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 March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0 - 20957
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SUN BANCORP, INC.
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(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
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(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
$1.00 Par Value Common Stock 11,754,200 May 13, 2003
- ---------------------------- ---------------------------- ------------
Class Number of shares outstanding Date
SUN BANCORP, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Financial
Condition at March 31, 2003 and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2003 2002
------------ -------------
(Dollars in thousands)
ASSETS
Cash and due from banks $ 83,171 $ 65,476
Federal funds sold 239 138
---------- ----------
Cash and cash equivalents 83,410 65,614
Investment securities available for sale (amortized cost -
$754,566; 2003 and $714,962; 2002) 762,042 723,201
Loans receivable (net of allowance for loan losses -
$16,478; 2003 and $16,408; 2002) 1,236,883 1,217,008
Restricted equity investments 12,499 11,610
Bank properties and equipment, net 29,434 29,468
Real estate owned, net 570 904
Accrued interest receivable 12,531 11,012
Goodwill 19,672 19,672
Intangible assets, net 18,858 19,783
Deferred taxes, net 6,515 6,867
Other assets 4,363 7,033
---------- ----------
TOTAL $2,186,777 $2,112,172
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,706,583 $1,690,462
Federal funds purchased 32,000
Advances from the Federal Home Loan Bank 162,912 142,260
Loans payable 1,160
Securities sold under agreements to repurchase 68,655 61,860
Other liabilities 8,431 11,533
---------- ----------
Total liabilities 1,978,581 1,907,275
---------- ----------
Guaranteed preferred beneficial interest in Company's
subordinated debt 59,274 59,274
SHAREHOLDERS' EQUITY
Preferred stock, none issued
Common stock, $1 par value, 25,000,000 shares authorized,
Issued and outstanding: 11,275,319 in 2003 and 11,271,135
in 2002 (2003 includes 563,641 shares - stock dividend
declared) 11,839 11,271
Surplus 122,828 114,930
Retained earnings 10,379 15,030
Accumulated other comprehensive income 4,922 5,438
Treasury stock at cost, 86,250 shares (1,046) (1,046)
---------- ----------
Total shareholders' equity 148,922 145,623
---------- ----------
TOTAL $2,186,777 $2,112,172
========== ==========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months
Ended March 31,
---------------------------
2003 2002
--------- ---------
(Dollars in thousands,
except per share amounts)
INTEREST INCOME:
Interest and fees on loans $21,106 $20,334
Interest on taxable investment securities 5,783 6,593
Interest on non-taxable investment securities 616 505
Dividends on restricted equity investments 173 133
Interest on federal funds sold 11 53
------- -------
Total interest income 27,689 27,618
------- -------
INTEREST EXPENSE:
Interest on deposits 6,800 9,358
Interest on short-term borrowed funds 2,106 1,885
Interest on guaranteed preferred beneficial
interest in Company's subordinated debt 1,058 1,360
------- -------
Total interest expense 9,964 12,603
------- -------
Net interest income 17,725 15,015
PROVISION FOR LOAN LOSSES 675 1,075
------- -------
Net interest income after provision for
loan losses 17,050 13,940
------- -------
OTHER INCOME:
Service charges on deposit accounts 1,754 1,666
Other service charges 102 114
Gain (loss) on sale of bank properties and equipment 53 (14)
Gain on sale of investment securities available for sale 45 183
Gain on sale of branch 1,315
Other 722 852
------- -------
Total other income 3,991 2,801
------- -------
OTHER EXPENSES:
Salaries and employee benefits 8,016 6,741
Occupancy expense 2,455 1,904
Equipment expense 1,360 1,086
Data processing expense 791 830
Amortization of intangible assets 925 1,084
Real estate operations, net (650) (35)
Other 2,627 2,071
------- -------
Total other expenses 15,524 13,681
------- -------
INCOME BEFORE INCOME TAXES 5,517 3,060
INCOME TAXES 1,759 923
------- -------
NET INCOME $3,758 $2,137
====== ======
Basic earnings per share $0.32 $0.19
===== =====
Diluted earnings per share $0.31 $0.19
===== =====
Weighted average shares, basic 11,745,312 11,129,855
========== ==========
Weighted average shares, diluted 12,273,694 11,461,229
========== ==========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
4
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
-------------------------
2003 2002
----------- -----------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 3,758 $ 2,137
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 675 1,075
Depreciation 634 569
Net amortization of investments securities 1,521 468
Amortization of intangible assets 925 1,084
Gain on sale of investment securities available for sale (45) (183)
(Gain) loss on sale of bank properties and equipment (53) 14
Gain on sale of branch (1,315)
Gain on sale of real estate owned (651) (26)
Deferred income taxes 599 (200)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (1,519) (1,550)
Other assets 2,670 (3,871)
Other liabilities (3,102) 4,698
--------- ---------
Net cash provided by operating activities 4,097 4,215
