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 June 30, 2004
-------------------
OR [X] 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 (I.R.S. Employer
incorporation or organization) Identification)
226 Landis Avenue, Vineland, New Jersey 08360
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
(856) 691 - 7700
----------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- --------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes X No
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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 17,084,463 August 4, 2004
- ----------------------------- ---------- ---------------
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 June 30, 2004 and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Income
for the Three and Six Months Ended June 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 2004 5
Unaudited Condensed Consolidated Statements of Cash Flows 6
for the Six Months Ended June 30, 2004 and 2003
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 24
ITEM 4. CONTROLS AND PROCEDURES 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Changes in Securities, Use of Proceeds 27
and Issuer Purchases of Equity Securities
ITEM 3. Defaults upon Senior Securities 27
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
CERTIFICATIONS 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except par value amounts)
June 30, December 31,
2004 2003
----------- -----------
ASSETS
Cash and due from banks $ 83,491 $ 78,841
Interest-bearing bank balances 18,499 2,789
Federal funds sold 51 487
----------- -----------
Cash and cash equivalents 102,041 82,117
Investment securities available for sale (amortized cost -
$820,319; 2004 and $960,877; 2003) 808,472 963,428
Loans receivable (net of allowance for loan losses -
$18,701; 2004 and $17,614; 2003) 1,480,451 1,364,465
Restricted equity investments 15,505 12,551
Bank properties and equipment, net 32,215 34,093
Real estate owned, net 2,211 4,444
Accrued interest receivable 11,258 11,266
Goodwill 50,581 50,600
Intangible assets, net 23,875 26,195
Deferred taxes, net 13,564 8,465
Bank owned life insurance 33,617 32,785
Other assets 7,162 9,078
----------- -----------
TOTAL $ 2,580,952 $ 2,599,487
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 2,042,984 $ 2,111,125
Advances from the Federal Home Loan Bank 154,418 163,964
Federal funds purchased - 2,500
Securities sold under agreements to repurchase - FHLB 50,000 -
Securities sold under agreements to repurchase - customers 69,425 55,934
Junior subordinated debentures 72,167 72,167
Other liabilities 6,517 8,079
----------- -----------
Total liabilities 2,395,511 2,413,769
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued
Common stock, $1 par value, 25,000,000 shares authorized,
issued: 14,077,112; 2004 and 13,381,310; 2003 14,077 13,381
Additional paid in capital 167,293 151,631
Retained earnings 12,541 20,062
Accumulated other comprehensive (loss) income (7,424) 1,690
Treasury stock at cost, 90,562 shares (1,046) (1,046)
----------- -----------
Total shareholders' equity 185,441 185,718
----------- -----------
TOTAL $ 2,580,952 $ 2,599,487
=========== ===========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 21,895 $ 20,998 $ 42,945 $ 42,104
Interest on taxable investment securities 5,821 5,635 12,150 11,418
Interest on non-taxable investment securities 505 625 1,011 1,241
Interest on restricted equity investments 119 209 225 382
Interest on federal funds sold 21 18 83 29
------------ ------------ ------------ ------------
Total interest income 28,361 27,485 56,414 55,174
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 5,217 6,537 10,658 13,337
Interest on short-term borrowed funds 1,789 2,243 3,588 4,349
Interest on debentures 812 - 1,621 -
Interest on guaranteed preferred beneficial interest
in Company's subordinated debt - 1,048 - 2,106
------------ ------------ ------------ ------------
Total interest expense 7,818 9,828 15,867 19,792
------------ ------------ ------------ ------------
Net interest income 20,543 17,657 40,547 35,382
PROVISION FOR LOAN LOSSES 735 710 1,360 1,385
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 19,808 16,947 39,187 33,997
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Service charges on deposit accounts 2,209 1,932 4,371 3,686
Other service charges 210 104 306 206
Gain (loss) on sale of bank properties and equipment 2,321 (44) 2,321 9
Gain on sale of loans 105 - 111 -
Gain on sale of investment securities 578 825 903 870
Gain on sale of branch deposits - - - 1,315
Other 1,407 1,051 2,592 1,773
------------ ------------ ------------ ------------
Total non-interest income 6,830 3,868 10,604 7,859
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 9,099 8,165 18,615 16,181
Occupancy expense 2,702 2,156 5,165 4,611
Equipment expense 1,731 1,414 3,276 2,774
Data processing expense 1,018 838 1,983 1,629
Amortization of intangible assets 1,160 925 2,320 1,850
Other 3,630 2,896 6,472 4,873
------------ ------------ ------------ ------------
Total non-interest expenses 19,340 16,394 37,831 31,918
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 7,298 4,421 11,960 9,938
INCOME TAXES 2,268 1,294 3,509 3,053
------------ ------------ ------------ ------------
NET INCOME $ 5,030 $ 3,127 $ 8,451 $ 6,885
============ ============ ============ ============
Basic earnings per share $ 0.36 $ 0.25 $ 0.60 $ 0.56
============ ============ ============ ============
Diluted earnings per share $ 0.33 $ 0.24 $ 0.56 $ 0.53
============ ============ ============ ============
Weighted average shares - basic 13,982,111 12,337,603 13,974,320 12,335,104
============ ============ ============ ============
Weighted average shares - diluted 15,077,659 13,170,022 15,145,872 13,035,406
============ ============ ============ ============
- -----------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
4
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Six Months Ended June 30, 2004
(In thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
----- ------- -------- ------------- ----- -----
BALANCE, DECEMBER 31, 2003 $13,381 $151,631 $20,062 $ 1,690 $(1,046) $185,718
Comprehensive income:
Net income - - 8,451 - - -
Net change in unrealized gain on
securities available for sale,
net of taxes of $5,284 - - - (9,114) - -
--------
Comprehensive income - - - - - (663)
--------
Exercise of stock options 21 148 - - - 169
Issuance of common stock 10 218 - - - 228
Stock dividends 665 15,296 (15,961) - - -
Cash paid for fractional interest
resulting from stock dividend - - (11) - - (11)
------- -------- ------- ------- -------- --------
BALANCE, JUNE 30, 2004 $14,077 $167,293 $12,541 $(7,424) $ (1,046) $185,441
======= ======== ======= ======= ======== ========
- ------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
5
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Six Months
Ended June 30,
----------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income $ 8,451 $ 6,885
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,360 1,385
Depreciation 1,685 1,300
Net amortization of investments securities 1,135 1,434
Amortization of intangible assets 2,320 1,850
Write down of book value of fixed assets 76 -
Gain on sale of investment securities available for sale (903) (870)
Gain on sale of bank properties and equipment (2,321) (9)
Gain on sale of branch deposits - (1,315)
Gain on sale of loans (111) -
Increase in cash value of BOLI (832) (234)
Deferred income taxes 184 452
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable 8 13
Other assets 1,917 1,341
Other liabilities (1,562) (4,934)
--------- ---------
Net cash provided by operating activities 11,407 7,298
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (327,124) (322,955)
Purchases of restricted equity securities (2,954) (909)
Proceeds from maturities, prepayments or calls of investment securities
available for sale 413,102 300,463
Proceeds from sale of investment securities available for sale 54,348 21,058
Net increase in loans (117,235) (57,276)
Purchase of bank properties and equipment (2,114) (1,429)
Proceeds from the sale of bank properties and equipment 4,200 121
Purchase of bank owned life insurance policies - (25,000)
Net proceeds from sale of real estate owned 2,585 605
--------- ---------
Net cash provided by (used in) investing activities 24,808 (85,322)
--------- ---------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (68,141) 74,860
Decrease in cash resulting from branch sale - (17,886)
Purchase price adjustment of branch assets purchased 19 -
Net borrowings under line of credits, advances and repurchase agreements 51,445 58,387
Principal payments on loan payable - (1,160)
Proceeds from exercise of stock options 169 182
Payments of fractional interests resulting from stock dividend (11) (7)
Proceeds from issuance of common stock 228 133
--------- ---------
Net cash (used in) provided by financing activities (16,291) 114,509
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,924 36,485
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 82,117 65,614
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 102,041 $ 102,099
========= =========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
6
SUN BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except per share amounts, are in
thousands.)
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation - The unaudited condensed
consolidated financial statements include the accounts of the Company
and its principal wholly owned subsidiary, 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 in
consolidation. Effective with the adoption of FASB Interpretation
Number ("FIN") 46, Consolidation of Variable Interest Entities and FIN
46 (R) on December 31, 2003, the Company deconsolidated Sun Capital
Trust (liquidated in April 2002), Sun Capital Trust II (liquidated in
December 2003), Sun Capital Trust III, Sun Capital Trust IV, Sun
Capital Trust V and Sun Capital Trust VI, collectively, the "Issuer
Trusts".
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with instructions to Form 10-Q, and
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations,
changes in equity and cash flows in conformity with accounting
principles generally accepted in the United States of America. However,
all normal recurring adjustments that, in the opinion of management,
are necessary for a fair presentation of the consolidated financial
statements have been included. These financial statements should be
read in conjunction with the audited consolidated financial statements
and the accompanying notes thereto included in the Company's Annual
Report on Form 10-K for the period ended December 31, 2003. The results
for the three and six months ended June 30, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year
ending December 31, 2004 or any other period.
Use of Estimates in the Preparation of Financial Statements - The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. The significant estimates include the allowance for
loan losses, goodwill, core deposit and other intangible assets,
deferred tax asset valuation allowance, and derivative financial
instruments. Actual results could differ from those estimates.
Stock Dividend - On March 18, 2004, the Company's Board of Directors
declared a 5% stock dividend paid on April 20, 2004 to shareholders of
record on April 6, 2004. Accordingly, per share data have been adjusted
for all periods presented.
Accounting for Stock Options - In December 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation --Transition and Disclosure, an amendment of FASB
Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Prior to the fourth quarter of 2003, the Company accounted for its
granted stock options according to Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees and related
interpretations. All options granted prior to 2003 had an intrinsic
value of zero on the date of grant under APB No. 25, and, therefore, no
stock-based employee compensation expense was recognized in the
Company's consolidated financial statements. During the fourth quarter
of 2003, the Company adopted, effective January 1, 2003, the fair value
recognition provisions of SFAS No. 123. Under the prospective method
provisions of SFAS No. 148, the recognition provisions of SFAS No. 123
will be applied to all option awards granted, modified or settled after
January 1, 2003.
