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, 2005
------------------------
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
----------------------------------------------------
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
--- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12-b2 of the Exchange Act). Yes No X
--- ---
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 18,153,920 November 7, 2005
- ----------------------------- ---------- -----------------
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, 2005 and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Income
for the Three and Nine Months Ended September 30, 2005 and 2004 4
Unaudited Condensed Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 2005 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2005 and 2004 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
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 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Unregistered Sales of Equity 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 27
SIGNATURES 28
CERTIFICATIONS 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except par value amounts)
September 30, December 31,
2005 2004
----------- -----------
ASSETS
Cash and due from banks $ 73,578 $ 69,022
Interest-bearing bank balances 3,735 1,878
Federal funds sold 24,450 4,002
----------- -----------
Cash and cash equivalents 101,763 74,902
Investment securities available for sale (amortized cost -
$763,183; 9/05 and $823,896; 12/04) 753,351 819,424
Investment securities held to maturity 35,306 43,048
Loans receivable (net of allowance for loan losses -
$22,310; 9/05 and $22,037; 12/04) 1,939,465 1,847,721
Restricted equity investments 14,713 15,405
Bank properties and equipment, net 37,092 36,830
Real estate owned 1,437 2,911
Accrued interest receivable 15,314 12,519
Goodwill 104,891 104,969
Intangible assets, net 31,057 34,753
Deferred taxes, net 6,267 4,626
Bank owned life insurance 48,378 47,179
Other assets 16,276 9,300
----------- -----------
TOTAL $ 3,105,310 $ 3,053,587
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 2,507,565 $ 2,430,363
Advances from the Federal Home Loan Bank (FHLB) 129,656 144,669
Securities sold under agreements to repurchase - FHLB - 50,000
Securities sold under agreements to repurchase - customers 86,315 59,641
Junior subordinated debentures 77,322 77,322
Other liabilities 12,892 12,372
----------- -----------
Total liabilities 2,813,750 2,774,367
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued - -
Common stock, $1 par value, 25,000,000 shares authorized,
issued: 18,149,063; 9/05 and 17,205,245; 12/04 18,149 17,205
Additional paid in capital 263,614 244,108
Retained earnings 16,173 21,718
Accumulated other comprehensive loss (6,376) (2,765)
Treasury stock at cost, 90,562 shares at 12/04 - (1,046)
----------- -----------
Total shareholders' equity 291,560 279,220
----------- -----------
TOTAL $ 3,105,310 $ 3,053,587
=========== ===========
- -------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
------- -------- -------- --------
INTEREST INCOME:
Interest and fees on loans $31,981 $25,911 $91,736 $68,856
Interest on taxable investment securities 6,381 6,289 18,545 18,439
Interest on non-taxable investment securities 249 468 1,139 1,479
Interest and dividends on restricted equity investments 223 134 622 359
Interest on federal funds sold 522 183 852 266
------- ------- ------- -------
Total interest income 39,356 32,985 112,894 89,399
------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits 11,391 6,264 29,398 16,922
Interest on short-term borrowed funds 2,118 1,838 6,968 5,426
Interest on junior subordinated debentures 1,331 939 3,705 2,560
------- ------- ------- -------
Total interest expense 14,840 9,041 40,071 24,908
------- ------- ------- -------
Net interest income 24,516 23,944 72,823 64,491
PROVISION FOR LOAN LOSSES 500 300 1,790 1,660
------- ------- ------- -------
Net interest income after provision for loan losses 24,016 23,644 71,033 62,831
------- ------- ------- -------
NON-INTEREST INCOME:
Service charges on deposit accounts 2,245 2,387 6,783 6,758
Other service charges 88 27 203 333
Gain on sale of bank properties and equipment - 152 103 2,473
Gain on sale of loans 318 70 748 181
Gain on sale of investment securities - 277 809 1,180
Gain on derivative instruments 491 - 1,056 -
Other 1,470 1,336 4,190 3,928
------- ------- ------- -------
Total non-interest income 4,612 4,249 13,892 14,853
------- ------- ------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 10,701 10,598 31,804 29,213
Occupancy expense 2,758 2,876 8,485 8,041
Equipment expense 1,959 1,871 5,820 5,147
Data processing expense 1,064 976 3,056 2,959
Amortization of intangible assets 1,117 1,522 3,381 3,842
Other 3,580 3,394 10,389 9,866
------- ------- ------- -------
Total non-interest expenses 21,179 21,237 62,935 59,068
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 7,449 6,656 21,990 18,616
INCOME TAXES 2,455 2,164 7,053 5,674
------- ------- ------- -------
NET INCOME $ 4,994 $ 4,492 $14,937 $12,942
======= ======= ======= =======
Basic earnings per share $ 0.28 $ 0.25 $ 0.82 $ 0.83
======= ======= ======= =======
Diluted earnings per share $ 0.26 $ 0.24 $ 0.77 $ 0.76
======= ======= ======= =======
Weighted average shares - basic 18,141,052 17,657,777 18,130,280 15,675,212
========== ========== ========== ==========
Weighted average shares - diluted 19,341,580 18,943,079 19,375,820 16,925,704
========== ========== ========== ==========
- -------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
4
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For The Nine Months Ended September 30, 2005
(In thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock Total
----- ------- -------- ---- ----- -----
BALANCE, JANUARY 1, 2005 $17,205 $244,108 $21,718 $(2,765) $(1,046) $279,220
Other comprehensive income:
Net income - - 14,937 - - 14,937
Other comprehensive income - net change
in unrealized loss on securities
available for sale, net of tax of $1,749 - - - (3,611) - (3,611)
--------
Comprehensive income - - - - - 11,326
--------
Exercise of stock options 147 343 - - - 490
Issuance of common stock 26 506 - - - 532
Stock dividends 771 18,657 (20,474) - 1,046 -
Cash paid for fractional interest
resulting from stock dividends - - (8) - - (8)
------- -------- -------- -------- ----- --------
BALANCE, SEPTEMBER 30, 2005 $18,149 $263,614 $ 16,173 $ (6,376) $ - $291,560
======= ======== ======== ======== ===== ========
- ------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
5
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months
Ended September 30,
----------------------
2005 2004
--------- ---------
OPERATING ACTIVITIES:
Net income $ 14,937 $ 12,942
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,790 1,660
Depreciation 3,484 2,741
Net (accretion) amortization of investments securities (36) 1,609
Amortization of intangible assets 3,381 3,842
Write down of book value of fixed assets 64 177
Gain on sale of investment securities available for sale (809) (1,180)
Gain on sale of bank properties and equipment (103) (2,473)
Originations of loans held for sale (8,208) (2,051)
Proceeds from the sale of loans 8,685 2,245
Gain on sale of loans (748) (181)
Increase in cash value of bank owned life insurance (BOLI) (1,199) (1,219)
Deferred income taxes 108 1,015
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (2,795) (578)
Other assets (6,976) (589)
Other liabilities 913 3,097
--------- ---------
Net cash provided by operating activities 12,488 21,057
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities (170,270) (398,131)
Redemption of restricted equity securities 692 411
Proceeds from maturities, prepayments or calls of investment securities 212,865 442,740
Proceeds from sale of investment securities available for sale 26,705 131,776
Net increase in loans (93,263) (145,229)
Purchase of bank properties and equipment (3,807) (3,613)
Proceeds from the sale of bank properties and equipment 100 7,260
Net proceeds from sale of real estate owned 1,474 2,936
--------- ---------
Net cash (used in) provided by investing activities (25,504) 38,150
--------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 77,202 (23,765)
Increase in cash resulting from bank acquisitions / branch sales - 11,963
Purchase price adjustment of branch assets purchased - 19
Net repayments under line of credits, advances and repurchase agreements (38,339) (12,599)
Proceeds from exercise of stock options 490 238
Payments of fractional interests resulting from stock dividend (8) (10)
Proceeds from issuance of common stock 532 331
--------- ---------
Net cash provided by (used in) financing activities 39,877 (23,823)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 26,861 35,384
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 74,902 82,117
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 101,763 $ 117,501
========= =========
- -----------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 39,733 $ 25,140
Income taxes paid $ 6,147 $ 3,258
- -----------------------------------------------------------------------
See notes to the unaudited condensed consolidated financial statements.