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (144,354) (182,633)
Purchases of restricted equity securities (889) (334)
Proceeds from maturities, prepayments or calls of investment
securities available for sale 93,260 145,548
Proceeds from sale of investment securities available for sale 10,014 5,308
Net increase in loans (20,754) (49,164)
Purchase of bank properties and equipment (632) (393)
Proceeds from the sale of bank properties and equipment 85
Proceeds from sale of real estate owned 1,189 61
--------- ---------
Net cash used in investing activities (62,081) (81,607)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in deposits 35,322 (29,262)
Decrease in deposits resulting from branch sale (17,886)
Net borrowings under line of credits, advances and repurchase
agreements 59,447 65,532
Principal payments on loan payable (1,160)
Proceeds from other borrowings 25,000
Proceeds from exercise of stock options 453
Treasury stock purchased (315)
Proceeds from issuance of common stock 57 103
--------- ---------
Net cash provided by financing activities 75,780 61,511
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,796 (15,881)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 65,614 79,082
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 83,410 $ 63,201
========= =========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
5
SUN BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except per share amounts, are in
thousands.)
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Sun Capital
Trust ("SunTrust I") (liquidated in April 2002), Sun Capital Trust II
("SunTrust II"), Sun Capital Trust III ("SunTrust III"), Sun Capital Trust
IV ("SunTrust IV"), Sun National Bank (the "Bank") and the Bank's wholly
owned subsidiaries, Med-Vine, Inc., Sun Financial Services, L.L.C. and 2020
Properties, L.L.C. All significant intercompany balances and transactions
have been eliminated.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q, and therefore, do
not include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America. However, all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the financial
statements, have been included. These financial statements should be read
in conjunction with the audited financial statements and the accompanying
notes thereto included in the Company's Annual Report for the period ended
December 31, 2002. The results for the three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2003 or any other period.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. The significant
estimates include the allowance for loan losses, goodwill, core deposit and
other intangible assets, and deferred tax asset valuation allowance. Actual
results could differ from those estimates.
Stock dividend - On March 19, 2003, the Company's Board of Directors
declared a 5% stock dividend paid on April 21, 2003 to shareholders of
record on April 7, 2003. Accordingly, per share data and equity accounts
have been adjusted for all periods presented.
Goodwill and Other Intangible Assets - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when
those assets were initially recognized. However, SFAS No. 142 did not
change the accounting prescribed for certain acquisitions by banking and
thrift institutions, resulting in continued amortization of the excess of
cost over fair value of net assets acquired under SFAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which allows financial institutions meeting certain
criteria to reclassify their unidentifiable intangible asset balances to
goodwill and retroactively cease amortization beginning as of January 1,
2002. The Company adopted SFAS No. 147 on October 1, 2002, and as required
by the standard, the Company restated earnings for the quarterly periods
ended March 31, 2002, June 30, 2002 and September 30, 2002.
6
A reconciliation of previously reported net income and earnings per share
to the amounts adjusted for the exclusion of goodwill amortization, net of
tax, follows. The per share amounts have been restated to retroactively
give effect to stock dividends.
Three Months
Ended March 31,
2002
---------------
Net income:
Reported net income $1,593
Add: goodwill amortization, net of tax 544
------
Adjusted net income $2,137
======
Basic earnings per share:
Reported basic earnings per share $0.14
Add: goodwill amortization, net of tax 0.05
-----
Adjusted basic net income per share $0.19
Diluted earnings per share:
Reported diluted earnings per share $0.14
Add: goodwill amortization, net of tax 0.05
-----
Adjusted diluted net income per share $0.19
=====
Accounting for Stock Options - The Company accounts for stock-based
compensation using the intrinsic value method that recognizes as expense
the difference between the market value of the stock and the exercise price
at grant date. The Company has not recognized any compensation expense
under this method. The Company discloses the pro forma effects of
accounting for stock-based compensation using the fair value method (using
the Black-Scholes model) as described in SFAS No. 123 issued by the FASB
and the method of accounting for stock-based employee compensation and the
effect of the method used on reported results described in SFAS No. 148.
