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, 2002
------------------------
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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)
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(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
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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 11,176,929 November 12, 2002
- ----------------------------- ---------- -----------------
Class Number of shares outstanding Date
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2002 2001
----------- -----------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 67,602 $ 67,557
Federal funds sold 79,006 11,525
----------- -----------
Cash and cash equivalents 146,608 79,082
Investment securities available for sale (amortized cost -
$701,112; 2002 and $648,340; 2001) 711,112 647,558
Loans receivable (net of allowance for loan losses -
$15,963; 2002 and $13,332; 2001) 1,183,960 1,089,605
Restricted equity investments 11,752 12,561
Bank properties and equipment, net 29,005 28,180
Real estate owned, net 579 898
Accrued interest receivable 12,471 11,089
Excess of cost over fair value of assets acquired, net 37,951 43,637
Deferred taxes 4,291 8,154
Other assets 10,430 8,661
----------- -----------
TOTAL $ 2,148,159 $ 1,929,425
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,707,391 $ 1,572,338
Advances from the Federal Home Loan Bank 146,563 74,008
Securities sold under agreements to repurchase 74,089 84,928
Loans payable 1,160 1,160
Other liabilities 16,916 9,704
----------- -----------
Total liabilities 1,946,119 1,742,138
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Guaranteed preferred beneficial interest in Company's subordinated debt 59,287 57,327
SHAREHOLDERS' EQUITY
Preferred stock, none issued
Common stock, $1 par value, 25,000,000 shares authorized,
issued and outstanding: 11,261,079 in 2002 and 10,553,942 in 2001 11,261 10,554
Surplus 114,855 108,058
Retained earnings 10,506 11,864
Accumulated other comprehensive income (loss) 7,177 (516)
Treasury stock at cost, 86,250 shares in 2002 (1,046) -
----------- -----------
Total shareholders' equity 142,753 129,960
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TOTAL $ 2,148,159 $ 1,929,425
=========== ===========
- ------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
2
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 21,503 $ 21,564 $ 62,832 $ 66,446
Interest on taxable investment securities 6,553 8,210 20,009 28,455
Interest on non-taxable investment securities 523 481 1,532 1,466
Interest on restricted equity investments 117 140 423 1,104
Interest on federal funds sold 275 629 408 1,349
------------ ------------ ------------ ------------
Total interest income 28,971 31,024 85,204 98,820
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 8,909 13,416 27,226 40,809
Interest on short-term borrowed funds 2,116 2,283 6,272 11,110
Interest on guaranteed preferred beneficial interest in
Company's subordinated debt 1,099 1,359 3,396 4,078
------------ ------------ ------------ ------------
Total interest expense 12,124 17,058 36,894 55,997
------------ ------------ ------------ ------------
Net interest income 16,847 13,966 48,310 42,823
PROVISION FOR LOAN LOSSES 1,000 2,345 3,185 7,385
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 15,847 11,621 45,125 35,438
------------ ------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 1,783 1,839 5,182 4,989
Other service charges 109 104 337 296
Gain (loss) on sale of bank properties and equipment 5 3 (9) 16
Gain on sale of investment securities 536 156 1,335 275
Other 826 729 2,472 2,126
------------ ------------ ------------ ------------
Total other income 3,259 2,831 9,317 7,702
------------ ------------ ------------ ------------
OTHER EXPENSES:
Salaries and employee benefits 7,164 6,099 20,754 17,909
Occupancy expense 1,990 1,914 5,854 5,448
Equipment expense 1,322 1,293 3,611 3,752
Data processing expense 1,015 758 2,634 2,332
Amortization of excess of cost over fair value
of assets acquired 1,862 1,945 5,686 5,885
Other 2,537 3,081 7,539 7,798
------------ ------------ ------------ ------------
Total other expenses 15,890 15,090 46,078 43,124
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 3,216 (638) 8,364 16
INCOME TAXES (BENEFIT) 984 (300) 2,510 (267)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 2,232 $ (338) $ 5,854 $ 283
============ ============ ============ ============
Less: Trust Preferred issuance costs write-off $ - $ - $ 777 $ -
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 2,232 $ (338) $ 5,077 $ 283
============ ============ ============ ============
Basic earnings per share $ 0.20 $ (0.03) $ 0.45 $ 0.03
============ ============ ============ ============
Diluted earnings per share $ 0.19 $ (0.03) $ 0.44 $ 0.03
============ ============ ============ ============
Weighted average shares - basic 11,183,920 10,851,104 11,165,091 10,824,975
============ ============ ============ ============
Weighted average shares - diluted 11,580,619 11,424,352 11,585,943 11,192,697
============ ============ ============ ============
- ------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
------------------------
2002 2001
--------- ---------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 5,854 $ 283
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 3,185 7,385
Provision for losses on real estate owned 117 310
Depreciation 1,770 1,835
Net amortization (accretion) of investments securities 1,929 (2,137)
Amortization of excess cost over fair value of assets acquired 5,686 5,885
Gain on sale of investment securities available for sale (1,335) (275)
Loss (gain) on sale of bank properties and equipment 9 (16)
Deferred income taxes (100) (2,544)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (1,382) 3,257
Other assets 2,546 1,403
Other liabilities 7,212 2,521
--------- ---------
Net cash provided by operating activities 20,399 17,907
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (498,035) (441,254)
Redemption of restricted equity securities 809 16,819
Proceeds from maturities, prepayments or calls of investment
securities available for sale 404,855 399,042
Proceeds from sale of investment securities available for sale 40,688 160,614
Net increase in loans (98,204) (29,409)
Purchase of bank properties and equipment (2,609) (1,236)
Proceeds from the sale of bank properties and equipment 5 31
Proceeds from sale of real estate owned 866 274
--------- ---------
Net cash (used in) provided by investing activities (151,625) 104,881
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 135,053 163,769
Net advances (repayments) under line of credit and repurchase agreements 61,716 (265,494)
Proceeds from other borrowings 25,000
Repayment of other borrowings (25,000)
Proceeds from issuance of Trust Preferred Securities 30,000
Redemption of Trust Preferred Securities (28,040)
Proceeds from exercise of stock options 774 468
Payments for fractional interests resulting from stock dividend (6) (4)
Treasury stock purchased (1,046)
Proceeds from issuance of common stock 301 150
--------- ---------
Net cash provided by (used in) financing activities 198,752 (101,111)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 67,526 21,677
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 79,082 69,617
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 146,608 $ 91,294
========= =========
- ----------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
4
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 contained
herein for Sun Bancorp, Inc. (the "Company") include the accounts of
the Company and its wholly-owned subsidiaries, Sun Capital Trust ("Sun
Trust I") (liquidated in April 2002), Sun Capital Trust II ("Sun Trust
II"), Sun Capital Trust III ("Sun Trust III"), Sun National Bank,
Delaware ("Sun Delaware"), Sun National Bank ("Sun") and Sun's
wholly-owned subsidiaries Med-Vine, Inc., 2020 Properties, L.L.C. and
Sun Financial Services, L.L.C. All significant intercompany balances
and transactions have been eliminated. The Company merged Sun Delaware
into Sun in the fourth quarter 2001.