6
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 Sun Bancorp,
Inc. and its subsidiaries (the Company). Its principal wholly owned
subsidiary is Sun National Bank (the Bank). All significant
intercompany balances and transactions have been eliminated in
consolidation.
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,
changes in equity 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 consolidated financial
statements have been included. These financial statements should be
read in conjunction with the audited consolidated financial statements
and the accompanying notes thereto included in the Company's Annual
Report on Form 10-K for the period ended December 31, 2004. The results
for the three and nine months ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2005 or any other period.
Reclassifications - Certain items previously reported in the 2004
financial statements have been reclassified to conform to the current
presentation.
Use of Estimates in the Preparation of Financial Statements - The
preparation of the consolidated 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, intangible assets, deferred tax asset valuation
allowance and derivative financial instruments. Actual results could
differ from those estimates.
Stock Dividend - On March 17, 2005, the Company's Board of Directors
declared a 5% stock dividend paid on April 20, 2005 to shareholders of
record on April 6, 2005. Accordingly, per share data have been adjusted
for all periods presented.
Stock Based Compensation - In December 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 148, Accounting for Stock-Based Compensation
--Transition and Disclosure, an amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Prior to the fourth
quarter of 2003, the Company accounted for its granted stock options
according to Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees and related interpretations.
All options granted prior to 2003 had an intrinsic value of zero on the
date of grant under APB No. 25, and, therefore, no stock-based employee
compensation expense was recognized in the Company's consolidated
financial statements. During the fourth quarter of 2003, the Company
adopted, effective January 1, 2003, the fair value recognition
provisions of SFAS No. 123. Under the prospective method provisions of
SFAS No. 148, the recognition provisions of SFAS No. 123 were applied
to all option awards granted, modified or settled after January 1,
2003.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of
7
accounting for stock-based employee compensation and the effect of the
method used on reported results. This Statement is effective for
financial statements for fiscal years ending after December 15, 2002.
The Company has provided the required disclosures in the tables below.
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 for all periods presented using the
Black-Scholes option pricing model to stock-based employee
compensation.
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
Reported net income available to shareholders $4,994 $4,492 $14,937 $12,942
Add: Total stock-based employee compensation
expense included in reported net income 51
(net of tax) 41 6 26
Deduct: Total stock-based employee
compensation expense determined under
fair value method (net of tax) (102) (141) (311) (554)
------ ------ ------- -------
Pro forma net income available to shareholders $4,933 $4,357 $14,677 $12,414
====== ====== ======= =======
Earnings per share:
Basic - as reported $ 0.28 $ 0.25 $ 0.82 $ 0.83
Basic - pro forma $ 0.27 $ 0.25 $ 0.81 $ 0.79
Diluted - as reported $ 0.26 $ 0.24 $ 0.77 $ 0.76
Diluted - pro forma $ 0.26 $ 0.23 $ 0.76 $ 0.73
Recent Accounting Pronouncements -
SFAS No. 123R - In December 2004, the FASB issued SFAS No. 123R
(revised 2004), Share-Based Payment, which revises SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. This Statement requires
an entity to recognize the cost of employee services received in
share-based payment transactions and measure the cost on a grant-date
fair value of the award. That cost will be recognized over the period
during which an employee is required to provide service in exchange for
the award. The provisions of SFAS No. 123R will become effective for
the Company's consolidated financial statements issued for the fiscal
year beginning January 1, 2006.
In March 2005, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 107 which expressed the views of
the SEC regarding the interaction between SFAS No. 123R and certain SEC
rules and regulations. SAB No. 107 provides guidance related to the
valuation of share-based payment arrangements for public companies,
including assumptions such as expected volatility and expected term.
The Company is assessing the impact SFAS No. 123R and SAB No. 107 will
have on its consolidated financial statements.
EITF 03-1 - In March 2004, the Emerging Issues Task Force (EITF)
reached a consensus on and the FASB ratified EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1). EITF 03-1 provides guidance on
recognizing other-than-temporary impairments of investment securities.
The Company has adopted the disclosure requirements of EITF 03-1 for
investments accounted for under FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS No. 115). On
September 30, 2004, the FASB issued FASB Staff Position (FSP) EITF
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments, which delayed the effective date of the
application guidance on impairment of securities included within EITF
03-1. The FASB, at its September 14, 2005 meeting, decided to retain
the paragraph in the proposed FSP pertaining to the accounting for debt
securities subsequent to an other-than-temporary impairment and add a
footnote to clarify that
8
the proposed FSP does not address when a debt security should be
designated as non-accrual or how to subsequently report income on a
non-accrual debt security. In addition, the FASB decided that (1)
transition would be applied prospectively and (2) the effective date
would be reporting periods beginning after December 15, 2005. However,
the provisions of EITF 03-1 regarding the measurement, disclosure and
post-impairment accounting guidance of debt securities, as well as the
identification of impaired cost method investments remain intact.
Additionally, the existing guidance under SFAS No. 115 remains in
effect.