7
In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. This Statement is effective for financial statements for
fiscal years ending after December 15, 2002. The Company has provided
the required disclosures in the tables below.
At June 30, 2004, the Company had three stock-based employee
compensation plans. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Reported net income available to shareholders $5,030 $3,127 $8,451 $6,885
Add: Total stock-based employee compensation
expense included in reported net income
(net of tax) 10 - 20 -
Deduct: Total stock-based employee
compensation expense determined under
fair value method (net of tax) (206) (347) (412) (692)
------ ------ ------ ------
Pro forma net income available to shareholders $4,834 $2,780 $8,059 $6,193
====== ====== ====== ======
Earnings per share:
Basic - as reported $ 0.36 $ 0.25 $ 0.60 $ 0.56
Basic - pro forma $ 0.35 $ 0.23 $ 0.58 $ 0.50
Diluted - as reported $ 0.33 $ 0.24 $ 0.56 $ 0.53
Diluted - pro forma $ 0.32 $ 0.21 $ 0.53 $ 0.48
Recent Accounting Principles - In March 2004, the FASB's Emerging
Issues Task Force ("EITF") reached a consensus regarding EITF 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The consensus provides guidance for evaluating
whether an investment is other-than-temporarily impaired and requires
certain disclosures for equity investments accounted for under the
cost method. The amount of any other-than-temporary impairment that
may need to be recognized upon adoption of EITF 03-1 will be dependent
on market conditions and management's intent and ability at the time
of the impairment evaluation to hold the underwater investments until
a forecasted recovery in fair value up to (or beyond) adjusted cost.
Disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments that were required under an earlier
EITF 03-1 consensus remain in effect. The EITF 03-1 guidance for
determining other-than-temporary impairment is effective for the
Company's reporting periods beginning after June 15, 2004, and the
disclosures for the cost method investments are effective for the
Company's fiscal year ending December 31, 2004. Management does not
expect the adoption of EITF 03-1 to have a material effect on the
Company's operating results or financial condition.
In March 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin (SAB) No. 105, Application of Accounting
Principles to Loan Commitments, which provides guidance regarding loan
commitments that are accounted for as derivative instruments. In this
SAB, the SEC determined that an interest rate lock commitment should
generally be valued at zero at inception. The rate locks will continue
to be adjusted for changes in value resulting from changes in market
interest rates. The Company adopted this new standard prospectively
effective April 1, 2004. This SAB did not have a material effect on
the Company's operating results or financial condition.
8
(2) Acquisitions
On July 8, 2004, the Company acquired Community Bancorp of New Jersey
("Community") in a stock-for-stock exchange merger valued at
approximately $66 million. In the merger Community shareholders
received 0.8715 shares of common stock of the Company for each issued
and outstanding share of Community common stock. Approximately
3,096,000 shares of the Company common stock have been issued. At July
8, 2004, Community's assets totaled $374 million, loan receivables, net
of allowances for loan losses, were $230 million, investments
securities were $115 million and total deposits were $346 million.
Goodwill of approximately $31 million was recorded in conjunction with
this transaction and will not be amortized in accordance with SFAS No.
142, but will be reviewed at least annually for impairment. Core
Deposit Intangibles of approximately $14 million was recorded and will
be amortized over approximately nine years.
(3) Loans
The components of loans as of June 30, 2004 and December 31, 2003 were
as follows:
June 30, 2004 December 31, 2003
------------- -----------------
Commercial and industrial $1,271,369 $1,169,164
Home equity 93,851 80,292
Second mortgages 47,482 51,531
Residential real estate 30,064 29,788
Other 56,386 51,304
---------- ----------
Total gross loans 1,499,152 1,382,079
Allowance for loan losses (18,701) (17,614)
---------- ----------
Net Loans $1,480,451 $1,364,465
========== ==========
Non-accrual loans $20,728 $21,568
======= =======
(4) Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
For the six month
period ended For the year ended
June 30, 2004 December 31, 2003
------------- -----------------
Balance, beginning of period $17,614 $16,408
Charge-offs (843) (4,380)
Recoveries 570 761
------- -------
Net charge-offs (273) (3,619)
Provision for loan losses 1,360 4,825
------- --------
Balance, end of period $18,701 $17,614
======= =======
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.
9
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:
June 30, 2004 December 31, 2003
------------- -----------------
Impaired loans with related reserve for loan
losses calculated under SFAS No. 114 $29,158 $31,463
Impaired loans with no related reserve for loan
losses calculated under SFAS No. 114 7,388 6,147
------- -------
Total impaired loans $36,546 $37,610
======= =======
Valuation allowance related to impaired loans $ 2,025 $ 3,439
======= =======
For the six For the
months ended year ended
June 30, 2004 December 31, 2003
------------- -----------------
Average impaired loans $37,179 $34,715
======= =======
Interest income recognized on impaired loans $ 808 $2,177
====== ======
Cash basis interest income recognized on
impaired loans $ 748 $2,311
===== ======
(5) Real estate owned
June 30, 2004 December 31, 2003
------------- -----------------
Commercial properties $1,550 $4,013
Residential properties - 122
Bank properties 661 309
------ ------
Total $2,211 $4,444
====== ======
The decrease in real estate owned was due primarily to the sale of one
commercial property which resulted in a pre-tax gain of $188,000. The
remaining $1.6 million in commercial properties consists mainly of one
property with a book value of $1.4 million which is currently listed
for sale. It is anticipated that the sale proceeds of this property
will exceed its carrying value.