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 for the period ended December
31, 2001. The results for the three and nine months ended September 30,
2002 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2002 or any other period.
Reclassifications - Certain reclassifications have been made in the
2001 unaudited condensed consolidated financial statements to conform
to those classifications used in 2002.
Recent Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 147,
Acquisitions of Certain Financial Institutions. SFAS No. 147 requires
that the excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired in a
business combination represents goodwill that should be accounted for
under SFAS No. 142, Goodwill and Other Intangible Assets. Thus, the
specialized accounting guidance in paragraph 5 of SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions,
will not apply after September 30, 2002. If certain criteria in SFAS
No. 147 are met, the amount of the unidentifiable intangible asset will
be reclassified to goodwill upon adoption of the statement, and
previously issued financial statements as of the date SFAS No. 142 was
initially applied (January 1, 2002) will be required to restate.
Additionally, the scope of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, is amended to include long-term
customer-relationship intangible assets such as depositor- and
borrower-relationship intangible assets and credit cardholder
intangible assets. This statement is effective for the Company
beginning October 1, 2002. The Company is reviewing its prior branch
acquisitions against the criteria established in SFAS No. 147 and has
not made a final determination of the amount the excess of cost over
fair value of net assets acquired ($38.0 million at September 30, 2002)
that will be reclassified to goodwill. For the three and nine months
ended September 30, 2002, the Company amortized $1.9 million and $5.7
million, respectively.
5
(2) Loans
The components of loans were as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Commercial and industrial $1,006,317 $ 911,145
Home equity 38,670 23,854
Second mortgages 51,775 49,047
Residential real estate 48,535 55,282
Installment 54,626 63,609
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Total gross loans 1,199,923 1,102,937
Allowance for loan losses (15,693) (13,332)
---------- --------
Net Loans $1,183,960 $1,089,605
========== ==========
Non-accrual loans $ 7,388 $ 9,123
========== ==========
Restructured loans $ 13,476 $ 0
========== ==========
During the third quarter 2002, the Company classified two credits
aggregating $13.5 million as restructured loans. These loans have had a
temporary modification of terms to provide near-term cash flow relief
to the borrowers. These loans are not considered nonperforming. At
September 30, 2002, these loans were current, fully performing and well
collateralized.
(3) Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
For the nine
months ended For the year ended
September 30, 2002 December 31, 2001
------------------ -----------------
Balance, beginning of period $13,332 $10,486
Charge-offs (1,045) (5,416)
Recoveries 491 467
------- -------
Net charge-offs (554) (4,949)
Provision for loan losses 3,185 7,795
------- -------
Balance, end of period $15,963 $13,332
======= =======
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 issued by the FASB. 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:
6
September 30, 2002 December 31, 2001
------------------ -----------------
Impaired loans with related reserve for loan losses
calculated under SFAS No. 114 $21,536 $1,643
Impaired loans with no related reserve for loan losses
calculated under SFAS No. 114 5,610 6,101
------- ------
Total impaired loans $27,146 $7,744
======= ======
For the nine
months ended For the year ended
September 30, 2002 December 31, 2001
------------------ -----------------
Average impaired loans $9,043 $6,787
Interest income recognized on impaired loans $1,345 $558
Cash basis interest income recognized on impaired loans $1,357 $651
The increase in the impaired loans during the nine months ended
September 30, 2002 is primarily due to two credits aggregating $13.5
million that the Company classified as restructured loans during the
third quarter 2002, as discussed in Note 2 above.
(4) Deposits
Deposits consist of the following major classifications:
September 30, 2002 December 31, 2001
------------------ -----------------
Demand deposits - interest bearing $ 610,268 $ 523,737
Demand deposits - non-interest bearing 321,187 280,196
Savings deposits 328,002 275,146
Time certificates under $100,000 317,148 363,199
Time certificates $100,000 or more 130,786 130,060
---------- ----------
Total $1,707,391 $1,572,338
========== ==========
(5) 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, 2002 December 31, 2001
------------------ -----------------
Convertible rate advances $53,200 $45,000
Term amortizing advances 93,363 29,008
-------- -------
Total $146,563 $74,008
======== =======
7
Term amortizing advances were as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Original principal $1,800
Interest rate 5.404%
Monthly payment $12
Maturity date October 8, 2008
Balance $1,587 $1,632
Original principal $2,600
Interest rate 5.867%
Monthly payment $18
Maturity date November 26, 2018
Balance 2,313 2,376
Original principal $25,000
Interest rate 3.890%
Monthly payment $459
Maturity date November 15, 2006
Balance 21,553 25,000
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 10, 2007
Balance 22,346 -
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 30, 2007
Balance 22,346 -
Original principal $25,000
Interest rate 4.740%
Monthly payment $350
Maturity date January 30, 2009
Balance 23,218 -
------- -------
Total $93,363 $29,008
======= =======
(6) Loans Payable
As more fully described in Note 9, on March 29, 2002, the Company
borrowed a combined $25.0 million as short-term financing in connection
with the call of the Company's outstanding $28.0 million of 9.85% Sun
Trust I Preferred Securities. Of the total, $20.0 million was borrowed
to provide liquidity until the Company completed the issuance of $20.0
million Pooled Floating Rate Capital Securities on April 10, 2002. The
Company borrowed $10.0 million from a company affiliated with the
Chairman of the Board of Directors of the Company, $10.0 million from
an unrelated third-party bank and an additional $5.0 million from the
same unrelated bank. The terms and interest rate (9.85%) were the same
for both $10.0 million loans. The Company paid off both $10.0 million
loans, including accrued interest on April 10, 2002. The $5.0 million
uncollateralized demand borrowing, at an interest rate of 6.00% with
interest only monthly payments, and was paid off on July 11, 2002.