At March 31, 2003, the Company had three stock-based employee compensation
plans. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
For the Three Months
Ended
March 31,
--------------------
2003 2002
------- -------
Net income, as reported $3,758 $2,137
Deduct: Total stock-based employee
compensation expense determined
under fair value method (net of tax) (353) (765)
------ ------
Pro forma net income $3,405 $1,372
====== ======
Earnings per share:
Basic - as reported $0.32 $0.19
Basic - pro forma $0.29 $0.12
Diluted - as reported $0.31 $0.19
Diluted - pro forma $0.28 $0.12
7
Recent Accounting Principles - In November 2002, the FASB issued FASB
Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness
of Others. This Interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation also incorporates, without change, the
guidance in FIN No. 34, Disclosure of Indirect Guarantees of Indebtedness
of Others, which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
currently has no guarantees that would be required to be recognized,
measured or disclosed under this Interpretation.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company is not a
party to any variable interest entities covered by the Interpretation.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, except for the provision of
this statement that relate to SFAS 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003 and for
hedging relationships designated after June 30, 2003. All provisions are to
be applied prospectively except for the provision of this statement that
relate to SFAS 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003. These provisions are to
be applied in accordance with their respective effective dates. The
provisions that relate to SFAS 133 Implementation Issues have not had an
impact on the Company's financial position or results of operations.
Management of the Company will evaluate the impact, if any, the adoption of
this statement might have on the Company's results of operations or
financial condition for contracts entered into or modified after June 30,
2003.
(2) Loans
The components of loans as of March 31, 2003 and December 31, 2002 were as
follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Commercial and industrial $1,062,503 $1,043,885
Home equity 50,766 44,603
Second mortgages 44,505 47,458
Residential real estate 41,772 43,375
Installment 53,815 54,095
---------- ----------
Total gross loans 1,253,361 1,233,416
Allowance for loan losses (16,478) (16,408)
---------- ----------
Net Loans $1,236,883 $1,217,008
========== ==========
Non-accrual loans $9,202 $9,963
====== ======
8
(3) Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
For the three month
period ended For the year ended
March 31, 2003 December 31, 2002
------------------- ------------------
Balance, beginning of period $16,408 $13,332
Charge-offs (658) (1,609)
Recoveries 53 510
------- -------
Net charge-offs (605) (1,099)
Provision for loan losses 675 4,175
------- -------
Balance, end of period $16,478 $16,408
======= =======
The provision for loan losses charged to expense is based upon past loan
loss experience and an evaluation of estimated losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114
and 118. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan.
An insignificant delay or insignificant shortfall in amount of payments
does not necessarily result in a loan being identified as impaired. For
this purpose, delays less than 90 days are considered to be insignificant.
Impairment losses are included in the provision for loan losses. Large
groups of smaller balance, homogeneous loans are collectively evaluated for
impairment, except for those loans restructured under a troubled debt
restructuring. Loans collectively evaluated for impairment include consumer
loans and residential real estate loans, and are not included in the data
that follow:
March 31, 2003 December 31, 2002
-------------- -----------------
Impaired loans with related reserve for loan
losses calculated under SFAS No. 114 $34,166 $25,511
Impaired loans with no related reserve for loan
losses calculated under SFAS No. 114 3,471 4,051
------- -------
Total impaired loans $37,637 $29,562
======= =======
For the three
months ended For the year ended
March 31, 2003 December 31, 2002
-------------- ------------------
Average impaired loans $35,867 $13,471
======= =======
Interest income recognized on impaired loans $ 518 $ 1,936
======= =======
Cash basis interest income recognized on impaired loans $ 550 $ 2,013
======= =======
The increase in average impaired loans from the year ended December 31,
2002 to the three months ended March 31, 2003 is primarily two credits
aggregating $13.5 million that were classified in September 2002 as
restructured loans within the definition of SFAS No. 15. These loans have
had a temporary modification of terms to provide near-term cash flow relief
to the borrowers. At March 31, 2003 and December 31, 2002, these loans, as
restructured, were current, fully performing and well collateralized. These
loans were not classified as non-accrual and are not considered
non-performing. In addition, during the quarter ended March 31, 2003, one
$8.0 million commercial loan
9
was added to the impaired loan listing. This loan was not classified as
non-accrual and is not considered non-performing.