(6) Deferred taxes
June 30, 2004 December 31, 2003
------------- -----------------
Deferred tax asset:
Allowance for loan losses $ 7,635 $ 7,175
Goodwill amortization 2,561 3,040
Compensation 81 17
Unrealized loss on investment securities 4,423 -
------- -------
Total deferred tax asset 14,727 10,232
Deferred tax liability:
Property (792) (846)
Deferred loan fees (323) (12)
Unrealized gain on investment securities - (861)
Other (48) (48)
------- -------
Total deferred tax liability (1,163) (1,767)
------- -------
Net deferred tax asset $13,564 $ 8,465
======= =======
10
The increase of $5.1 million of deferred taxes is primarily due to the
$5.3 million increase in the unrealized gain (loss) on investment
securities component, which is due to the increase in the market
interest rates at June 30, 2004 compared to December 31, 2004.
(7) Deposits
Deposits consist of the following major classifications:
June 30, 2004 December 31, 2003
------------- -----------------
Demand deposits - interest bearing $ 734,469 $ 784,453
Demand deposits - non-interest bearing 426,307 399,538
Savings deposits 372,873 392,784
Time certificates under $100,000 373,888 390,312
Time certificates $100,000 or more 135,447 144,038
---------- ----------
Total $2,042,984 $2,111,125
========== ==========
(8) Borrowing
On June 30, 2004, the Company entered into a one month, $50.0 million
repurchase agreement with the Federal Home Loan Bank of New York with
an interest rate of 1.4%. On July 30, 2004, the borrowing matured and
was repaid.
(9) Junior Subordinated Debentures Held by Trusts that Issued Capital Debt
The following is a summary of the outstanding capital securities issued
by each Issuer Trust and the junior subordinated debentures issued by
the Company to each Trust as of June 30, 2004:
Capital Securities Junior Subordinated Debentures
---------------------------------------------------------------------------------------------------
Stated Distribution Principal Redeemable
-
Issuer Trust Issuance Date Value Rate Amount Maturity Beginning
------------ ------------- ----- ---- ------ -------- ---------
6-mo LIBOR
Sun Trust III April 22, 2002 $20,000 plus 3.70% $20,619 April 22, 2032 April 22, 2007
3-mo LIBOR
Sun Trust IV July 7, 2002 10,000 plus 3.65% 10,310 October 7, 2032 July 7, 2007
3-mo LIBOR
Sun Trust V December 18, 2003 15,000 plus 2.80% 15,464 December 30, 2033 December 30, 2008
3-mo LIBOR
Sun Trust VI December 19, 2003 25,000 plus 2.80% 25,774 January 23, 2034 January 23, 2009
------- -------
Total $70,000 $72,167
======= =======
11
While the capital securities have been deconsolidated in accordance
with GAAP, they continue to qualify as Tier 1 capital under federal
regulatory guidelines. The change in accounting guidance did not have
an impact on the Tier 1 regulatory capital of either the Company or the
Bank. In July 2003, the Board of Governors of the Federal Reserve
System (the "Fed Board") issued a supervisory letter instructing bank
holding companies ("BHCs") to continue to include the capital
securities in their Tier 1 capital for regulatory capital purposes
until notice is given to the contrary. In May 2004, the Fed Board
issued a Trust Preferred Security Proposal. Under the proposal, after a
three-year transition period, the aggregate amount of trust preferred
securities and certain other capital elements would be limited to 25
percent of tier 1 capital elements, net of goodwill. The amount of
trust preferred securities and certain other elements in excess of the
limit could be included in tier 2 capital, subject to restrictions.
Internationally-active BHCs would generally be expected to limit trust
preferred securities and certain other capital elements to 15 percent
of tier 1 capital elements, net of goodwill. Requested public comments
on this proposal were due on July 11, 2004. The Company will continue
to monitor this proposal.
The Issuer Trusts are wholly owned subsidiaries of the Company and have
no independent operations. The obligations of Issuer Trusts are fully
and unconditionally guaranteed by the Company. The debentures are
unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. Interest on
the debentures is cumulative and payable in arrears. Proceeds from any
redemption of debentures would cause a mandatory redemption of capital
securities having an aggregate liquidation amount equal to the
principal amount of debentures redeemed.
Sun Trust III variable annual rate will not exceed 11.00% through five
years from its issuance. Sun Trust IV variable annual rate will not
exceed 11.95% through five years from its issuance. Sun Trust V and Sun
Trust VI do not have interest rate caps.
(10) Comprehensive Income
The Company classifies items of other comprehensive income by their
nature and displays the accumulated balance of other comprehensive
income separately from retained earnings and additional paid in capital
in the equity section of the statement of financial position. Amounts
categorized as other comprehensive income represent net unrealized
gains or losses on investment securities available for sale, net of
income taxes. Total comprehensive (loss) income for the three-months
ended June 30, 2004 and 2003 amounted to ($7,566,000) and $6,977,000,
respectively. Total comprehensive (loss) income for the six-months
ended June 30, 2004 and 2003 amounted to ($663,000) and $10,219,000,
respectively.
