearing liabilities $(1,052) $(7,952) $(9,004)
------- -------- -------
Net change in net interest income $ 9,670 $(4,464) $ 5,206
======= ======= =======
Net interest income (on a tax-equivalent basis) increased $5.2 million,
or 10.6% to $54.3 million for the nine months ended September 30, 2003 from
$49.1 million for the same period in 2002. From the volume component, net
interest income (on a tax-equivalent basis) increased $9.7 million, the majority
of which is due to an increase in the average balance of interest-earning
assets. The rate component decreased net interest income by $4.5 million.
Interest income (on a tax-equivalent basis) decreased by $3.8 million,
to $82.2 million for the nine months ended September 30, 2003 compared to $86.0
million for the same period in 2002. The decrease in interest income was due to
the continued drop in interest rates, which lowered the yield on average
interest-earning assets by 68 basis points, or $12.4 million, offset by the
combined 8.6% increase in the average balance of loans receivable and investment
securities which produced an increase in interest income of $8.8 million.
24
Interest expense decreased $9.0 million, or 24.4%, to $27.9 million for
the nine months ended September 30, 2003 compared to $36.9 million for the same
period in 2002. The decrease in interest expense was due primarily to the
overall decrease in market interest rates and the change in the mix of deposits
from higher costing time deposits to lower costing core deposits. The change in
the mix of deposits is the result of the Company's relationship pricing
strategy. The decrease in the average balance of time deposits from $454.4
million at September 30, 2002 to $406.0 million at September 30, 2003, resulted
in the decrease in the volume component of interest expense of $1.4 million.
Provision for Loan Losses. For the nine months ended September 30,
2003, the provision for loan losses was $3.7 million, an increase of $475,000,
compared to $3.2 million for the same period in 2002. The Company focuses on its
loan portfolio management and credit review process to effectively address the
current risk profile of the portfolio and aggressively manage troubled credits.
This analysis includes evaluations of concentrations of credit, past loss
experience, current economic conditions, amount and composition of the loan
portfolio, estimated fair value of underlying collateral, loan commitments
outstanding, delinquencies and other factors.
Non-Interest Income. Non-interest income increased $4.0 million, or
43.2% for the nine-month period ended September 30, 2003 compared to the
nine-month period ended September 30, 2002. The increase was primarily the
result of gains on the sale of four branches of $2.6 million during 2003, a
$479,000 increase in service charges on deposit accounts resulting primarily
from the Company's overdraft privilege program, an increase in the gain on sale
of investment securities of $323,000, a $164,000 gain on the sale of fixed
assets resulting from the sale of branches, and an increase of $458,000 in other
income primarily resulting from $572,000 in BOLI investment income.
Non-Interest Expenses. Non-interest expenses increased $5.0 million, or
11.4% to $48.6 million for the nine months ended September 30, 2003 as compared
to $43.6 million for the same period in 2002. Of the increase, $4.1 million was
in salaries and employee benefits due to an increase in staffing during 2002,
$880,000 was in occupancy expense, $435,000 was in equipment, offset by the
decrease in amortization of intangible assets expense of $442,000.
Income Taxes. Income taxes increased $1.2 million for the nine months
ended September 30, 2003 as compared to the same period in 2002. The increase
resulted from higher pre-tax earnings.
Recent Accounting Principles. In November 2002, the FASB issued FASB
Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others. This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation also incorporates, without change, the guidance in FIN No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others, which is being
superseded. The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The adoption of FIN No. 45 did not have a material impact on the
consolidated financial statements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
guarantees are primarily issued to support private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. In the event of a draw
by the beneficiary that complies with the terms of the letter of credit, the
Company would be required to honor the commitment. The Company takes various
forms of collateral, such as real estate assets and customer business assets to
secure the commitment. Additionally, all letters of credit are supported by
indemnification agreements executed by the customer. The maximum undiscounted
exposure related to these commitments at September 30, 2003 was $39.0 million,
and the portion of the exposure not covered by collateral was approximately
$10.5 million. We believe that the utilization rate of these letters of credit
will continue to be substantially less than the amount of these commitments, as
has been our experience to date.
25
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. The Interpretation clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company has participated in the issue of preferred trust
securities through various trusts established for such purpose. The Company is
currently assessing the trust preferred securities structure and the continued
consolidation of the related trusts pursuant to FIN 46. Management does not
believe the results of the assessment will result in a material change to the
Company's balance sheet or income statement upon the adoption of FIN No. 46 in
the fourth quarter 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, except for the provisions of this statement that relate to
SFAS 133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003 and for hedging relationships designated after June
30, 2003. All provisions are to be applied prospectively except for the
provisions of this statement that relate to SFAS 133 Implementation Issues that
have been effective for fiscal quarters that began prior to June 15, 2003. These
provisions are to be applied in accordance with their respective effective
dates. The adoption of SFAS No. 149 did not have an impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the statement of
financial position. The Company currently classifies its trust preferred
securities after total liabilities and before shareholders' equity on its
statement of financial position. Under the provisions of SFAS No. 150, these
securities would be reclassified as borrowed funds. The effective date of SFAS
No. 150 has been indefinitely deferred by the FASB when certain criteria are
met. As the structure of the Company's trust preferred securities meets such
criteria, the Company qualifies for this limited deferral. Therefore, the
Company will assess the classification of the trust preferred securities in
conjunction with adoption of FIN No. 46 in the fourth quarter of 2003, as noted
above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
The Company's exposure to interest rate risk results from the
difference in maturities and repricing characteristics of the interest-earning
assets and interest-bearing liabilities and the volatility of interest rates. If
the Company's assets have shorter maturity or repricing terms than its
liabilities, the Company's earnings will tend to be negatively affected during
periods of declining interest rates. Conversely, this mismatch would benefit the
Company during periods of increasing interest rates. Management monitors the
relationship between the interest rate sensitivity of the Company's assets and
liabilities.