The following table provides the gross unrealized losses and fair
value, aggregated by investment category and length of time the
individual securities have been in a continuous unrealized loss
position at September 30, 2005:
Less than 12 Months 12 Months or Longer Total
------------------- -------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
U.S. Treasury obligations $ 49,645 $ (67) $ 9,880 $ (151) $ 59,525 $ (218)
U.S. Government agencies 216,025 (1,373) 121,312 (2,647) 337,337 (4,020)
Other mortgage backed
securities 88,382 (825) 268,002 (5,324) 356,384 (6,149)
State and municipal obligations 17,247 (172) 1,935 (65) 19,182 (237)
-------- ------- -------- ------- -------- --------
Total $371,299 $(2,437) $401,129 $(8,187) $772,428 $(10,624)
======== ======== ======== ======== ======== =========
At September 30, 2005, 100% of the unrealized losses in the security
portfolio were comprised of securities issued by U.S. Government
agencies, U.S. Government sponsored agencies and other securities rated
investment grade by at least one bond credit rating service. The
Company believes that the price movements in these securities are
dependent upon the movement in market interest rates particularly given
the negligible inherent credit risk for these securities. At September
30, 2005, the unrealized loss in the category 12 months or longer of
$8.2 million consisted of 53 securities having an aggregate
depreciation of 2.0%. The securities represented U.S. Treasury, Federal
Agency issues and seven securities currently rated Aaa by at least two
rating services. At September 30, 2005, securities in a gross
unrealized loss position for less than twelve months consisted of 103
securities having an aggregate depreciation of 0.7% from the Company's
amortized cost basis. Management believes that at September 30, 2005,
there are no impaired investment securities which are
other-than-temporary.
(2) Acquisitions
On August 25, 2005, the Company and the Bank entered into an Agreement
and Plan of Merger with Advantage Bank (Advantage) whereby the Bank
will acquire Advantage. In the merger, each share of Advantage common
stock outstanding on the effective date of the merger (other than
shares held by dissenting shareholders) will be converted into the
right to elect to receive, subject to adjustment or proration under
certain circumstances, either $19.00 in cash or 0.87 shares of Company
common stock. At June 30, 2005, Advantage's assets totaled $166
million, and Advantage had five branch locations in New Jersey,
including three in Somerset County and two in Hunterdon County. The
proposed merger is subject to certain customary conditions for
transactions of this type including, among others, Advantage
shareholder approval and regulatory approval. The Advantage
shareholder meeting to vote on the proposed merger is scheduled for
November 30, 2005. The proposed merger requires the approval of the
Office of the Comptroller of the Currency (the OCC) under the Bank
Merger Act. In addition, the Company has received a waiver from the
Federal Reserve Board of the application requirements that would
otherwise apply to the merger under the Bank Holding Company Act. The
merger is expected to be consummated in the first quarter of 2006.
9
(3) Loans
The components of loans as of September 30, 2005 and December 31, 2004
were as follows:
September 30, 2005 December 31, 2004
------------------ -----------------
Commercial and industrial $1,674,263 $1,603,868
Home equity 137,693 122,735
Second mortgages 45,238 50,541
Residential real estate 28,785 26,117
Other 75,796 66,497
---------- ----------
Total gross loans 1,961,775 1,869,758
Allowance for loan losses (22,310) (22,037)
---------- ----------
Net Loans $1,939,465 $1,847,721
========== ==========
Non-accrual loans $11,848 $13,457
======= =======
(4) 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, 2005 December 31, 2004
------------------ -----------------
Balance, beginning of period $22,037 $17,614
Charge-offs (1,969) (1,382)
Recoveries 452 793
------- -------
Net charge-offs (1,517) (589)
Provision for loan losses 1,790 2,075
Purchased allowance from bank acquisition - 2,937
------- -------
Balance, end of period $22,310 $22,037
======= =======
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:
10
September 30, 2005 December 31, 2004
------------------ -----------------
Impaired loans with related allowance for loan
losses calculated under SFAS No. 114 $10,286 $23,346
Impaired loans with no related allowance for loan
losses calculated under SFAS No. 114 18,377 9,775
------- -------
Total impaired loans $28,663 $33,121
======= =======
Valuation allowance related to impaired loans $ 2,891 $ 3,332
======= =======
For the nine For the
months ended year ended
September 30, 2005 December 31, 2004
------------------ -----------------
Average impaired loans $32,230 $35,991
======= =======
Interest income recognized on impaired loans $ 815 $ 2,315
======= =======
Cash basis interest income recognized on impaired loans $ 109 $ 2,111
======= =======
The $13.1 million decrease in impaired loans with related allowance and
the related increase of $8.6 million in the impaired loans with no
related allowance is mainly attributable to the reclassification of one
$7.8 million loan. The organization for which this loan was made is
currently under both an operating arrangement and agreement of sale
with a third party. The loan is well collateralized, payments are
current, and at sale, the loan is expected to be paid off. The loan
will remain impaired under the guidelines of SFAS No. 114, however, no
specific allowance is deemed necessary at this time.
(5) Real Estate Owned
Real estate owned at September 30, 2005 and December 31, 2004 was as
follows:
September 30, 2005 December 31, 2004
------------------ -----------------
Commercial properties $1,066 $2,424
Residential properties 62 178
Bank properties 309 309
------ ------
Total $1,437 $2,911
====== ======
The decrease in real estate owned was due primarily to the sale of one
commercial property in the first quarter of 2005 which resulted in a
pre-tax gain of $200,000. The remaining $1.1 million in commercial
properties consists of one property which is currently listed for sale.
It is anticipated that the sale proceeds of this property will exceed
its carrying value.
(6) Deposits
Deposits consist of the following major classifications:
September 30, 2005 December 31, 2004
------------------ -----------------
Demand deposits - interest bearing $ 903,806 $ 793,290
Demand deposits - non-interest bearing 510,761 543,601
Savings deposits 413,626 452,726
Time certificates under $100,000 448,693 410,632
Time certificates $100,000 or more 230,679 230,114
---------- ----------
Total $2,507,565 $2,430,363
========== ==========
11
(7) Junior Subordinated Debentures Held by Trusts that Issued Capital Debt
The following is a summary of the outstanding capital securities issued
by each Issuer Trust and the junior subordinated debentures issued by
the Company to each Trust as of September 30, 2005:
Capital Securities Junior Subordinated Debentures
--------------------------------------------- ----------------------------------------------------
Stated Distribution Principal Redeemable
Issuer Trust Issuance Date Value Rate Amount Maturity Beginning
------------ ------------- ----- ---- ------ -------- ---------
6-mo LIBOR
Sun Trust III April 22, 2002 $20,000 plus 3.70% $20,619 April 22, 2032 April 22, 2007
3-mo LIBOR
Sun Trust IV July 7, 2002 10,000 plus 3.65% 10,310 October 7, 2032 July 7, 2007
3-mo LIBOR
Sun Trust V December 18, 2003 15,000 plus 2.80% 15,464 December 30, 2033 December 30, 2008
3-mo LIBOR
Sun Trust VI December 19, 2003 25,000 plus 2.80% 25,774 January 23, 2034 January 23, 2009
3-mo LIBOR
CBNJ Trust I December 19, 2002 5,000 plus 3.35% 5,155 January 7, 2033 January 7, 2008
------- -------
$75,000 $77,322
======= =======
While the capital securities have been deconsolidated in accordance
with Generally Accepted Accounting Principles (GAAP), they continue to
qualify as Tier 1 capital under federal regulatory guidelines. The
change in accounting guidance did not have an impact on the current
Tier 1 regulatory capital of either the Company or the Bank. In March
2005, the Federal Reserve amended its risk-based capital standards to
expressly allow the continued limited inclusion of outstanding and
prospective issuances of trust preferred securities in a bank holding
company's Tier 1 capital, subject to tightened quantitative limits. The
Federal Reserve's amended rule will, effective March 31, 2009, limit
capital securities and other restricted core capital elements to 25% of
all core capital elements, net of goodwill less any associated deferred
tax liability. Management has developed a capital plan for the Company
and the Bank that should allow the Company and the Bank to maintain
"well-capitalized" regulatory capital levels.