(4) Deposits
Deposits consist of the following major classifications:
March 31, 2003 December 31, 2002
-------------- -----------------
Demand deposits - interest bearing $ 683,093 $ 627,394
Demand deposits - non-interest bearing 317,657 322,433
Savings deposits 322,530 328,508
Time certificates under $100,000 294,433 306,622
Time certificates $100,000 or more 88,870 105,505
---------- ----------
Total $1,706,583 $1,690,462
========== ==========
The Company is in the first phase of its branch rationalization program,
which at March 31, 2003 one branch had been sold with deposits of $17.9
million, three were under formal contract to be sold, and one branch
consolidation into an existing office. The Company expects a further
reduction, through sales and consolidations, of seven additional branches
by early 2004. The Company anticipates approximately $100 million of
additional deposits will be sold during the branch rationalization program.
(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:
March 31, 2003 December 31, 2002
-------------- -----------------
Convertible rate advances $ 45,000 $ 45,000
Term amortizing advances 94,712 89,060
Term non-amortizing advances 23,200 8,200
-------- --------
Total $162,912 $142,260
======== ========
Term amortizing advances - On February 21, 2003, the Company executed a
$10.0 million term advance, at a rate of 3.78%, maturing on February 21,
2013. Principal and interest monthly payments are $100,200 during the term
of the advance.
Term non-amortizing advances - On February 14, 2003, the Company executed a
$15.0 million term advance, at a rate of 3.39%, maturing on February 14,
2008. Monthly payments are interest only during the term of the advance.
(6) 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 the
statement of financial position. Amounts categorized as other comprehensive
income represent net unrealized gains or losses on investment securities
available for sale, net of income taxes. Total comprehensive income (loss)
for the three-month periods ended March 31, 2003 and 2002 was $3,242,000
and ($1,823,000), respectively.
10
(7) Real Estate Operations, net
The results of the Company's real estate operations were comprised of the
following:
For the Three Months
Ended March 31,
---------------------
2003 2002
------- -------
Gain on sales of real estate $(651) $(26)
Operating expenses, net of rental income 1 (9)
----- ----
Total $(650) $(35)
===== ====
(8) Earnings Per Share
Basic earnings per share is computed by dividing income available to
shareholders (net income), by the weighted average number of shares of
common stock net of treasury shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock net of treasury shares outstanding
increased by the number of common shares that are assumed to have been
purchased with the proceeds from the exercise of the options (treasury
stock method) along with the assumed tax benefit from the exercise of
non-qualified options. These purchases were assumed to have been made at
the average market price of the common stock, which is based on the daily
closing price. Retroactive recognition has been given to market values,
common stock outstanding and potential common shares for periods prior to
the date of the Company's stock dividends.
For the Three Months
Ended March 31,
---------------------------
2003 2002
------------- ------------
Net income $ 3,758 $ 2,137
Dilutive stock options outstanding 2,313,748 1,611,419
Average exercise price per share $ 9.19 $ 8.59
Average market price - diluted basis $ 13.42 $ 11.93
Average common shares outstanding 11,745,312 11,129,855
Increase in shares due to exercise of options - diluted basis 528,382 331,374
----------- -----------
Adjusted shares outstanding - diluted 12,273,694 11,416,229
Net income per share - basic $ 0.32 $ 0.19
Net income per share - diluted $ 0.31 $ 0.19
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 424,224 1,163,442
======= =========
11
(9) Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
Guaranteed preferred beneficial interest in Company's subordinated debt
consists of the following:
March 31, 2003 December 31, 2002
-------------- -----------------
Sun Trust II $29,274 $29,274
Sun Trust III 20,000 20,000
Sun Trust IV 10,000 10,000
------- -------
$59,274 $59,274
======= =======
The sole asset of Sun Trust II is $29.9 million original principal amount
of 8.875% Junior Subordinated Debentures issued by the Company. The Company
has the right to optionally redeem Sun Trust II Debentures prior to the
maturity date of December 31, 2028, on or after December 31, 2003, at 100%
of the stated liquidation amount, plus accrued and unpaid distributions, if
any, to the redemption date. At March 31, 2002 and December 31, 2002, the
Company had repurchased 61,300 shares.
The sole asset of Sun Trust III is $20.0 million of Floating Rate Junior
Subordinated Debentures issued by the Company. The Coupon Rate at March 31,
2003 was 5.32%. The Company has the right to optionally redeem Sun Trust
III Debentures prior to the maturity date of April 22, 2032, on or after
April 22, 2007, at 100% of the stated liquidation amount, plus accrued and
unpaid distributions, if any, to the redemption date.
The sole asset of Sun Trust IV is $10.0 million of Floating Rate Junior
Subordinated Debentures issued by the Company. The Coupon Rate at March 31,
2003 was 5.03%. The Company has the right to optionally redeem Sun Trust IV
Debentures prior to the maturity date of October 7, 2032, on or after July
7, 2007, at 100% of the stated liquidation amount, plus accrued and unpaid
distributions, if any, to the redemption date.