8
(7) Other 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 surplus in the equity
section of a 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 income for the three-months ended September 30, 2002 and
2001 amounted to $6,302,000 and $5,199,000, respectively. Total
comprehensive income for the nine-months ended September 30, 2002 and
2001 amounted to $13,547,000 and $14,405,000, respectively.
(8) Earnings Per Share
Basic earnings per share is computed by dividing income available to
common shareholders (net income less Trust Preferred issuance costs
write-off), 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 available to common
shareholders 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.
For the For the
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $2,232 $ (338) $5,854 $283
Less: Trust Preferred issuance costs write-off $ - $ - $ 777 $ -
------ ------ ------ ----
Net income (loss) available to common
shareholders $2,232 $ (338) $5,077 $283
====== ====== ====== ====
Dilutive stock options outstanding 2,174,536 1,334,852 2,153,508 1,318,245
Average exercise price per share $9.55 $5.47 $9.41 $5.54
Average market price $12.73 $11.67 $12.80 $9.35
Average common shares outstanding 11,183,920 10,851,104 11,165,091 10,824,975
Increase in shares due to exercise of
options - diluted basis 396,699 573,248 420,852 367,722
---------- ---------- ---------- ----------
Adjusted shares outstanding - diluted 11,580,619 11,424,352 11,585,943 11,192,697
========== ========== ========== ==========
Net earnings per share - basic $0.20 $(0.03) $0.45 $0.03
Net earnings per share - diluted $0.19 $(0.03) $0.44 $0.03
9
(9) Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
Guaranteed preferred beneficial interest in Company's subordinated debt
consists of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Sun Trust I $28,040
Sun Trust II $29,287 29,287
Sun Trust III 20,000 -
Sun Trust IV 10,000 -
------- -------
$59,287 $57,327
======= =======
During the first quarter 2002, the Company notified the holders of the
outstanding $28.0 million of 9.85% Sun Trust I Preferred Securities of
its intention to call these securities contemporaneously with the
redemption of the Sun Trust I 9.85% Junior Subordinated Debentures on
April 1, 2002. During the second quarter, the Company wrote down the
unamortized debt issuance costs of the called securities in the amount
of $777,000, net of income tax, through a charge to equity. The Company
funded this call with short-term borrowings of $25.0 million and a $3.0
million dividend from Sun. On April 10, 2002, the Company issued $20.0
million Pooled Floating Rate Capital Securities ("Sun Trust III Capital
Securities"). The interest rate resets every six months to LIBOR plus
3.70%, with an initial rate of 6.02%, and will not exceed 11.00%
through five years from its issuance. The proceeds were used to pay
down $20.0 million of short-term borrowings.
The sole asset of Sun Trust II is $29.9 million, original principal
amount of 8.875% Junior Subordinated Debentures issued by the Company
that mature on December 31, 2028. At June 30, 2002 and December 31,
2001, the Company had repurchased 61,300 shares. 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.
On July 11, 2002, the Company issued $10.0 million Pooled Floating Rate
Capital Securities ("Sun Trust IV Capital Securities"). The interest
rate resets every three months to LIBOR plus 3.65%, with an initial
rate of 5.51%, and will not exceed 11.95% through five years from its
issuance. The proceeds were used to pay down $5.0 million of short-term
borrowings and for general corporate purposes.
10
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, 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.
11
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at September 30, 2002 increased by $218.7 million, or
11.3% to $2.15 billion as compared to $1.93 billion at December 31, 2001. The
increase was primarily due to an increase in net loans receivable of $94.4
million, an increase in investment securities of $63.6 million and an increase
in federal funds sold of $67.5 million, partially offset by a decrease in excess
of cost over fair value of assets acquired of $5.7 million and a decrease in
deferred taxes of $3.9 million. The overall increase in total assets reflects
the Company's continued strategy of growth of its core businesses, with emphasis
on commercial and small business lending and community banking, while sustaining
adequate liquidity, managing interest rate risk and maintaining strong capital.
Federal funds sold increased $67.5 million, from $11.5 million at
December 31, 2001 to $79.0 million at September 30, 2002. The increase in
liquidity is primarily due to the increase in deposits and advances from the
FHLB exceeding loan growth through September 30, 2002. The Company expects that
this liquidity level will be maintained through the balance of the year 2002.
With the historically low interest rate environment, the Company anticipates
maintaining excess funds in liquid overnight funds and short-term securities.
Investment securities available for sale increased $63.6 million, or
9.8%, from $647.6 million at December 31, 2001 to $711.1 million at September
30, 2002. The increase in investment securities during the nine months ended
September 30, 2002 was consistent with the Company's asset and liability
management goals which are designed to provide a portfolio of high quality
investments which optimizes interest income within acceptable limits of safety
and liquidity. The increase was primarily the result of $498.0 million of
security purchases partially offset by $445.5 million of proceeds from
maturities, prepayments or calls of investment securities.
Net loans receivable at September 30, 2002 was $1.18 billion, an
increase of $94.4 million, or 8.7% from $1.09 billion at December 31, 2001. Of
this increase, $95.2 million was due primarily to originations of commercial and
industrial loans. Credit quality at September 30, 2002 improved from December
31, 2001. The ratio of non-performing assets to total loans and real estate
owned at September 30, 2002 was 0.72% compared to 1.01% at December 31, 2001.