The Issuer Trusts are wholly owned unconsolidated subsidiaries of the
Company and have no independent operations. The obligations of Issuer
Trusts are fully and unconditionally guaranteed by the Company. The
debentures are unsecured and rank subordinate and junior in right of
payment to all indebtedness, liabilities and obligations of the
Company. Interest on the debentures is cumulative and payable in
arrears. Proceeds from any redemption of debentures would cause a
mandatory redemption of capital securities having an aggregate
liquidation amount equal to the principal amount of debentures
redeemed.
Sun Trust III variable annual rate will not exceed 11.00% through five
years from its issuance. Sun Trust IV variable annual rate will not
exceed 11.95% through five years from its issuance. Sun Trust V and Sun
Trust VI do not have interest rate caps. CBNJ Trust I was acquired in
the July 2004 acquisition of Community Bancorp of New Jersey. CBNJ
Trust I variable annual rate will not exceed 12.5% through five years
from its issuance.
(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 condition. Amounts
categorized as other comprehensive income represent net unrealized
gains or losses on investment securities available for sale, net of
income taxes. Total comprehensive income for the three months ended
September 30, 2005 and 2004 amounted to $3,717,000 and $10,735,000,
respectively. Total comprehensive income for the nine months ended
September 30, 2005 and 2004 amounted to $11,326,000 and $10,071,000,
respectively.
12
(9) Earnings Per Share
Basic earnings per share is computed by dividing 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 weighted average dilutive common stock options outstanding reduced
by the number of common shares that are assumed to have been purchased
by the Company 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.
Earnings per share for the periods presented are as follows:
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
----------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
Net income $4,994 $4,492 $14,937 $12,942
Dilutive stock options outstanding 3,118,292 3,254,301 3,125,507 3,075,980
Average exercise price per share $9.93 $8.81 $9.61 $8.80
Average market price $21.35 $19.13 $21.59 $20.71
Average common shares outstanding 18,141,052 17,657,777 18,130,280 15,675,212
Increase in shares due to exercise of
options - diluted basis 1,200,528 1,285,302 1,245,540 1,250,492
---------- ---------- ---------- ----------
Adjusted shares outstanding - diluted 19,341,580 18,943,079 19,375,820 16,925,704
========== ========== ========== ==========
Net earnings per share - basic $0.28 $0.25 $0.82 $0.83
Net earnings per share - diluted $0.26 $0.24 $0.77 $0.76
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 7,774 36,868 7,774 16,926
=========== ========== ===== ===========
13
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.
14
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 unaudited condensed consolidated financial
statements, which are prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenue and expenses.
Management evaluates these estimates and assumptions on an ongoing basis,
including those described below. 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. 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. 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. A provision for loan losses is charged to
operations based on management's evaluation of the estimated losses that have
been incurred in the Company's loan portfolio. It is the policy of management to
provide for losses on unidentified loans in its portfolio in addition to
classified loans.
Management monitors its allowance for loan losses on a quarterly basis
and makes adjustments to the allowance through the provision for loan losses as
economic conditions and other pertinent factors indicate. In this context, a
series of qualitative factors are used in a methodology as our measurement of
how current circumstances are affecting the loan portfolio. Included in these
qualitative factors are:
o Levels of past due, classified and non-accrual loans, troubled debt
restructurings and modifications
o Nature and volume of loans
o Changes in lending policies and procedures, underwriting standards,
collections, charge offs and recoveries
o National and local economic and business conditions, including various
market segments
o Concentrations of credit and changes in levels of such concentrations
o Effect of external factors on the level of estimated credit losses in
the current portfolio.
Additionally, historic loss experience over the trailing eight quarters
is taken into account. In determining the allowance for loan losses, management
has established both specific and general pooled allowances. Values assigned to
the qualitative factors and those developed from historic loss experience
provide a dynamic basis for the calculation of reserve factors for both
pass-rated loans (general pooled allowance) and those criticized and classified
loans without SFAS No. 114 reserves (specific allowance). 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 reserve factor percentages based on historic loss experience and
the qualitative factors described above. In determining the appropriate level of
the general pooled allowance, management makes estimates based on internal risk
ratings, which take into account such factors as debt service coverage, loan to
value ratios, and external factors. Estimates are periodically measured against
actual loss experience.
As changes in the Company's operating environment occur and as recent
loss experience ebbs and flows, the factors for each category of loan based on
type and risk rating will change to reflect current circumstances and the
quality of the loan portfolio.
15
Although the Company maintains its allowance for loan losses at levels
considered adequate to provide for the inherent risk of loss in its loan
portfolio, if economic conditions differ substantially from the assumptions used
in making the evaluations 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. Accordingly, a decline in the national economy or
the local economies of the areas in which the 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. In addition, the Company's determination as to the
amount of its allowance for loan losses is subject to review by its primary
regulator, the OCC, as part of its examination process. This 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.
Accounting for Income Taxes. The Company accounts for income taxes in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management exercises significant
judgment in the evaluation of the amount and timing of the recognition of the
resulting tax assets and liabilities. The judgments and estimates required for
the evaluation are 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 future cash flows and
measure the amount of impairment based on fair value.
Financial Condition
Total assets increased $51.7 million or 1.7% from $3.05 billion at
December 31, 2004 to $3.11 billion at September 30, 2005. Cash and cash
equivalents increased $26.9 million, net loans receivable increased $91.7
million and investment securities available for sale decreased $66.0 million.
Investment securities available for sale decreased $66.0 million or
8.8%, from $819.4 million at December 31, 2004 to $753.4 million at September
30, 2005. The decrease was primarily the result of the planned reduction of
investment securities with the proceeds used to supplement loan funding. This
reduction of investment securities is expected to continue during 2005 to
further supplement the Bank's loan portfolio growth.