12
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 2003 increased by $74.6 million, or 3.5% to
$2.19 billion as compared to $2.11 billion at December 31, 2002. The increase
was primarily due to an increase in investment securities of $38.8 million, in
loans receivable of $19.9 million and in cash and cash equivalents of $17.8
million. The overall increase in total assets continues to reflect the Company's
strategy on growth of its core businesses, with emphasis on commercial lending
and retail banking, while sustaining adequate liquidity, managing interest rate
risk and maintaining strong capital.
The Company is in the first phase of its branch rationalization
program, which at March 31, 2003 one branch had been sold, three were under
formal contract to be sold, and one branch consolidation into an existing
office. Completion of this phase is expected by the end of the second quarter,
or early third quarter. The Company expects a further reduction, through sales
and consolidations, of seven additional branches by early 2004.
Cash and cash equivalents increased $17.8 million, from $65.6 million
at December 31, 2002 to $83.4 million at March 31, 2003. This increase in end of
period balances represents a temporary increase. The daily average balance of
cash and cash equivalents was $60.4 million for the first quarter 2003 compared
to $60.7 million for the year ended December 31, 2002.
Investment securities available for sale increased $38.8 million or
5.4%, from $723.2 million at December 31, 2002 to $762.0 million at March 31,
2003. The increase in investment securities during the first quarter 2003 was
consistent with the Company's asset and liability management goals which are
designed to maintain a portfolio of high quality investments which optimizes
interest income within acceptable limits of safety and liquidity.
Net loans receivable at March 31, 2003 were $1.24 billion, an increase
of $19.9 million from $1.22 billion at December 31, 2002. The increase was
primarily from increased originations of commercial and industrial loans. The
increase in loans was match funded primarily with the $20.7 million net increase
in longer-term advances from the Federal Home Loan Bank. These advances are in
line with the Company's ALCO interest rate sensitivity policies. During the
first quarter 2003, the Company experienced significant loan prepayments
aggregating $50 million. Approximately $23 million of these prepayments were
from three credits, which were refinanced with longer term fixed rated loans
from non-depository institutions.
Non-performing loans were $10.0 million at March 31, 2003 compared to
$11.5 million at March 31, 2002 and $12.5 million at December 31, 2002. The
ratio of non-performing assets to total loans and other real estate was .84% at
March 31, 2003 compared to 1.12% at March 31, 2002 and 1.08% at December 31,
2002. The ratio of allowance for loan losses to total non-performing loans was
165.1% at March 31, 2003 compared to 118.3% at March 31, 2002 and 131.6% at
December 31, 2002.
Total deposits were $1.71 billion at March 31, 2003, reflecting a $16.1
million increase over December 31, 2002. Excluding the $17.9 million decrease in
deposits resulting from the sale of a branch, total deposits increased $35.3
million. The Company's core deposits, (demand and savings deposits) increased
$44.9 million, or 3.5% while the non-core deposits (time deposits) declined
$28.8 million, or 7.0%. The Company's deposit strategy stresses the importance
of building a relationship with each and every customer. To help facilitate
these relationships, the Company has continued during the first quarter 2003 to
focus on its relationship pricing strategy. This relationship strategy has
enabled the Company to favorably increase the deposit mix with a higher
concentration of core deposits.
Federal funds purchased increased $32.0 million and securities sold
under agreement to repurchase increased $6.8 million from December 31, 2002 to
March 31, 2003, reflecting the seasonality of these borrowings.
14
Total shareholders' equity increased by $3.3 million, from $145.6
million at December 31, 2002, to $148.9 million at March 31, 2003. The increase
was primarily the result of first quarter earnings amounting to $3.8 million,
partially offset by a $516,000 decrease in accumulated other comprehensive
income.
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 $83.4 million at March 31, 2003, the
Company has additional secured borrowing capacity with the FHLB and other
sources. The Company plans to liquidate a portion of its short-term investment
portfolio to fund the approximately $100 million of additional deposits
anticipated to be sold during the branch rationalization program. Management
will continue to monitor the Company's liquidity in order to maintain it at a
level that is adequate but not excessive.