Gap Analysis
Banks have become increasingly concerned with the extent to which they
are able to match maturities or repricing characteristics of interest-earning
assets and interest-bearing liabilities. Such matching is facilitated by
examining the extent to which such assets and liabilities are interest-rate
sensitive and by monitoring a bank's interest rate sensitivity gap. An asset or
liability is considered to be interest-rate sensitive if it will mature or
reprice within a specific time period. The interest rate sensitivity gap is
defined as the excess of interest-earning assets maturing or repricing within a
specific time period over interest-bearing liabilities maturing or repricing
within that time period. On a monthly basis, the Bank monitors its gap,
primarily its six-month and one-year maturities. Management and the Board of
Directors monitor the Company's gap position quarterly.
26
The Asset/Liability Committee of the Bank's Board of Directors discuss,
among other things, interest rate risk. The Bank also uses simulation models to
measure the impact of potential changes of up to 300 basis points in interest
rates on net interest income. Sudden changes to interest rates should not have a
material impact to results of operations. Should the Bank experience a positive
or negative mismatch in excess of the approved range, it has a number of
remedial options. The Bank has the ability to reposition its investment
portfolio to include securities with more advantageous repricing and/or maturity
characteristics. It can attract variable- or fixed-rate loan products as
appropriate. The Bank can also price deposit products to attract deposits with
maturity characteristics that can lower their exposure to interest rate risk.
At September 30, 2003, the Company had a positive position with respect
to its exposure to interest rate risk. Total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing during the same time period by $134.7 million, representing a
positive cumulative one-year gap ratio of 5.92%. As a result, the cost of
interest-bearing liabilities of the Company should adjust to changes in interest
rates at a slower rate than yield on interest-earning assets of the Company.
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at September 30, 2003 All amounts are categorized by their actual
maturity or repricing date with the exception of interest-bearing demand
deposits and savings deposits. As a result of prior experience during periods of
rate volatility and management's estimate of future rate sensitivities, the
Company allocates the interest-bearing demand deposits and savings deposits into
categories noted below, based on the estimated duration of those deposits.
Maturity/Repricing Time Periods
----------------------------------------------------------------------
0-3 Months 4-12 Months 1-5 Years Over 5 Yrs. Total
---------- ----------- --------- ----------- -----
FHLB interest-bearing deposit $ 4,494 $ 4,494
Loans receivable 455,440 $193,706 $616,287 $ 37,271 1,302,704
Investment securities 166,834 118,833 350,343 71,214 707,224
Federal funds sold 86,114 86,114
-------- -------- -------- -------- ----------
Total interest-earning assets 712,882 312,539 966,630 108,485 2,100,536
-------- ------- -------- -------- ----------
Interest-bearing demand deposits 220,533 117,966 312,742 39,938 691,179
Savings deposits 28,110 78,325 194,921 19,342 320,698
Time certificates 123,447 166,619 122,462 1,622 414,150
Federal Home Loan Bank Advances 4,699 14,395 130,017 19,551 168,662
Securities sold under agreements
to repurchase 77,376 77,376
Guaranteed interest in Company's
subordinated debt 59,274 59,274
-------- ------- -------- -------- ----------
Total interest-bearing liabilities 513,439 377,305 760,142 80,453 1,731,339
-------- ------- -------- -------- ----------
Periodic Gap $199,443 (64,766) $206,488 $ 28,032 $ 369,197
======== ======= ======== ======== ==========
Cumulative Gap $199,443 $134,677 $341,165 $369,197
======== ======= ======== ========
Cumulative Gap Ratio 8.77 % 5.92 % 15.00 % 16.23 %
======== ======= ======== ========
27
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
------------------------------------------------
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the quarter
-------------------------------------------------------
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at September 30, 2003. From time to time, the Company is a
party to legal proceedings in the ordinary course of business
wherein it enforces its security interest in loans.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 31 Certification Pursuant to ss.302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32 Certification Pursuant to ss.906 of the Sarbanes-Oxley
Act of 2002.
Form 8-K The Company filed a Current Report on Form 8-K on
July 23, 2003 to report earnings for the quarter ended
June 30, 2003.
Form 8-K The Company filed a Current Report on Form 8-K on
September 4, 2003 to report the signing of a definite
agreement to acquire eight branches from New York
Community Bank.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Bancorp, Inc.
(Registrant)
Date: November 14, 2003 /s/Thomas A. Bracken
-------------------------------------
Thomas A. Bracken
President and Chief Executive Officer
Date: November 14, 2003 /s/Dan A. Chila
-------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
29