Net loans receivable at September 30, 2005 were $1.94 billion, an
increase of $91.7 million from $1.85 billion at December 31, 2004. This increase
(net of prepayments approximating $80 million) was the result of continuing
internal loan growth primarily in commercial and industrial loans. The ratio of
allowance for loan losses to total loans was 1.14% at September 30, 2005
compared to 1.18% at December 31, 2004.
Non-performing loans were $12.4 million at September 30, 2005 compared
to $14.3 million at December 31, 2004. The ratio of allowance for loan losses to
total non-performing loans was 179.6% at September 30, 2005 compared to 153.6%
at December 31, 2004. Non-performing assets were $13.9 million at September 30,
2005 compared to $17.3 million at December 31, 2004. The ratio of non-performing
assets to total loans and real estate owned was 0.71% at September 30, 2005
compared to 0.92% at December 31, 2004.
Other assets increased $7.0 million from $9.3 million at December 31,
2004, to $16.3 million at September 30, 2005. On September 30, 2005, the Company
recorded a prepaid asset in the amount of $6.8 million related to the purchase
of additional Bank Owned Life Insurance which did not become effective until
October 1, 2005.
Total deposits were $2.51 billion at September 30, 2005, reflecting a
$77.2 million increase from December 31, 2004. The increase in deposits reflects
the successful completion of a four week deposit campaign in May 2005. Core
deposits represented 72.9% and 73.6% of total deposits at September 30, 2005 and
December 31, 2004, respectively. As a result of the increased liquidity from
this deposit campaign, the Bank repaid $70.0 million of FHLB repurchase
agreements.
16
Total shareholders' equity increased $12.4 million, from $279.2 million
at December 31, 2004, to $291.6 million at September 30, 2005. The increase was
primarily the result of net income amounting to $14.9 million, offset by a $3.6
million increase in accumulated other comprehensive loss resulting from an
increased unrealized net loss on available for sale securities due to market
interest rates.
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 $101.8 million at September 30, 2005,
the Company had additional secured borrowing capacity with the FHLB of
approximately $53.5 million and other sources of approximately $52 million.
A major source of the Company's funding is deposits, which management
believes will be sufficient to meet the Company's long-term daily operating
liquidity needs. The ability of the Company to retain and attract new deposits
is dependent upon the variety and effectiveness of its customer account
products, customer service and convenience, and rates paid to customers. During
the second quarter of 2005, the Company demonstrated its ability to attract new
deposits with a successful deposit promotion. Over a four week period, the Bank
generated approximately $200 million of new deposits. The Company also obtains
funds from the repayment and maturities of loans as well as sales and maturities
of investment securities. Additional funds can be obtained from a variety of
sources including federal funds purchased, securities sold under agreements to
repurchase, FHLB advances, loan sales or participations and other secured and
unsecured borrowings. It is anticipated that FHLB advances and securities sold
under agreements to repurchase will be secondary sources of funding, and
management expects there to be adequate collateral for such funding
requirements.
The Company's primary uses of funds are the origination of loans, the
funding of the Company's maturing certificates of deposit, deposit withdrawals
and the repayment of borrowings. Certificates of deposit scheduled to mature
during the 12 months ending September 30, 2006 total $425.3 million. The Company
has implemented a core deposit relationship strategy that has placed less
reliance on certificates of deposits as a funding source. In the current and
expected continuing rising interest rate environment, the Company has extended
its relationship strategy to retail certificates of deposit in selected terms to
provide fixed rate funding. However, based on market conditions and other
liquidity considerations, it may avail itself of the secondary borrowings
discussed above.
During the nine months ended September 30, 2005, net loans grew
approximately $91.7 million or 5.0%. The Company anticipates that cash and cash
equivalents on hand, the cash flow from assets, particularly investment
securities, 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 $101.8 million at September 30, 2005, the
Company's estimated cash flow from securities with maturities of less than one
year and principal payments from mortgage-backed securities over the next twelve
months totaled $353.6 million. In addition, the FHLB provides a reliable source
of funds with a wide variety of terms and structures. Management will continue
to monitor the Company's liquidity and maintain it at a level deemed adequate
but not excessive.
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 and 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.
While the capital securities have been deconsolidated in accordance
with GAAP, they continue to qualify as Tier 1 capital under federal regulatory
guidelines. The change in accounting guidance did not
17
have an impact on the current Tier 1 regulatory capital of either the Company or
the Bank. In March 2005, the Federal Reserve amended its risk-based capital
standards to expressly allow the continued limited inclusion of outstanding and
prospective issuances of trust preferred securities in a bank holding company's
Tier 1 capital, subject to tightened quantitative limits. The Federal Reserve's
amended rule will, effective March 31, 2009, limit capital securities and other
restricted core capital elements to 25% of all core capital elements, net of
goodwill less any associated deferred tax liability.
As part of its capital plan, the Company, through its deconsolidated
trust subsidiaries, 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, 2005, the full amount of
the Company's $75.0 million in trust preferred securities qualify as Tier 1.
Disclosures about Commercial Commitments
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, 2005 was $68.0 million,
and the portion of the exposure not covered by collateral was approximately
$18.1 million. The Company believes 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.
Comparison of Operating Results for the Three Months Ended September 30, 2005
and 2004
Net income increased by $500,000, or 11.2% for the three months ended
September 30, 2005 to $5.0 million from $4.5 million for the three months ended
September 30, 2004. The increase in net income was primarily due to an increase
in net interest income of $572,000 and an increase in non-interest income of
$363,000 offset by an increase in the provision for loan losses of $200,000 and
an increase in income taxes of $291,000.
Net Interest Income. Net interest income (on a tax-equivalent basis)
increased $459,000, or 1.9% to $24.6 million for the three months ended
September 30, 2005 from $24.2 million for the same period in 2004. Net interest
income (on a tax-equivalent basis) increased $2.7 million due to volume, the
majority of which was due to an increase of $173.8 million in the average
balance of interest-earning assets offset by a $141.8 million increase in
interest-bearing liabilities. The rate component offset the $2.7 million volume
related increase by $2.3 million. This was due to an increase of 57 basis points
in the average yield on interest-earning assets or $3.0 million offset by an
increase of 89 basis points in the average cost of interest-bearing liabilities
or $5.3 million.
The interest rate spread and margin (on a tax-equivalent basis) for the
three months ended September 30, 2005 was 2.99% and 3.45%, respectively,
compared to 3.31% and 3.61%, respectively, for the same period in 2004. The
yield on average interest-earning assets increased 57 basis points from 4.96%
for the three months ended September 30, 2004 to 5.53% for the same period in
2005, while the cost of funds on average interest-bearing liabilities increased
89 basis points from 1.65% for the three months ended September 30, 2004 to
2.54% for the same period in 2005.