(11) 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.
12
Earnings per share for the periods presented are as follows:
For the For the
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $5,030 $3,127 $8,451 $6,885
Dilutive stock options outstanding 2,827,942 2,872,307 2,835,172 2,476,671
Average exercise price per share $9.74 $9.66 $9.73 $8.83
Average market price $21.15 $16.09 $22.89 $14.47
Average common shares outstanding 13,982,111 12,337,603 13,974,320 12,335,104
Increase in shares due to exercise of
options - diluted basis 1,095,548 832,419 1,171,552 700,302
---------- ---------- ---------- ----------
Adjusted shares outstanding - diluted 15,077,659 13,170,022 15,145,872 13,035,406
========== ========== ========== ==========
Net earnings per share - basic $0.36 $0.25 $0.60 $0.56
Net earnings per share - diluted $0.33 $0.24 $0.56 $0.53
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 - 1,385 - 397,600
========== ========== ========== ==========
(12) Commitments
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
The guarantees are primarily issued to support private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. In the event of a draw by the beneficiary that complies
with the terms of the letter of credit, the Company would be required
to honor the commitment. The Company takes various forms of
collateral, such as real estate assets and customer business assets to
secure the commitment. Additionally, all letters of credit are
supported by indemnification agreements executed by the customer. The
maximum undiscounted exposure related to these commitments at June 30,
2004 was $44.7 million, and the portion of the exposure not covered by
collateral was approximately $14.7 million. The Company believes that
the utilization rate of these letters of credit will continue to be
substantially less than the amount of these commitments, as has been
our experience to date.
(13) Branch Real Estate Sale
During the quarter ended June 30, 2004, the Company completed the sale
of the real estate associated with its Atlantic City, New Jersey,
branch office and recognized a pre-tax gain of $2.3 million. The terms
of the sale agreement provide that the Bank will operate at the
existing location until it relocates to a new location. As part of the
overall transaction, the Company acquired the rights to purchase and
the obligations to develop a certain parcel of undeveloped land
located in Atlantic City for the purpose of the new branch. In lieu of
undertaking the responsibility of acquiring and developing this
parcel, the Company entered into an Assignment and Assumption
Agreement with a company controlled by Bernard A. Brown, Chairman of
the Board of Directors of the Company (Related Party) whereby the
Company assigned all its rights, title and interest in this real
estate to the Related Party, and the Related Party assumed all the
covenants, duties and obligations with respect to the acquisition and
development of this real estate. The Company believes that this
Assignment and Assumption Agreement entered into with the Related
Party was an arms' length transaction.
13
THE COMPANY MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING
STATEMENTS," INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS QUARTERLY REPORT ON FORM 10-Q
AND THE EXHIBITS THERETO), IN ITS REPORTS TO SHAREHOLDERS AND IN OTHER
COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES'
LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, RISK-BASED
CAPITAL GUIDELINES AND REPORTING INSTRUCTIONS, SECURITIES AND INSURANCE);
TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING
HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE
FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of the financial condition and results of
operations are based on the Consolidated Financial Statements, which are
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenue and expenses. Management evaluates these estimates
and assumptions on an ongoing basis, including those related to the allowance
for loan losses, income taxes, goodwill, and derivative financial instruments.
Management bases its estimates on historical experience and various other
factors and assumptions that are believed to be reasonable under the
circumstances. These form the bases for making judgments on the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Allowance for loan losses. Through the Bank, the Company originates
loans that it intends to hold for the foreseeable future or until maturity or
repayment. The Bank may not be able to collect all principal and interest due on
these loans. Allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio as of the balance sheet
date. Management performs regular reviews in order to identify inherent losses
and to assess the overall credit risk of the loan portfolio. The allowance for
loan losses is determined by management based upon past experience, evaluation
of estimated loss and impairment in the loan portfolio, current economic
conditions and other pertinent factors. The allowance for loan losses is
maintained at a level that management considers adequate to provide for
estimated losses and impairment based upon an evaluation of known and inherent
risk in the loan portfolio. Loan impairment is evaluated based on the fair value
of collateral or estimated net realizable value. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations. The determination of the allowance
for loan losses involves the monitoring of delinquency, default and historical
loss experience. Management makes estimates and assumptions regarding existing
but yet unidentified losses caused by current economic conditions and other
factors. If the Bank does not adequately reserve for these uncollectible loans,
it may incur additional charges to loan losses in the consolidated financial
statements.
In determining the Bank's allowance for loan losses, management has
established both specific and general pooled allowances. The amount of the
specific allowance is determined through a loan-by-loan analysis of certain
large dollar commercial loans. Loans not individually reviewed are evaluated as
a group using expected loss ratios, which are based on the Bank's historical
charge-off experience and current market and economic conditions. In determining
the appropriate level of the general pooled allowance and projecting losses
management makes estimates based on internal risk ratings, which take into
account such factors as debt service coverage, loan to value ratios and cost and
timing of collateral repossession and disposal. Estimates are periodically
measured against actual loss experience. Adjustments are made to future
projections as assumptions are revised.