The Company's largest cash flows are both investing and financing
activities. During the quarter ended March 31, 2003, the Company's primary
source of cash from investing activities was the proceeds from the sale,
maturities, prepayments or calls of investment securities. The primary use of
cash from investing activities was the purchase of investment securities and the
increase in loans. Financing activities, which provided $75.8 million of net
cash, was primarily the net increase in deposits, after a branch sale, and net
borrowings under lines of credit, advances and repurchase agreements. The
activity during the first quarter 2003 reflects the Company's continued focus on
overall balance sheet and capital management, concentrating on growth of its
core businesses, with emphasis on commercial lending and retail banking, while
managing the Company's liquidity, interest-rate risk and capital resources.
Management has developed a capital plan for the Company and the Bank
that should allow the Company and the Bank to grow capital internally at levels
sufficient for achieving its 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 Board. The portion that exceeds the 25% capital limitation
qualifies as Tier 2, or supplementary capital of the Company. At March 31, 2003,
of the Company's $59.3 million trust preferred securities, $48.0 million qualify
as Tier 1 capital and $11.3 million qualify as Tier 2 capital.
Comparison of Operating Results for the Three Months Ended March 31, 2003 and
2002
Net income increased by $1.7 million, or 75.8% for the three months
ended March 31, 2003 to $3.8 million from $2.1 million for the three months
ended March 31, 2002. As more fully described below, the increase in net income
was due to an increase of $2.7 million in net interest income, a decrease of
$400,000 in the provision for loan losses and an increase of $1.2 million in
non-interest income, partially offset by an increase in non-interest expenses of
$1.8 million.
Net Interest Income. The increase in the interest rate spread and
margin for the three months ended March 31, 2003 of 3.23% and 3.60%,
respectively, compared to 2.89% and 3.36%, respectively, for the same period
2002, 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 yield on the average interest-earning assets
declined 53 basis points from 6.13% for the three months ended March 31, 2002 to
5.59% for the same period in 2003, while cost of funds on average
interest-bearing liabilities decreased 87 basis points from 3.24% for the three
months ended March 31, 2002 to 2.37% for the same period in 2003.
15
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
March 31, 2003 March 31, 2002
---------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,059,424 $17,926 6.77% $938,183 $16,803 7.16%
Home equity 46,931 498 4.24 24,495 346 5.65
Second mortgage 45,698 811 7.10 49,449 939 7.59
Residential real estate 41,085 764 7.44 54,593 1,027 7.53
Installment 53,186 1,107 8.32 57,014 1,219 8.55
---------- ------- ---------- -------
Total loans receivable 1,246,324 21,106 6.77 1,123,734 20,334 7.24
Investment securities (3) 746,622 6,876 3.68 673,451 7,459 4.43
Interest-bearing deposit with banks 5,653 11 0.81 9,337 29 1.23
Federal funds sold 3,556 11 1.19 12,534 53 1.68
---------- ------- ---------- -------
Total interest-earning assets 2,002,155 28,004 5.59 1,819,056 27,875 6.13
---------- ------- ---------- -------
Cash and due from banks 60,356 61,818
Bank properties and equipment 29,501 28,134
Goodwill and intangible assets 39,105 42,943
Other assets 33,936 13,216
---------- ----------
Non-interest-earning assets 162,898 146,111
---------- ----------
Total assets $2,165,053 $1,965,167
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 644,085 2,085 1.29% $ 528,334 2,575 1.95%
Savings deposits 324,839 1,269 1.56 294,303 1,720 2.34
Time deposits 409,292 3,446 3.37 463,114 5,063 4.37
---------- -------- ---------- -------
Total interest-bearing deposit
accounts 1,378,216 6,800 1.97 1,285,751 9,358 2.91
---------- -------- ---------- -------
Borrowed money:
Repurchase agreements with customers 62,838 95 0.60 78,905 184 0.93
FHLB advances 175,014 1,980 4.53 133,461 1,674 5.02
Federal funds purchased 7,486 31 1.67 711 4 2.06
Other borrowed money - - 1,993 23 4.69
---------- -------- ---------- -------
Total borrowed money 245,338 2,106 3.43 215,070 1,885 3.51
---------- -------- ---------- -------
Guaranteed preferred beneficial interest
in Company's subordinated debt 59,274 1,058 7.14 57,327 1,360 9.49
---------- ----- ---------- -------
Total interest-bearing liabilities 1,682,828 9,964 2.37 1,558,148 12,603 3.24
---------- ----- ---------- -------
Non-interest-bearing demand deposits 303,256 266,272
Other liabilities 31,369 8,955
---------- ----------
Non-interest-bearing liabilities 334,625 275,227
---------- ----------
Total liabilities 2,017,453 1,833,375
Shareholders' equity 147,600 131,792
---------- ----------
Total liabilities and shareholders'
equity $2,165,053 $1,965,167
========== ==========
Net interest income $18,040 $15,272
======= =======
Interest rate spread (4) 3.23% 2.89%
====== ======
Net yield on interest-earning assets (5) 3.60% 3.36%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities
118.98% 116.74%
====== ======
(footnotes on the following page)
16
- ----------------------------------------------------
(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.