18
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, 2005 September 30, 2004
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,672,481 $27,230 6.51 % $1,457,918 $22,261 6.11 %
Home equity 134,382 2,049 6.10 115,961 1,114 3.84
Second mortgage 46,350 731 6.31 51,302 846 6.60
Residential real estate 27,634 565 8.18 31,893 604 7.58
Other 74,220 1,406 7.58 60,039 1,086 7.24
---------- ------- ---------- -------
Total loans receivable 1,955,067 31,981 6.54 1,717,113 25,911 6.04
Investment securities (3) 831,006 6,921 3.33 886,733 7,087 3.20
Interest-bearing deposit with banks 7,414 59 3.18 19,665 44 0.89
Federal funds sold 60,856 522 3.43 57,075 193 1.28
---------- ------- ---------- -------
Total interest-earning assets 2,854,343 39,483 5.53 2,680,586 33,225 4.96
---------- ------- ---------- -------
Cash and due from banks 79,296 83,126
Bank properties and equipment 37,220 38,875
Goodwill and intangible assets 136,664 116,409
Other assets 51,528 55,946
---------- ----------
Non-interest-earning assets 304,708 294,356
---------- ----------
Total assets $3,159,051 $2,974,942
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $906,514 4,571 2.02 % $798,397 1,830 0.92 %
Savings deposits 421,059 1,293 1.23 485,133 1,011 0.83
Time deposits 712,596 5,527 3.10 597,233 3,423 2.29
---------- ------- ---------- -------
Total interest-bearing deposit accounts 2,040,169 11,391 2.23 1,880,763 6,264 1.33
---------- ------- ---------- -------
Borrowed money:
Federal funds purchased 47 1 4.30 - - -
Securities sold under agreements to
repurchase 86,007 613 2.85 68,534 138 0.81
FHLB advances 131,364 1,504 4.58 166,985 1,700 4.07
Junior subordinated debentures 77,322 1,331 6.89 76,874 939 4.89
---------- ------- ---------- -------
Total borrowings 294,740 3,449 4.68 312,393 2,777 3.56
---------- ------- ---------- -------
Total interest-bearing liabilities 2,334,909 14,840 2.54 2,193,156 9,041 1.65
---------- ------- ---------- -------
Non-interest-bearing demand deposits 516,778 512,643
Other liabilities 14,995 21,403
---------- ----------
Non-interest-bearing liabilities 531,773 534,046
---------- ----------
Total liabilities 2,866,682 2,727,202
Shareholders' equity 292,369 247,740
---------- ----------
Total liabilities and shareholders'
equity $3,159,051 $2,974,942
========== ==========
Net interest income $24,643 $24,184
======= =======
Interest rate spread (4) 2.99 % 3.31 %
==== ====
Net interest margin (5) 3.45 % 3.61 %
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 122.25 % 122.23 %
====== ======
- --------------------------------------------------------------------------------
(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 interest margin represents net interest income as a percentage of
average interest-earning assets.
19
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,
2005 vs. 2004
-----------------------------
Increase (Decrease)
Due to
-----------------------------
Volume Rate Net
------- ------- -------
Interest income
Loans receivable:
Commercial and industrial $ 3,433 $ 1,537 $ 4,970
Home equity 199 736 935
Second mortgage (79) (36) (115)
Residential real estate (84) 45 (39)
Other 267 53 320
------- ------- -------
Total loans receivable 3,736 2,335 6,071
Investment securities (453) 286 (167)
Interest-bearing deposits accounts (41) 56 15
Federal funds sold 13 326 339
------- ------- -------
Total interest-earning assets $ 3,255 $ 3,003 $ 6,258
------- ------- -------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 280 $ 2,461 $ 2,741
Savings deposits (148) 430 282
Time deposits 742 1,362 2,104
------- ------- -------
Total interest-bearing deposit accounts 874 4,253 5,127
Borrowed money:
Federal funds purchased 1 - 1
Securities sold under agreements to repurchase 44 431 475
FHLB advances (392) 196 (196)
Junior Subordinated Debentures 6 386 392
------- ------- -------
Total borrowed money (341) 1,013 672
Total interest-bearing liabilities $ 533 $ 5,266 $ 5,799
------- ------- -------
Net change in net interest income $ 2,722 $(2,263) $ 459
======= ======= =======
Interest income (on a tax-equivalent basis) increased by $6.3 million,
to $39.5 million for the three months ended September 30, 2005 from $33.2
million for the same period in 2004. The increase in interest income was due to
a 6.5% increase in the average balance of interest-earning assets, which
produced an increase in interest income of $3.3 million, along with an increase
in interest rates, which increased the yield on average interest-earning assets
by 57 basis points, or $3.0 million.
Interest expense increased $5.8 million, or 64.4%, to $14.8 million for
the three months ended September 30, 2005 compared to $9.0 million for the same
period in 2004. The increase in interest expense was due to an increase in
interest rates, which increased the cost of average interest-bearing liabilities
by 89 basis points, or $5.3 million, and a 6.5% increase in the average balance
of interest-bearing liabilities which produced an increase in interest expense
of $533,000.
20
Provision for Loan Losses. For the three months ended September 30,
2005, the provision for loan losses was $500,000, compared to $300,000 for the
same period in 2004. The Company focuses on its loan portfolio management and
credit review process to address the current risk profile of the portfolio and
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 $363,000 or 8.5% for
the three-month period ended September 30, 2005 compared to the three-month
period ended September 30, 2004. This increase was primarily the result of an
increase of $491,000 in income earned on our commercial loan derivative products
and a $248,000 increase on our gain on SBA loan sales. Offsetting these
increases were decreases in gains of sale of investment securities and fixed
assets of $277,000 and $152,000, respectively.
Non-Interest Expenses. Non-interest expenses remained level at $21.2
million for the three months ended September 30, 2005 and 2004. As a result of
the 2004 branch closures as part of the Company's branch rationalization
program, amortization of intangible assets and occupancy expenses decreased
$405,000 and $118,000, respectively. These decreases were offset by minor
increases in salaries, equipment, data processing and other expenses.
Income Taxes. Income taxes increased $291,000 for the three months
ended September 30, 2005 as compared to the same period in 2004. The increase
resulted from higher pre-tax earnings.
Comparison of Operating Results for the Nine Months Ended September 30, 2005 and
2004
Net income increased by $2.0 million, or 15.5% for the nine months
ended September 30, 2005 to $14.9 million from $12.9 million for the nine months
ended September 30, 2004. The increase in net income was primarily due to an
increase in net interest income of $8.3 million offset by a decrease in
non-interest income of $961,000 and increases in non-interest expense of $3.9
million and income taxes of $1.4 million.