The determination of the allowance for loan losses requires management
to make significant estimates with respect to the amounts and timing of losses
and market and economic conditions. Accordingly, a decline in the national
economy or the local economies of the areas in which the Bank's loans are
concentrated could result in an increase in loan delinquencies, foreclosures or
repossessions resulting in increased charge-off amounts and the need for
additional loan loss allowances in future periods. The Bank will continue to
monitor its allowance for loan losses and make future adjustments to the
allowance through the provision for loan losses as economic conditions and other
factors dictate. Although the Bank maintains its allowance for loan losses at
levels considered adequate to provide for the inherent risk of loss in its loan
portfolio, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods. In addition, the Bank's determination as to the
amount of its allowance for loan losses is subject to review by its primary
regulator, the Office of the Comptroller of the Currency (the "OCC"), as part of
its examination process, which may result in the establishment of an additional
allowance based upon the judgment of the OCC after a review of the information
available at the time of the OCC examination.
15
In July 2001, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. SAB No. 102 expresses the SEC staff's
views on the development, documentation and application of a systematic
methodology for determining the allowance for loan losses in accordance with
accounting principles generally accepted in the United States of America. In
addition, in July 2001, the federal banking agencies issued guidance on this
topic through the Federal Financial Institutions Examination Council interagency
guidance, Policy Statement on Allowance for Loan and Lease Losses Methodologies
and Documentation for Banks and Savings Institutions. In management's opinion,
the Bank's methodology and documentation of the allowance for loan losses meets
the guidance issued.
Accounting for income taxes. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management exercises significant
judgment in the evaluation of the amount and timing of the recognition of the
resulting tax assets and liabilities and the judgments and estimates required
for the evaluation are periodically updated based upon changes in business
factors and the tax laws.
Valuation of goodwill. The Company assesses the impairment of goodwill
at least annually, and whenever events or significant changes in circumstance
indicate that the carrying value may not be recoverable. Factors that the
Company considers important in determining whether to perform an impairment
review include significant under performance relative to forecasted operating
results and significant negative industry or economic trends. If the Company
determines that the carrying value of goodwill may not be recoverable, then the
Company will assess impairment based on a projection of undiscounted future cash
flows and measure the amount of impairment based on fair value. In the fourth
quarter 2003, the Company performed, with the assistance of an independent third
party other than its independent auditors, its annual impairment test of
goodwill as required under the SFAS No. 142, Goodwill and Other Intangible
Assets, and SFAS No. 147, Acquisitions of Certain Financial Institutions an
amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. Such
testing is based upon a number of factors, which are based upon assumptions and
management judgments. These factors include among other things, future growth
rates, discount rates and earnings capitalization rates. The test indicated that
no impairment charge was necessary for the year ended December 31, 2003.
Branch Rationalization Program
The Company's branch rationalization efforts continued with the closure
of three branches during the second quarter, for a total of four closed through
the six months ended June 30, 2004. Total targeted closures for the year have
increased from fourteen to fifteen, with the remaining closures expected to be
completed in the third and fourth quarters of 2004. By year end 2004, the
Company will have eliminated twenty-two branches since December 2001. During the
quarter, the Company incurred branch closing costs of $454,000. These closing
costs are part of the previously disclosed estimated branch rationalization
closing costs of $2.3 million. The Company believes that this $2.3 million
remains a reasonable estimate.
During the second quarter 2004, the Company completed a real estate
sale of its Atlantic City office and recognized a pre-tax gain of $2.3 million.
The terms of the sale agreement provide that the Bank will operate at the
existing location until it occupies a new location.
Financial Condition
Total assets at June 30, 2004 decreased by $18.5 million, or 0.7% to
$2.58 billion as compared to $2.60 billion at December 31, 2003. The decrease
was primarily the result of a decrease in investment securities of $155.0
million, partially offset by an increase in loans receivable of $116.0 million,
and an increase in cash and cash equivalents of $19.9 million.
Cash and cash equivalents increased $19.9 million, from $82.1 million
at December 31, 2003 to $102.0 million at June 30, 2004, resulting primarily
from the increase of interest bearing deposits with the FHLB of $15.7 million.
16
Investment securities available for sale decreased $155.0 million or
16.1%, from $963.4 million at December 31, 2003 to $808.5 million at June 30,
2004. Due to the increased liquidity resulting from the December 2003
acquisition of branches from New York Community Bank, the Company purchased
approximately $125.0 million of short term investment securities. During the six
months ended June 30, 2004, loan demand outpaced deposit growth and the majority
of these funds were reinvested into the loan portfolio which saw a net increase
of $116.0 million.
Net loans receivable at June 30, 2004 were $1.48 billion, an increase
of $116.0 million from $1.36 billion at December 31, 2003. The increase was
primarily in commercial and industrial loans and home equity consumer loans. The
ratio of allowance for loan losses to total loans was 1.25% at June 30, 2004
compared to 1.27% at December 31, 2003.
Non-performing loans were $22.4 million at June 30, 2004 compared to
$21.8 million at December 31, 2003. The ratio of allowance for loan losses to
total non-performing loans was 83.61% at June 30, 2004 compared to 80.74% at
December 31, 2003. Other real estate owned decreased $2.2 million to $2.2
million at June 30, 2004, resulting from the sale of one commercial property
with a carrying value of $2.5 million and resulting in a gain of $188,000. The
ratio of non-performing assets to total loans and real estate owned was 1.64% at
June 30, 2004 compared to 1.89% at December 31, 2003.