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 March 31,
2003 vs. 2002
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Volume Rate Net
Interest income
Loans receivable:
Commercial and industrial $ 2,087 $ (964) $ 1,123
Home equity 255 (103) 152
Second mortgage (69) (59) (128)
Residential real estate (251) (12) (263)
Installment (80) (32) (112)
------- ------- -------
Total loans receivable 1,942 (1,170) 772
Investment securities 757 (1,340) (583)
Interest-bearing deposits accounts (9) (9) (18)
Federal funds sold (30) (12) (42)
------- ------- -------
Total interest-earning assets $ 2,660 $(2,531) $ 129
------- ------- -------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 489 $ (979) $ (490)
Savings deposits 164 (615) (451)
Time deposits (543) (1,074) (1,617)
------- ------- -------
Total interest-bearing deposit accounts 110 (2,668) (2,558)
Borrowed money:
Repurchase agreements with customers (32) (57) (89)
FHLB advances 482 (176) 306
Federal funds purchased 28 (1) 27
Other borrowed money (23) - (23)
------- ------- -------
Total borrowed money 455 (234) 221
Guaranteed preferred beneficial interest
in Company's subordinated debt 45 (347) (302)
------- ------- -------
Total interest-bearing liabilities $ 610 $(3,249) $(2,639)
------- ------- -------
Net change in interest income $ 2,050 $ 718 $ 2,768
======= ======= =======
17
Net interest income (on a tax-equivalent basis) increased $2.8 million,
or 18.1% to $18.0 million for the quarter ended March 31, 2003 compared to $15.3
million for the same period in 2002. This increase is primarily due to the
change in the volume of interest-earning assets and interest-bearing
liabilities, as well as the market rate decreases between periods. From the
volume component, net interest income (on a tax-equivalent basis) increased $2.1
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 $718,000.
Interest income (on a tax-equivalent basis) increased $129,000, to
$28.0 million for the three months ended March 31, 2003 compared to $27.9
million for the same period in 2002. The increase in interest income was due to
the increased average balance of interest-earnings asset, offset by the
continued drop in interest rates, which lowered the yield on average
interest-earning assets by 53 basis points. The majority of this variance was
from loans receivable. The 10.9% increase in average balance of loans receivable
from $1.12 billion at March 31, 2002 to $1.25 billion at March 31, 2003 produced
an increase in interest income of $1.9 million, which was offset by the decrease
in yield of 46 basis points that produced a decrease in interest income of $1.2
million. In addition, interest income on investment securities decreased
$583,000 caused by primarily due to a decrease in yield of 75 basis points.
Interest expense decreased $2.6 million, or 20.9%, to $10.0 million for
the three months ended March 31, 2003 compared to $12.6 million for the same
period in 2002. The decrease in interest expense was due primarily to the
overall decrease in market interest rates and the change in the mix of deposits
between core and time deposits, refinancing a portion of the Company's trust
preferred securities from fixed-rate to floating-rate securities, 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 87
basis points, resulting in a decrease in interest expense of $3.2 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 $463.1 million at March 31, 2002 to $409.3 million
at March 31, 2003, resulted in the decrease in the volume component of interest
expense of $543,000. The time deposit decrease was offset with an increase in
the average balance of core deposits from $822.6 million at March 31, 2002 to
$968.9 million at March 31, 2003, resulted in the increase in the volume
component of interest expense of $653,000. A $455,000 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. In addition, for the entire
quarter ended March 31, 2002, the Company had outstanding $28.0 million of 9.85%
Sun Trust I Preferred Securities, which the Company called during the second
quarter 2002 and replaced with two floating rate securities aggregating $30
million. The refinancing of these securities decreased cost of funds by 234
basis points, resulting in a decrease in interest expense of $347,000.
Provision for Loan Losses. For the three months ended March 31, 2003,
the provision for loan losses was $675,000, a decrease of $400,000, compared to
$1.1 million for the same period in 2002. The Company focuses on its loan
portfolio management and credit review process to effectively address the
current risk profile of the portfolio and aggressively manage troubled credits.
The result was that non-performing loans have been reduced from a high of $14.6
million during 2001 to $10.0 million at March 31, 2003. 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
March 31, 2003 was $16.5 million or 1.31% of loans. This compares to the
allowance for loan losses of $13.6 million at March 31, 2002, or 1.18% of loans.