Net Interest Income. Net interest income (on a tax-equivalent basis)
increased $8.2 million, or 12.6% to $73.4 million for the nine months ended
September 30, 2005 from $65.2 million for the same period in 2004. Net interest
income (on a tax-equivalent basis) increased $13.4 million due to volume, the
majority of which was due to an increase of $360.0 million in the average
balance of interest-earning assets. The rate component offset this increase in
net interest income by $5.2 million which was due to an increase of 68 basis
points in the average cost of interest-bearing deposits and an increase of 69
basis points in the average cost of borrowings offset by an increase in the
yield on interest-earning assets of 47 basis points.
The interest rate spread and margin (on a tax-equivalent basis) for the
nine months ended September 30, 2005 was 3.08% and 3.48%, respectively, compared
to 3.28% and 3.55%, respectively, for the same period in 2004. The yield on
average interest-earning assets increased 47 basis points from 4.91% for the
nine months ended September 30, 2004 to 5.38% for the same period in 2005, while
the cost of funds on average interest-bearing liabilities increased 67 basis
points from 1.63% for the nine months ended September 30, 2004 to 2.30% for the
same period in 2005.
21
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, 2005 September 30, 2004
------------------------------ -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,652,621 $78,644 6.34 % $1,294,084 $58,918 6.07 %
Home equity 130,903 5,300 5.40 96,456 2,752 3.81
Second mortgage 47,969 2,248 6.25 49,950 2,393 6.39
Residential real estate 26,970 1,598 7.90 31,314 1,673 7.12
Other 71,380 3,946 7.37 55,323 3,120 7.52
---------- ------- ---------- -------
Total loans receivable 1,929,843 91,736 6.34 1,527,127 68,856 6.01
Investment securities (3) 837,579 20,758 3.30 880,257 20,977 3.18
Interest-bearing deposit with banks 6,850 132 2.57 11,696 59 0.67
Federal funds sold 35,819 852 3.17 30,967 266 1.15
---------- ------- ---------- -------
Total interest-earning assets 2,810,091 113,478 5.38 2,450,047 90,158 4.91
---------- ------- ---------- -------
Cash and due from banks 82,534 75,693
Bank properties and equipment 37,200 35,558
Goodwill and intangible assets 136,894 89,461
Other assets 52,879 64,178
---------- ----------
Non-interest-earning assets 309,507 264,890
---------- ----------
Total assets $3,119,598 $2,714,937
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $859,708 10,918 1.69 % $780,207 4,852 0.83 %
Savings deposits 432,055 3,668 1.13 416,971 2,432 0.78
Time deposits 687,100 14,812 2.87 542,109 9,638 2.37
---------- ------- ---------- -------
Total interest-bearing deposit accounts 1,978,863 29,398 1.98 1,739,287 16,922 1.30
---------- ------- ---------- -------
Borrowed money:
Federal funds purchased 4,044 89 2.93 4,276 47 1.47
Securities sold under agreements to
repurchase 76,629 1,354 2.36 63,123 249 0.53
FHLB advances 181,169 5,525 4.07 163,055 5,130 4.19
Junior subordinated debentures 77,605 3,705 6.37 73,753 2,560 4.63
---------- ------- ---------- -------
Total borrowings 339,447 10,673 4.19 304,207 7,986 3.50
---------- ------- ---------- -------
Total interest-bearing liabilities 2,318,310 40,071 2.30 2,043,494 24,908 1.63
---------- ------- ---------- -------
Non-interest-bearing demand deposits 499,293 437,382
Other liabilities 14,741 25,443
---------- ----------
Non-interest-bearing liabilities 514,034 462,825
---------- ----------
Total liabilities 2,832,344 2,506,319
Shareholders' equity 287,254 208,618
---------- ----------
Total liabilities and shareholders'
equity $3,119,598 $2,714,937
========== ==========
Net interest income $73,407 $65,250
======= =======
Interest rate spread (4) 3.08 % 3.28 %
==== ====
Net interest margin (5) 3.48 % 3.55 %
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 121.21 % 119.89 %
====== ======
- --------------------------------------------------------------------------------
(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 interest margin represents net interest income as a percentage of
average interest-earning assets.
22
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,
2005 vs. 2004
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Volume Rate Net
-------- -------- --------
Interest income
Loans receivable:
Commercial and industrial $ 16,954 $ 2,772 $ 19,726
Home equity 1,176 1,372 2,548
Second mortgage (93) (52) (145)
Residential real estate (247) 172 (75)
Other 889 (63) 826
-------- -------- --------
Total loans receivable 18,679 4,201 22,880
Investment securities (1,030) 811 (219)
Interest-bearing deposits accounts (33) 106 73
Federal funds sold 48 538 586
-------- -------- --------
Total interest-earning assets $ 17,664 $ 5,656 $ 23,320
-------- -------- --------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 541 $ 5,525 $ 6,066
Savings deposits 92 1,144 1,236
Time deposits 2,882 2,292 5,174
-------- -------- --------
Total interest-bearing deposit accounts 3,515 8,961 12,476
Borrowed money:
Federal funds purchased (3) 45 42
Securities sold under agreements to
repurchase 65 1,040 1,105
FHLB advances 551 (156) 395
Junior Subordinated Debentures 140 1,005 1,145
-------- -------- --------
Total borrowed money 753 1,934 2,687
Total interest-bearing liabilities $ 4,268 $ 10,895 $ 15,163
-------- -------- --------
Net change in net interest income $ 13,396 $ (5,239) $ 8,157
======== ======== ========
Interest income (on a tax-equivalent basis) increased by $23.3 million,
to $113.5 million for the nine months ended September 30, 2005 from $90.2
million for the same period in 2004. The increase in interest income was due to
an 14.7% increase in the average balance of interest-earning assets which
produced an increase in interest income of $17.7 million along with an increase
in interest rates, which increased the yield on average interest-earning assets
by 47 basis points, or $5.7 million. In July 2004, the Company acquired
approximately $345 million in interest-earning assets from the Community Bank of
New Jersey (Community) acquisition.
23
Interest expense increased $15.2 million, or 60.9%, to $40.1 million
for the nine months ended September 30, 2005 compared to $24.9 million for the
same period in 2004. The increase in interest expense was due to a 13.5%
increase in the average balance of interest-bearing liabilities which produced
an increase in interest expense of $4.3 million and an increase in interest
rates, which increased the cost of average interest-bearing liabilities by 67
basis points, or $10.9 million. The increase in the average balance of
interest-bearing liabilities was partly attributable to the July 2004
acquisition of approximately $357 million in interest-bearing liabilities from
the Community acquisition and the second quarter 2005 deposit promotion campaign
that generated approximately $200 million of new deposits.
Provision for Loan Losses. For the nine months ended September 30,
2005, the provision for loan losses was $1.8 million, compared to $1.7 million
for the same period in 2004.