Total deposits were $2.04 billion at June 30, 2004, reflecting a $68.1
million decrease from December 31, 2003. The Company's core deposits, (demand
and savings deposits) decreased $43.1 million, or 2.7% while the non-core
deposits (time deposits) decreased $25.0 million, or 4.7%. The total decrease
from December 31, 2003 to June 30, 2004 is due to many factors including an
expected deposit run-off relating to the December 2003 acquisition of branches
from New York Community Bank, expected decreases in public funds due to
seasonality, and non-relationship deposit decreases due to promotional rates
offered by other financial institutions. Also noted were offsetting increases in
large commercial accounts due to timing. The Company believes that the aggregate
decrease in total deposits does not represent a continuing trend.
On June 30, 2004, the Company entered into a one month, $50.0 million
repurchase agreement with the Federal Home Loan Bank of New York. The interest
rate on the borrowing was 1.4%. On July 30, 2004, the borrowing matured and was
repaid.
Total shareholders' equity decreased $277,000, from $185.7 million at
December 31, 2003, to $185.4 million at June 30, 2004. The decrease was
primarily the result of net income amounting to $8.5 million being more than
offset by a $9.1 million decrease in accumulated other comprehensive income,
resulting from an increased unrealized net loss on available for sale securities
due to an increase in market interest rates.
Liquidity and Capital Resources
Liquidity management is a daily and long-term business function. The
Company's liquidity, represented in part by cash and cash equivalents, is a
product of its operating, investing and financing activities. Proceeds from
repayment and maturities of loans, sales and maturities of investment
securities, net income and increases in deposits and borrowings are the primary
sources of liquidity of the Company.
The Company anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for the Company's future operating, investing and financing needs. In
addition to cash and cash equivalents of $102.0 million at June 30, 2004, the
Company had additional secured borrowing capacity with the FHLB of approximately
$83.8 million and other sources of approximately $57 million.
The Company's largest cash flows are investing activities. During the
six months ended June 30, 2004 the Company's primary source of cash from
investing activities was the proceeds from sales, 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 used $16.3 million of net cash, was primarily the
result of the net decrease in deposits offset by a net increase short term
borrowings. The activity during this period reflects the Company's continued
focus on overall balance sheet and capital management, concentrating on growth
of its core businesses, with emphasis on commercial lending and retail banking,
while managing the Company's liquidity, interest-rate risk and capital
resources.
17
Management has developed a capital plan for the Company and the Bank
that should allow the Company and the Bank to grow capital internally at levels
sufficient for achieving its internal growth projections while managing its
operating and financial risks. The Company has also considered a contingent
capital plan, and when appropriate, the Company's Board of Directors may
consider various capital raising alternatives. The principle components of the
capital plan are to generate additional capital through retained earnings from
internal growth, access the capital markets for external sources of capital,
such as common equity of trust preferred securities, when necessary or
appropriate, redeem existing capital instruments and refinance such instruments
at lower rates when conditions permit and maintain sufficient capital for safe
and sound operations. The capital plan is not expected to have a material impact
on our liquidity. It is the Company's intention to maintain "well-capitalized"
risk-based capital levels.
While the capital securities have been deconsolidated in accordance
with GAAP, they continue to qualify as Tier 1 capital under federal regulatory
guidelines. The change in accounting guidance did not have an impact on the Tier
1 regulatory capital of either the Company or the Bank. In July 2003, the Board
of Governors of the Federal Reserve System (the "Fed Board") issued a
supervisory letter instructing bank holding companies ("BHCs") to continue to
include the capital securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. In May 2004, the Fed Board
issued a Trust Preferred Security Proposal. Under the proposal, after a
three-year transition period, the aggregate amount of trust preferred securities
and certain other capital elements would be limited to 25 percent of tier 1
capital elements, net of goodwill. The amount of trust preferred securities and
certain other elements in excess of the limit could be included in tier 2
capital, subject to restrictions. Internationally-active BHCs would generally be
expected to limit trust preferred securities and certain other capital elements
to 15 percent of tier 1 capital elements, net of goodwill. Requested public
comments on this proposal were due on July 11, 2004. The Company will continue
to monitor this proposal.
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 June 30, 2004,
of the Company's $70.0 million trust preferred securities, $64.3 million qualify
as Tier 1 capital and $5.7 million qualify as Tier 2 capital.
Comparison of Operating Results for the Three Months Ended June 30, 2004 and
2003
Net income increased by $1.9 million, or 60.8% for the three months
ended June 30, 2004 to $5.0 million from $3.1 million for the three months ended
June 30, 2003. The increase in net income was primarily due to a net of tax gain
on sale of branch real estate of $1.4 million offset by net of tax branch
closing charges of $300,000. Excluding the gain on sale of branch real estate
and the branch closing charges, net income increased approximately $200,000
compared to the quarter ended June 30, 2003.