The ratio of allowance for loan losses to total non-performing loans was 197.05%
at September 30, 2002 compared to 130.44% at December 31, 2001. The ratio of
allowance for loan losses to total loans was 1.33% at September 30, 2002
compared to 1.21% at December 31, 2001. During the third quarter 2002, total
impaired loans increased from $9.5 million at June 30, 2002 to $27.1 million at
September 30, 2002, primarily due to two credits aggregating $13.5 million that
the Company classified as restructured loans. These loans have had a temporary
modification of terms to provide near-term cash flow relief to the borrowers.
These loans are not considered nonperforming. At September 30, 2002, these loans
were current, fully performing and well collateralized.
Excess of cost over fair value of assets acquired decreased $5.7
million from $43.6 million at December 31, 2001 to $38.0 million at September
30, 2002. The decrease was a result of scheduled amortization. The Company is in
the process of determining what amount, if any, of the excess of cost over fair
value of assets acquired should be reclassified to goodwill or core deposit
intangible upon adoption of SFAS No. 147. (See Notes to unaudited condensed
consolidated financial statements.) The Company will adopt SFAS No. 147 during
the fourth quarter 2002.
12
Total deposits were $1.71 billion at September 30, 2002, reflecting a
$135.1 million, or 8.6% increase over December 31, 2001. The Company's core
deposits, (demand and savings deposits) increased $180.4 million, or 16.7%,
while the non-core deposits (time deposits) declined $45.3 million, or 9.2%. The
Company maintains a deposit relationship pricing strategy that has enabled the
Company to favorably increase the deposit mix with a higher concentration of
core deposits. Core deposits as a percentage of total deposits were 73.8% at
September 30, 2002 and 68.6% at December 31, 2001.
Advances from the Federal Home Loan Bank increased $72.6 million to
$146.6 million at September 30, 2002 from $74.0 million at December 31, 2001.
These advances are in line with the Company's ALCO interest rate sensitivity
policies, by matching longer-term assets with longer-term liabilities.
Securities sold under agreement to repurchase decreased $10.8 million
from $84.9 million at December 31, 2001 to $74.1 million at September 30, 2002,
reflecting the borrowers' liquidity.
Total shareholders' equity increased by $12.8 million, from $130.0
million at December 31, 2001, to $142.8 million at September 30, 2002. The
increase was primarily the result of the Company's nine months net earnings of
$5.9 million and a $7.7 million increase in accumulated other comprehensive
income, due to the improvement in the market value of the investment portfolio,
partially offset by the purchase of treasury stock of $1.0 million.
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, calls, 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 $146.6 million at September 30, 2002,
the Company has additional secured borrowing capacity with the FHLB and other
sources. Management will continue to monitor the Company's liquidity in order to
maintain it at a level that is adequate but not excessive.
Through the first nine months of 2002, the Company has realized a
substantial increase in deposits of $135.1 million or 8.6% over December 31,
2001. Consistent with its deposit relationship pricing strategy, the Company
continues to increase the deposit mix with a higher concentration of core
deposits. Core deposits, as a percentage of total deposits, were 73.8% at
September 30, 2002 and 68.6% at December 31, 2001. This increase in core
deposits has had a positive impact on net interest margin and has reduced the
Company's reliance on borrowed funds. This deposit growth has outpaced the loan
growth over the nine month period ended September 30, 2002 and has resulted in a
level of liquidity, which has averaged $64.7 million in federal funds sold
during the quarter ended September 30, 2002. The Company expects that this
liquidity will be maintained through the balance of the year. In this
historically low interest rate environment, the Company anticipates maintaining
these funds invested in liquid overnight and short-term investment securities.
Net cash used in investing activities for the nine months ended
September 30, 2002, was $151.6 million compared to net cash provided by
investing activities for the nine months ended September 30, 2001 of $104.9
million. The investing activities during the first nine months of 2001 reflect
the Company's continued focus on overall balance sheet and capital management.
Continuing its strategy implemented during the later part of 2000, the Company
concentrated on growth of its core businesses, with emphasis on commercial and
small business lending and community banking, while also deleveraging the
balance sheet through a reduction in investments and borrowings. By year-end
2001, the Company had substantially executed its de-leveraging strategy. During
2002, the Company continued to execute its strategy of core business growth as
net loans for the nine months ended September 30, 2002 grew by $94.4 million or
8.7%. While total deposits grew $135.1 million over the same period, the excess
liquidity was invested in short-term securities, which increased a net $67.5
million.
13
Net cash provided by financing activities for the nine months ended
September 30, 2002, was $198.8 million compared to net cash used in financing
activities for the nine months ended September 30, 2001 of $101.1 million.
During 2001, as a result of the Company's de-leveraging strategy, borrowings
under line of credit and repurchase agreements were reduced by $265.5 million.
In the first nine months of 2002, the Company continues to realize deposit
growth of $135.1 million. In addition, the Company increased FHLB advances by
$61.7 million in order to match fund a portion of the loan portfolio growth.
During 2002, the Company called the outstanding $28.0 million of 9.85%
Sun Trust I Preferred Securities contemporaneously with the redemption of the
Sun Trust I 9.85% Junior Subordinated Debentures. The Company funded this call
with short-term borrowings of $25.0 million and a $3.0 million dividend from
Sun. On April 10, 2002, the Company issued $20.0 million Pooled Floating Rate
Capital Securities ("Sun Trust III Capital Securities"). The proceeds were used
to pay down $20.0 million of short-term borrowings.
On July 11, 2002, the Company issued $10.0 million Pooled Floating Rate
Capital Securities ("Sun Trust IV Capital Securities"). The interest rate resets
every three months to LIBOR plus 3.65%, with an initial rate of 5.51%, and will
not exceed 11.95% through five years from its issuance. The proceeds were used
to pay down $5.0 million of short-term borrowings and for general corporate
purposes.
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 growth projections and operating and financial
risks. It is the Company's intention to maintain "well-capitalized" risk-based
capital levels. The Company has also considered a plan for contingency capital
needs, and when appropriate, the Company's Board of Directors may consider
various capital raising alternatives.
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. The portion that exceeds the 25% capital limitation qualifies
as Tier 2, or supplementary capital of the Company.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and 2001
Net income increased by $2.6 million, for the three months ended
September 30, 2002 to $2.2 million from a net loss of $338,000 for the three
months ended September 30, 2001. As more fully described below, the increase in
net income was due to an increase of $2.9 million in net interest income and a
decrease of $1.3 million in the provision for loan losses, partially offset by
an increase in non-interest expenses of $800,000.