Non-Interest Income. Non-interest income decreased $961,000, or 6.5% to
$13.9 million for the nine-month period ended September 30, 2005 compared to
$14.9 million for the nine-month period ended September 30, 2004. The nine-month
period ended September 30, 2004 was impacted by a $2.3 million gain on sale of
branch real estate. The remaining $1.5 million increase was primarily the result
of an increase in gains on sale of SBA loans of $567,000 and an increase of $1.1
million in income earned on our commercial loan derivative products. These
increases were offset by a decrease in the gain on investment security sales of
$371,000.
Non-Interest Expenses. Non-interest expenses increased $3.8 million, or
6.6% to $62.9 million for the nine months ended September 30, 2005 as compared
to $59.1 million for the same period in 2004. Of this increase, approximately
$5.8 million is due to the incremental expenses resulting from the July 2004
Community acquisition which consist primarily of the following:
For the 2005 Expenses of
Nine Months Ended Newly Acquired Remaining
September 30, Branches Variance
---------------------------------------------------------
NON-INTEREST EXPENSES: 2005 2004
---- ----
Salaries and employee benefits $31,804 $29,213 $2,293 $298
Occupancy expense 8,485 8,041 1,190 (746)
Equipment expense 5,820 5,147 613 60
Data processing expense 3,056 2,959 32 65
Amortization of intangible assets 3,381 3,842 1,188 (1,649)
Other 10,389 9,866 460 63
------- ------- ------ -------
Total non-interest expenses $62,935 $59,068 $5,776 ($1,909)
======= ======= ====== =======
The majority of the remaining $1.9 million decrease in non-interest
expenses is a result of a $746,000 decrease in occupancy expense and a $1.6
million decrease in amortization of intangible assets both due to 2004 branch
closures as part of the Company's branch rationalization program which was
completed as of December 31, 2004.
Income Taxes. Income taxes increased $1.4 million for the nine months
ended September 30, 2005 as compared to the same period in 2004. The increase
resulted primarily from higher pre-tax earnings coupled with an increase in the
Company's effective tax rate. The Company's effective tax rate increased 5.3% to
32.1% for the nine months ended September 30, 2005 from 30.5% for the same
period in 2004. The increase is primarily the result of a $340,000 decrease in
the Company's interest income on non-taxable municipal securities.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
Interest rate, credit and operational risks are among the most
significant market risks impacting the performance of the Company. Interest rate
risk is reviewed monthly by the Asset Liability Committee (ALCO), composed of
senior management representatives from a variety of areas within the Company.
ALCO devises strategies and tactics to maintain the net interest income of the
Company within acceptable ranges over a variety of interest rate scenarios.
Should the Company's risk modeling indicate an undesired exposure to changes in
interest rates, there are a number of remedial options available including
changing the investment portfolio characteristics, and changing loan and deposit
pricing strategies. Two of the tools used in monitoring the Company's
sensitivity to interest rate changes are gap analysis and net interest income
simulation.
Gap Analysis. Banks are 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 the 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, over the interest-bearing liabilities maturing or
repricing within that same time period. On a monthly basis, the Company and the
Bank monitor their gap, primarily cumulative through one year maturities.
At September 30, 2005, total interest-earning assets maturing or
repricing within one year exceeded interest-bearing liabilities maturing or
repricing during the same time period by $126.6 million, representing a positive
one-year gap ratio of 4.08%. All amounts are categorized by their actual
maturity, anticipated call or repricing date with the exception of
interest-bearing demand deposits and savings deposits. Though the rates on
interest-bearing demand and savings deposits generally trend with open market
rates, they often do not fully adjust to open market rates and frequently adjust
with a time lag. 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 based on an
estimated decay rate for those deposits.
Net Interest Income Simulation. Due to the inherent limitations of gap
analysis, the Company also uses simulation models to measure the impact of
changing interest rates on its operations. The simulation model attempts to
capture the cash flow and repricing characteristics of the current assets and
liabilities on the Company's balance sheet. Assumptions regarding such things as
prepayments, rate change behaviors, level and composition of new balance sheet
activity and new product lines are incorporated into the simulation model. Net
interest income is simulated over a twelve month horizon under a variety of
linear yield curve shifts, subject to certain limits agreed to by ALCO. The
Company uses a base interest rate scenario provided by a third party econometric
modeling service.
Actual results may differ from the simulated results due to such
factors as the timing, magnitude and frequency of interest rate changes, changes
in market conditions, management strategies and differences in actual versus
forecasted balance sheet composition and activity.
The following table shows the Company's estimated earnings sensitivity
profile versus the most likely rate forecast from Global Insights as of
September 30, 2005:
Change in Interest Rates Percentage Change in Net Interest Income
(Basis Points) Year 1
-------------- ------
+200 +0.9%
+100 +0.5%
-100 -0.5%
-200 -0.3%
Derivative Financial Instruments. The Company utilizes certain
derivative financial instruments to enhance its ability to manage interest rate
risk that exists as part of its ongoing business operations. As of September 30,
2005, all derivative financial instruments have been entered into to hedge the
interest rate risk associated with the Bank's commercial lending activity. In
general, the derivative transactions fall into one of two types, a bank hedge of
a specific fixed rate loan or a hedged derivative offering to a Bank customer.
25
In those transactions in which the Bank hedges a specific fixed rate loan, the
derivative is executed for periods and terms that matches the related underlying
exposures and do not constitute positions independent of these exposures. For
derivatives offered to Bank customers, the economic risk of the customer
transaction is offset by a mirror position with a non-affiliated third party.
Interest rate swaps are agreements with a counterparty to exchange
periodic fixed and floating interest payments calculated on a notional amount.
The floating rate is based on a money market index, primarily short-term LIBOR.
Financial derivatives involve, to varying degrees, interest rate,
market and credit risk. For interest rate swaps, only periodic cash payments are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional amount.
Not all elements of interest rate, market and credit risk are addressed
through the use of financial or other derivatives, and such instruments may be
ineffective for their intended purposes due to unanticipated market
characteristics, among other reasons.
The notional amount of interest rate swap agreements at September 30,
2005 was $288.4 million compared to $44.4 million at December 31, 2004. The
total unrealized gain (loss) on these agreements at September 30, 2005 and
December 31, 2004 amounted to $122,000 and ($283,000), respectively.
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 and is accumulated and communicated to the Company's management,
including the principle executive officer and principle financial officer, as
appropriate to allow timely decisions regarding required disclosures.
(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.
26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at September 30, 2005. 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. Unregistered Sales of Equity 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
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003.
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2003.
27
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 7, 2005 /s/Thomas A. Bracken
-------------------------------------
Thomas A. Bracken
President and Chief Executive Officer
Date: November 7, 2005 /s/Dan A. Chila
-------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
28