18
Non-Interest Income. Non-interest income increased $1.2 million, or
42.5% for the three-month period ended March 31, 2003 compared to the
three-month period ended March 31, 2002. The increase was the result of a gain
on sale of a branch of $1.3 million during the first quarter 2003, partially
offset by a $138,000 reduction on gain on sale of investment securities and a
decrease of $130,000 of other income. The branch sale was part of the first
phase of the Company's branch rationalization program mentioned earlier.
Non-Interest Expenses. Non-interest expenses increased $1.8 million, or
13.5% to $15.5 million for the three months ended March 31, 2003 as compared to
$13.7 million for the same period in 2002. Of the increase, $1.3 million was in
salaries and employee benefits, $551,000 was in occupancy expense and $556,000
was other non-interest expense. These increases were partially offset by the
gain on sale of real estate owned of $651,000.
Income Taxes. Applicable income taxes increased $836,000 for the three
months ended March 31, 2003 as compared to the same period in 2002. The increase
resulted from higher pre-tax earnings.
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 changes of up to 300 basis points in interest
rates on net interest income. Sudden changes to interest rates should not have a
material impact to results of operations. Should the Bank experience a positive
or negative mismatch in excess of the approved range, it has a number of
remedial options. The Bank has the ability to reposition its investment
portfolio to include securities with more advantageous repricing and/or maturity
characteristics. It can attract variable- or fixed-rate loan products as
appropriate. The Bank can also price deposit products to attract deposits with
maturity characteristics that can lower their exposure to interest rate risk.
At March 31, 2003, the Company had a positive position with respect to
its exposure to interest rate risk. Total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing during the same time period by $86.8 million, representing a
positive cumulative one-year gap ratio of 3.97%. 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.
19
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at March 31, 2003 All amounts are categorized by their actual
maturity or repricing date with the exception of interest-bearing demand
deposits and savings deposits. As a result of prior experience during periods of
rate volatility and management's estimate of future rate sensitivities, the
Company allocates the interest-bearing demand deposits and savings deposits into
categories noted below, based on the estimated duration of those deposits.
Maturity/Repricing Time Periods
---------------------------------------------------------------
0-3 Months 4-12 Months 1-5 Years Over 5 Yrs. Total
---------- --------------- --------- ----------- ---------
FHLB interest-bearing deposit $ 2,549 $ 2,549
Loans receivable 422,376 $ 197,840 $ 603,011 $ 30,134 1,253,361
Investment securities 205,625 191,029 210,284 160,127 767,065
Federal funds sold 239 -- -- -- 239
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 630,789 388,869 813,295 190,261 2,023,214
---------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 234,946 140,526 279,598 28,023 683,093
Savings deposits 25,174 75,524 202,348 19,484 322,530
Time certificates 89,812 168,223 124,132 1,136 383,303
Federal funds purchased 32,000 32,000
Federal Home Loan Bank Advances 24,602 14,096 112,028 12,186 162,912
Securities sold under agreements
to repurchase 68,655 68,655
Guaranteed interest in Company's
subordinated debt 30,000 29,274 -- -- 59,274
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 505,189 427,643 718,106 60,829 1,711,767
---------- ---------- ---------- ---------- ----------
Periodic Gap $ 125,600 $ (38,774) $ 95,189 $ 129,432 $ 311,447
========== ========== ========== ========== ==========
Cumulative Gap $ 125,600 $ 86,826 $ 182,015 $ 311,447
========== ========== ========== ==========
Cumulative Gap Ratio 5.74% 3.97% 8.32% 14.24%
========== ========== ========== ==========
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.
20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at March 31, 2003. From time to time, the Company is a party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 Certification Pursuant toss.906 of the Sarbanes-Oxley Act
of 2002.
Form 8-K The Company filed a Current Report on Form 8-K on March 24,
2003 to report the declaration of a 5% stock dividend.
21
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: May 13, 2003 /s/ Thomas A. Bracken
------------ ---------------------------------------
Thomas A. Bracken
President and Chief Executive Officer
Date: May 13, 2003 /s/ Dan. A. Chila
------------ ---------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
22
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
March 31, 2003 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 officer 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: May 13, 2003 /s/ Thomas A. Bracken
------------ ---------------------------------
Thomas A. Bracken, President and
Chief Executive Officer
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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
March 31, 2003 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 officer 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: May 13, 2003 /s/ Dan A. Chila
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Dan A. Chila, Executive Vice President and
Chief Financial Officer
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