Net Interest Income. Net interest income is the most significant
component of the Company's income from operations. Net interest income is the
difference between interest received on interest-earning assets (primarily loans
and investment securities) and interest paid on interest-bearing liabilities
(primarily deposits and borrowed funds). Net interest income depends on the
volume and interest rate earned on interest-earning assets and the volume and
interest rate paid on interest-bearing liabilities.
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.
14
At or for the three months ended At or for the three months ended
September 30, 2002 September 30, 2001
--------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ------------------- ------- -------------------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,005,524 $18,012 7.17 % $ 889,957 $17,867 8.03 %
Home equity 35,301 441 5.00 23,211 464 7.99
Second mortgage 53,469 1,008 7.54 45,435 918 8.08
Residential real estate 49,836 849 6.82 52,218 973 7.45
Installment 55,175 1,193 8.65 59,069 1,342 9.09
---------- ------- ---------- -------
Total loans receivable 1,199,305 21,503 7.17 1,069,890 21,564 8.06
Investment securities (3) 683,754 7,442 4.35 666,975 9,024 5.41
Interest-bearing deposit with banks 9,131 18 0.77 13,176 51 1.56
Federal funds sold 64,676 275 1.70 71,485 629 3.52
---------- ------- ------ ---------- ------- ----
Total interest-earning assets 1,956,866 29,238 5.98 1,821,526 31,268 6.87
Cash and due from banks 61,484 70,785
Bank properties and equipment 28,833 28,665
Excess of cost over fair value of
assets acquired 39,116 48,198
Other assets 30,294 20,321
---------- ----------
Non-interest-earning assets 159,727 167,969
---------- ----------
Total Assets $2,116,593 $1,989,495
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 606,515 2,974 1.96 % $ 455,899 3,333 2.92 %
Savings deposits 320,928 1,842 2.30 232,852 1,655 2.84
Time deposits 441,936 4,093 3.70 594,715 8,428 5.67
---------- ------- ---------- -------
Total interest-bearing
deposits accounts 1,369,379 8,909 2.60 1,283,466 13,416 4.18
---------- ------- ---------- -------
accounts
Borrowed money:
Repurchase agreements with customers 74,409 210 1.13 85,814 554 2.58
Repurchase agreements with FHLB 93,395 894 3.83
FHLB advances 148,086 1,893 5.11 49,053 827 6.74
Federal funds purchased
Other borrowed money 1,703 13 2.95 1,160 8 2.72
---------- ------- ---------- -------
Total borrowed money 224,198 2,116 3.77 229,422 2,283 3.98
Guaranteed preferred beneficial
interest in Company's
subordinated debt 58,200 1,099 7.55 57,327 1,359 9.49
---------- ------- ---------- -------
Total interest-bearing liabilities 1,651,777 12,124 2.94 1,570,215 17,058 4.35
---------- ------- ---------- -------
Non-interest-bearing demand deposits 301,345 280,402
Other liabilities 23,811 10,333
---------- ----------
Non-interest-bearing liabilities 325,156 290,735
---------- ----------
Total liabilities 1,976,933 1,860,950
Shareholders' equity 139,660 128,545
---------- ----------
Total liabilities and shareholders'
equity $2,116,593 $1,989,495
========== ==========
Net interest income $17,114 $14,210
======= =======
Interest rate spread (4) 3.04 % 2.52 %
====== ======
Net yield on interest earning assets (5) 3.50 % 3.12 %
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities
118.47 % 116.00 %
====== ======
(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.
15
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,
2002 vs. 2001
------------------------------
Increase (Decrease)
Due to
------------------------------
Volume Rate Net
Interest income
Loans receivable:
Commercial and industrial $ 2,176 $(2,031) $ 145
Home equity 189 (212) (23)
Second mortgage 154 (64) 90
Residential real estate (43) (81) (124)
Installment (86) (63) (149)
------- ------- -------
Total loans receivable 2,390 (2,451) (61)
Investment securities 222 (1,804) (1,582)
Interest-bearing deposits accounts (13) (20) (33)
Federal funds sold (55) (299) (354)
------- ------- -------
Total interest-earning assets $ 2,544 $(4,574) $(2,030)
------- ------- -------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 918 $(1,277) $ (359)
Savings deposits 542 (355) 187
Time deposits (1,843) (2,492) (4,335)
------- ------- -------
Total interest-bearing deposit accounts (383) (4,124) (4,507)
Borrowed money:
Repurchase agreements with customers (66) (278) (344)
Repurchase agreements with FHLB (894) (894)
FHLB advances 1,310 (244) 1,066
Other borrowed money 4 1 59
------- ------- -------
Total borrowed money 354 (521) (167)
Guaranteed preferred beneficial
interest in Company's subordinated debt 18 (278) (260)
------- ------- -------
Total interest-bearing liabilities $ (11) $(4,923) $(4,934)
------- ------- -------
Net change in interest income $ 2,555 $ 349 $ 2,904
======= ======= =======
The increase in net interest income (on a tax-equivalent basis) of $2.9
million from the quarter September 30, 2002 compared to the quarter September
30, 2001 was due to a $4.9 million decrease in interest expense partially offset
by a $2.0 million decrease in interest income (on a tax-equivalent basis).
The increase in interest rate spread and margin for the three months
ended September 30, 2002, compared to the same period 2001, was primarily due to
the decrease in market interest rates and difference in maturities and repricing
characteristics of the interest-bearing liabilities and interest-earning assets.
The cost of funds on interest-bearing liabilities decreased 141 basis points
from 4.35% for the three months ended September 30, 2001 to 2.94% for the same
period in 2002, while the yield on the average interest-earning assets declined
89 basis points during the same time period.
16
Net interest income (on a tax-equivalent basis) increased $2.9 million,
or 20.4% to $17.1 million for the quarter ended September 30, 2002 compared to
$14.2 million for the same period in 2001. This increase is primarily due to the
change in the volume of interest-earning assets and interest-bearing
liabilities, as well as the number of market rate decreases between periods.
From the volume component, net interest income (on a tax-equivalent basis)
increased $2.6 million, the majority of this is due to an increase in the
average balance of interest-earning assets. 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 $349,000, reflecting a $4.9
million decrease in the cost of interest-bearing liabilities, partially offset
by a $4.6 million decrease in the yield of interest-earning assets.
Interest income (on a tax-equivalent basis) decreased $2.0 million, or
6.5% to $29.2 million for the three months ended September 30, 2002 compared to
$31.3 million for the same period in 2001. The decrease in interest income was
due to the continued drop in interest rates, which lowered the yield on average
interest-earning assets by 89 basis points. Interest income (on a tax-equivalent
basis) on investment securities decreased $1.6 million caused by a decrease in
yield of 106 basis points, partially offset by an increase in the average
balance from $667.0 million at September 30, 2001 to $683.8 million at September
30, 2002. The increase in average balance of loans receivable from $1.07 billion
at September 30, 2001 to $1.20 billion at September 30, 2002 produced an
increase in interest income of $2.4 million, which was offset by the decrease in
yield of 89 basis points that produced a decrease in interest income of $2.5
million. In addition, interest income on federal funds sold decreased $354,000
caused by primarily due to a decrease in yield of 182 basis points.
Interest expense decreased $4.9 million, or 28.9% to $12.1 million for
the three months ended September 30, 2002 compared to $17.1 million for the same
period in 2001. The decrease in interest expense was due primarily to the
overall decrease in market interest rates and the change in the mix of deposits
between core and time deposits, partially offset by the mix of borrowed money
between overnight and longer-term borrowings. The change in interest rates
decreased overall cost of funds by 141 basis points, or $4.9 million. The change
in the mix of deposits is the result of the Company's relationship pricing
strategy that has favorably increased the deposit mix to a higher concentration
of lower costing core deposits. The decrease in the average balance of time
deposits from $594.7 million at September 30, 2001 to $441.9 million at
September 30, 2002, resulted in the decrease in the volume component of interest
expense of $1.8 million. The time deposit decrease was partially offset with an
increase in the average balance of core deposits from $688.8 million at
September 30, 2001 to 927.4 million at September 30, 2002, resulted in the
increase in the volume component of interest expense of $1.5 million. A $354,000
increase in the borrowed money component of interest expense was the result of
the planned lengthening of the aggregate terms of borrowed money, primarily FHLB
advances, to match the longer-term assets recorded during the period. During
2001, the Company fully paid off repurchase agreements with the FHLB resulting
in a decrease of interest expense of $894,000, and the increased FHLB advances
in 2002 resulting in an increase of interest expense of $1.3 million.
17
Provision for Loan Losses. For the three months ended September 30,
2002, the provision for loan losses was $1.0 million, a decrease of $1.3
million, compared to $2.3 million for the same period in 2001. The third quarter
2001 provision was a result of continued loan portfolio growth, an increase in
non-accrual loans of $9.9 million, and the impact on the Company of the overall
slowing trends of the national and regional economy. The majority of that
increase represented the further deterioration of three criticized loans.
Commencing in the 2001, the Company focused on reinforcing its ongoing loan
portfolio management, enhancing the credit review process to effectively address
the current risk profile of the portfolio and a more aggressive approach to
troubled credits. The result was that non-performing loans have been reduced
from a high of $14.6 million during 2001 to $8.1 million at September 30, 2002.
Net charge-offs were $1.8 million for the three months ended September 30, 2001
compared to net recoveries of $255,000 for the three months ended September 30,
2002. 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, 2002 was $16.0 million, or 1.33% of
loans. This compares to the allowance for loan losses of $14.6 million at
September 30, 2001, or 1.36% of loans. Non-performing assets to total loans and
other real estate owned at September 30, 2002 and 2001 was 0.72% and 1.45%,
respectively.
Non-Interest Income. Other income increased $428,000, or 15.1% for the
quarter ended September 30, 2002 compared to the quarter ended September 30,
2001. The increase was primarily the result of the gain on the sale of
investment securities of $536,000 for the three months ended September 30, 2002
compared to a gain of $156,000 in the same period of 2001.
Non-Interest Expenses. Other expenses increased $800,000, or 5.3% to
$15.9 million for the three months ended September 30, 2002 as compared to $15.1
million for the same period in 2001. Of the increase, $1.1 million was in
salaries and employee benefits and $257,000 was in data processing expense.
These costs continued to reflect the ongoing investment for the Company's
initiatives announced in 2001. These increases were partially offset by a
decrease in other non-interest expenses of $544,000, primarily $270,000
consulting costs, $124,000 advertising and $103,000 FDIC insurance. The lower
FDIC insurance was the result of the reduction of our assessment due to an
improved bank risk rating by our primary regulator.
Income Taxes (Benefit). Applicable income taxes (benefit) increased
$1.3 million for the three months ended September 30, 2002 as compared to the
same period in 2001. The income tax benefit of ($300,000) for the period ended
September 30, 2001 was due to a net loss before taxes, as compared to an income
tax expense of $984,000 resulting from pre-tax earnings for the three months
ended September 30, 2002. In addition, the Company's effective tax rate changed
due primarily to the proportion of tax-free municipal income to income (loss)
before taxes.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
2001
General. Net income increased by $5.6 million for the nine months ended
September 30, 2002 to $5.9 million from $283,000 for the nine months ended
September 30, 2001. Net interest income increased $5.5 million and the provision
for loan losses decreased $4.2 million for the nine months ended September 30,
2002 compared to the same period in 2001. Other income increased by $1.6 million
to $9.3 million for the nine months ended September 30, 2002 as compared to $7.7
million for the nine months ended September 30, 2001. Other expenses increased
by $3.0 million to $46.1 million for the nine months ended September 30, 2002 as
compared to $43.1 million for the nine months ended September 30, 2001.
Net Interest Income. 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.
18
At or for the nine months ended At or for the nine months ended
September 30, 2002 September 30, 2001
----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $ 980,312 $52,445 7.13 % $ 881,786 $55,241 8.35 %
Home equity 29,736 1,164 5.22 23,940 1,570 8.74
Second mortgage 52,413 2,956 7.52 39,432 2,422 8.19
Residential real estate 52,496 2,643 6.71 53,964 3,080 7.61
Installment 56,112 3,624 8.61 60,685 4,133 9.08
---------- ------- ---------- -------
Total loans receivable 1,171,096 62,832 7.15 1,059,807 66,446 8.36
Investment securities (3) 678,013 22,684 4.46 702,688 31,541 5.98
Interest-bearing deposit with banks 7,969 64 1.07 9,257 226 3.26
Federal funds sold 32,250 408 1.69 45,007 1,349 4.00
---------- ------- ---------- -------
Total interest-earning assets 1,889,301 85,988 6.07 1,816,759 99,562 7.31
Cash and due from banks 60,784 63,328
Bank properties and equipment 28,430 28,961
Excess of cost over fair value of
assets acquired 41,009 50,137
Other assets 18,059 16,467
---------- ----------
Non-interest-earning assets 148,282 158,893
---------- ----------
Total Assets $2,037,583 $1,975,652
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 563,083 8,234 1.95 % $400,954 9,364 3.11 %
Savings deposits 308,079 5,325 2.30 199,636 4,123 2.75
Time deposits 454,442 13,667 4.01 619,091 27,322 5.88
---------- ------- ---------- -------
Total interest-bearing deposits
accounts 1,325,604 27,226 2.74 1,219,681 40,809 4.46
---------- ------- ---------- -------
accounts
Borrowed money:
Repurchase agreements with customers 75,486 591 1.04 79,802 2,142 3.58
Repurchase agreements with FHLB 172,603 6,455 4.99
FHLB advances 148,281 5,500 4.95 49,087 2,453 6.66
Federal funds purchased 912 15 2.13 703 30 5.61
Other borrowed money 3,944 166 5.60 1,160 30 3.40
---------- ------- ---------- -------
Total borrowed money 228,623 6,272 3.66 303,355 11,110 4.88
Guaranteed preferred beneficial
interest in Company's
subordinated debt 54,274 3,396 8.34 57,327 4,078 9.49
---------- ------- ---------- -------
Total interest-bearing liabilities 1,608,501 36,894 3.06 1,580,363 55,997 4.72
---------- ------- ---------- -------
Non-interest-bearing demand deposits 281,096 260,363
Other liabilities 13,959 10,438
---------- ----------
Non-interest-bearing liabilities 295,055 270,801
---------- ----------
Total liabilities 1,903,556 1,851,165
Shareholders' equity 134,027 124,487
---------- ----------
Total liabilities and
shareholders' equity $2,037,583 $1,975,652
========== ==========
Net interest income $49,094 $43,565
======= =======
Interest rate spread (4) 3.01 % 2.59 %
====== ======
Net yield on interest earning assets (5) 3.46 % 3.20 %
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.46 % 114.96 %
====== ======
(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.
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), (ii) changes in rate
(changes in rate multiplied by old average volume) and (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume).
Nine months Ended September 30,
2002 vs. 2001
----------------------------------
Increase (Decrease)
Due to
----------------------------------
Volume Rate Net
Interest income
Loans receivable:
Commercial and industrial $ 5,781 $ (8,577) $ (2,796)
Home equity 322 (728) (406)
Second mortgage 745 (211) 534
Residential real estate (81) (356) (437)
Installment (302) (207) (509)
-------- -------- --------
Total loans receivable 6,465 (10,079) (3,614)
Investment securities (1,073) (7,784) (8,857)
Interest-bearing deposits accounts (27) (135) (162)
Federal funds sold (308) (633) (941)
-------- -------- --------
Total interest-earning assets $ 5,057 $(18,631) $(13,574)
-------- -------- --------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 3,042 $ (4,172) $ (1,130)
Savings deposits 1,959 (757) 1,202
Time deposits (6,219) (7,436) (13,655)
-------- -------- --------
Total interest-bearing deposit accounts (1,218) (12,365) (13,583)
Borrowed money:
Repurchase agreements with customers (110) (1,441) (1,551)
Repurchase agreements with FHLB (6,455) (6,455)
FHLB advances 3,822 (775) 3,047
Federal funds purchased 6 (21) (15)
Other borrowed money 107 29 136
-------- -------- --------
Total borrowed money (2,630) (2,208) (4,838)
Guaranteed preferred beneficial
interest in Company's subordinated debt (209) (473) (682)
-------- -------- --------
Total interest-bearing liabilities $ (4,057) $(15,046) $(19,103)
-------- -------- --------
Net change in interest income $ 9,114 $ (3,585) $ 5,529
======== ======== ========
The increase in net interest income (on a tax-equivalent basis) of $5.5
million for the nine months ended September 30, 2002 compared to the nine months
ended September 30, 2001 was due to a $19.1 million decrease in interest expense
partially offset by a $13.6 million decrease in interest income (on a
tax-equivalent basis).
The increase in interest rate spread and margin for the nine months
ended September 30, 2002, compared to the same period 2001, was primarily due to
the decrease in market interest rates and difference in maturities and repricing
characteristics of the interest-bearing liabilities and interest-earning assets.
The cost of funds on interest-bearing liabilities decreased 166 basis points
from 4.72% for the nine months ended September 30, 2001 to 3.06% for the same
period in 2002, while the yield on the average interest-earning assets declined
124 basis points during the same time period.
20
For the nine-month period ended September 30, 2002, the average Prime
rate was 4.75%, as compared to 7.50% for the same period in 2001. This
difference in average Prime rate was primarily responsible for an $18.6 million
decrease in the rate component of interest income and a $15.1 million decrease
in the rate component of interest expense.
The increase in the average balance of loans of $111.3 million, or
10.5% reflects the Company's continued strategy on growth of its core
businesses, with emphasis on commercial and small business lending and community
banking, and is represented by the increase in the volume component of interest
income for loans of $6.5 million. This increase was partially offset by the
decrease in the average balance of investments and federal funds sold of $24.7
million and $12.8 million, respectively, and the related decrease in the volume
component of interest income for investments and federal funds sold of $1.1
million and $308,000, respectively.
Comparing the nine months ended September 30, 2002 to 2001, the
Company's liquidity and asset management strategies focused on changing the mix
of interest-bearing and non-interest-bearing liabilities. By focusing on
relationship accounts and competitive interest rates for core deposits, the
Company attempted to attract the maturing funds of the higher costing time
deposits, along with new funds, to lower costing core deposits. During this
period, the average balance for time deposits decreased $164.7 million while the
average balance for core deposits increased $270.6 million. The volume component
of interest expense for time deposits decreased $6.2 million, partially offset
by the volume component of interest expense for core deposits, which increased
by $5.0 million. By matching longer-term liabilities with longer-term assets,
the Company fully paid off the repurchase agreements with the FHLB and executed
longer-term advances with the FHLB.
The interest expense on the Company's Trust Preferred Securities
decreased $682,000 from the nine months ended September 30, 2001 to the nine
months ended September 30, 2002. During 2002, the Company called the outstanding
$28.0 million of 9.85% Sun Trust I Preferred Securities, issued $20.0 million
Pooled Floating Rate Capital Securities (Sun Trust III) with an initial rate of
6.02%, and issued $10.0 million Pooled Floating Rate Capital Securities (Sun
Trust IV) with an initial rate of 5.51%.
Provision for Loan Losses. For the nine months ended September 30,
2002, the provision for loan losses amounted to $3.2 million, a decrease of $4.2
million, compared to $7.4 million for the same period in 2001. The larger 2001
provision was a result of loan portfolio growth, portfolio maturation,
deterioration of several loans and the impact on the Company of the overall
slowing trends of the national and regional economy. Net charge-offs were $3.3
million for the nine months ended September 30, 2001 compared to net charge-offs
of $554,000 for the nine months ended September 30, 2002. 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.
Non-Interest Income. Other income increased $1.6 million, or 21.0% for
the nine months ended September 30, 2002 compared to the same period in 2001.
The increase was primarily the result of gain on the sale of investment
securities, which amounted to $1.3 million for the nine months ended September
30, 2002 compared to a gain of $275,000 for the same period of 2001. The
increase was also attributed to the increase in the volume of service charges of
$234,000 for the nine-months ended September 30, 2002 compared to the same
period in 2001.
Non-Interest Expenses. Other expenses increased $3.0 million, or 6.9%
to $46.1 million for the nine months ended September 30, 2002 as compared to
$43.1 million for the same period in 2001. Of the increase, $2.8 million was in
salaries and employee benefits, which reflect the ongoing investment for the
Company's initiatives announced in 2001.
21
Income Taxes. Applicable income taxes increased $2.8 million for the
nine months ended September 30, 2002 as compared to the same period in 2001. The
increase resulted from higher pre-tax earnings. In addition, the Company's
effective tax rate changed due to the proportion of tax-free municipal income to
net income before taxes.
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.
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 interest rate changes of up to 300 basis points
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 variance 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 its exposure to interest rate risk.
At September 30, 2002, 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 $107.9 million, representing a
positive cumulative one-year gap ratio of 5.02%. 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
Company's positive position with respect to its exposure to interest rate risk
increased from $24.0 million or 1.17% at June 30, 2002 principally due to the
increase in federal funds sold of $78.7 million during the quarter ended
September 30, 2002. This increase is the result of the liquidity position of the
Company as previously discussed.
22
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at September 30, 2002. 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. Management's allocation is 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 $ 2 222 $ 2,222
Loans receivable 349,780 $215,672 $595,161 $ 39,309 1,199,923
Investment securities 179,334 171,539 281,461 77,433 709,768
Federal funds sold 79,006 - - - 79,006
-------- -------- -------- -------- ----------
Total interest-earning assets 610,342 387,211 876,623 116,742 1,990,918
-------- -------- -------- -------- ----------
Interest-bearing demand deposits 220,310 90,690 272,425 26,843 610,268
Savings deposits 25,764 82,457 199,366 20,416 328,002
Time certificates 117,429 210,260 118,945 1,300 447,934
Federal Home Loan Bank Advances 4,348 33,138 75,277 33,800 146,563
Loan payable 1,160 1,160
Securities sold under agreements to repurchase 74,089 74,089
Guaranteed interest in Company's subordinated debt 30,000 - 29,287 - 59,287
-------- -------- -------- -------- ----------
Total interest-bearing liabilities 473,100 416,543 695,300 82,358 1,667,302
-------- -------- -------- -------- ----------
Periodic Gap $137,241 $(29,332) $181,323 $34,384 $ 323,616
======== ======== ======== ======== ==========
Cumulative Gap $137,241 $107,909 $289,232 $323,616
======== ======== ======== ========
Cumulative Gap Ratio 6.39% 5.02% 13.49% 15.06%
======== ======== ======== ========
Item 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) 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 controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
23
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at September 30, 2002. 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 99.1 Certification Pursuant to 18 U.S.C.ss.1350.
Form 8-K Not applicable
24
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.
Date November 12, 2002 Sun Bancorp, Inc.
------------------------ --------------------------------------
(Registrant)
/s/ Thomas A. Bracken
--------------------------------------
Thomas A. Bracken
President and Chief Executive Officer
Date November 12, 2002 /s/ Dan A. Chila
------------------------ --------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
25
SUN BANCORP, INC.
Vineland, New Jersey
CERTIFICATION
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Thomas A. Bracken, President and Chief Executive Officer of Sun
Bancorp, Inc. (the "Company"), hereby certify that:
1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 of the Company;
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in the report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14(c)) for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within the
Company, particularly during the period in which the report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
report (the "Evaluation Date"); and
(c) presented in the report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in the report
whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Thomas A. Bracken
-----------------------------------
Thomas A. Bracken, President and
Chief Executive Officer
26
SUN BANCORP, INC.
Vineland, New Jersey
CERTIFICATION
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Dan A. Chila, Executive Vice President and Chief Financial Officer
of Sun Bancorp, Inc. (the "Company"), hereby certify that:
1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 of the Company;
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in the report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14(c)) for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within the
Company, particularly during the period in which the report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
report (the "Evaluation Date"); and
(c) presented in the report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in the report
whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Dan A. Chila
-------------------------------------------
Dan A. Chila, Executive Vice President and
Chief Financial Officer
27