Net Interest Income. Net interest income (on a tax-equivalent basis)
increased $2.8 million, or 15.7% to $20.8 million for the three months ended
June 30, 2004 from $18.0 million for the same period in 2003. Net interest
income (on a tax-equivalent basis) increased $2.4 million due to volume the
majority of which is due to an increase of $287.7 million in the average balance
of interest-earning assets. The rate component increased net interest income by
$411,000.
The interest rate spread and margin for the three months ended June 30,
2004 was 3.32% and 3.58%, respectively, compared to 3.18% and 3.53%,
respectively, for the same period 2003. The yield on the average
interest-earning assets declined 54 basis points from 5.46% for the three months
ended June 30, 2003 to 4.92% for the same period in 2004, while the cost of
funds on average interest-bearing liabilities decreased 68 basis points from
2.28% for the three months ended June 30, 2003 to 1.60% for the same period in
2004.
18
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances.
At or for the three months At or for the three months
ended ended
June 30, 2004 June 30, 2003
------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,234,073 $18,735 6.07 % $1,071,011 $17,726 6.62 %
Home equity 90,201 841 3.73 57,518 588 4.09
Second mortgage 48,100 749 6.23 49,209 845 6.87
Residential real estate 31,410 554 7.06 40,247 762 7.57
Other 54,117 1,016 7.51 52,921 1,077 8.14
---------- ------- ---------- -------
Total loans receivable 1,457,901 21,895 6.01 1,270,906 20,998 6.61
Investment securities (3) 849,942 6,698 3.15 750,665 6,773 3.61
Interest-bearing deposit with banks 8,575 6 0.28 9,956 16 0.66
Federal funds sold 8,986 21 0.93 6,206 18 1.14
---------- ------- ---------- -------
Total interest-earning assets 2,325,404 28,620 4.92 2,037,733 27,805 5.46
---------- ------- ---------- -------
Cash and due from banks 73,176 63,909
Bank properties and equipment 33,519 29,498
Goodwill and intangible assets 75,182 38,184
Other assets 62,145 61,079
---------- ----------
Non-interest-earning assets 244,022 192,670
---------- ----------
Total Assets $2,569,426 $2,230,403
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 764,480 1,497 0.78 % $ 680,610 2,167 1.27 %
Savings deposits 378,409 691 0.73 322,365 1,151 1.43
Time deposits 502,410 3,029 2.41 396,680 3,219 3.25
---------- ------- ---------- -------
Total interest-bearing
deposit accounts 1,645,299 5,217 1.27 1,399,655 6,537 1.87
---------- ------- ---------- -------
Borrowed money:
Federal funds purchased 9,887 36 1.45 9,231 41 1.76
Securities sold under agreements
to repurchase 60,844 58 0.38 75,612 111 0.59
FHLB advances 161,276 1,695 4.20 179,921 2,091 4.65
Junior subordinated debentures 72,167 812 4.50 - - -
---------- ------- ---------- -------
Total borrowings 304,174 2,601 3.42 264,764 2,243 3.39
Guaranteed preferred beneficial interest in
Company's subordinated debt - - - 59,274 1,048 7.08
---------- ------- ---------- -------
Total interest-bearing liabilities 1,949,473 7,818 1.60 1,723,693 9,828 2.28
---------- ------- ---------- -------
Non-interest-bearing demand deposits 408,678 318,936
Other liabilities 22,438 36,283
---------- ----------
Non-interest-bearing liabilities 431,116 355,219
---------- ----------
Total liabilities 2,380,589 2,078,912
Shareholders' equity 188,837 151,491
---------- ----------
Total liabilities and shareholders' equity $2,569,426 $2,230,403
========== ==========
Net interest income $20,802 $17,977
======= =======
Interest rate spread (4) 3.32 % 3.18 %
==== ====
Net interest margin (5) 3.58 % 3.53 %
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 119.28 % 118.22 %
====== ======
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans.
(2) Loan fees are included in interest income and the amount is not material
for this analysis.
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
19
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Three Months Ended June 30,
2004 vs. 2003
------------------------------
Increase (Decrease)
Due to
------------------------------
Volume Rate Net
------ ---- ---
Interest income
Loans receivable:
Commercial and industrial $ 2,554 $(1,545) $ 1,009
Home equity 308 (55) 253
Second mortgage (19) (77) (96)
Residential real estate (159) (49) (208)
Other 24 (85) (61)
------- ------- -------
Total loans receivable 2,708 (1,811) 897
Investment securities 838 (913) (75)
Interest-bearing deposits accounts (2) (8) (10)
Federal funds sold 7 (4) 3
------- ------- -------
Total interest-earning assets $ 3,551 $(2,736) $ 815
------- ------- -------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 242 $ (912) $ (670)
Savings deposits 174 (634) (460)
Time deposits 746 (936) (190)
------- ------- -------
Total interest-bearing deposit accounts 1,162 (2,482) (1,320)
Borrowed money:
Federal funds purchased 3 (8) (5)
Securities sold under agreements to repurchase (19) (34) (53)
FHLB advances (206) (190) (396)
Debentures and trust securities 197 (433) (236)
------- ------- -------
Total borrowed money (25) (665) (690)
Total interest-bearing liabilities $ 1,137 $(3,147) $(2,010)
------- ------- -------
Net change in net interest income $ 2,414 $ 411 $ 2,825
======= ======= =======
Interest income (on a tax-equivalent basis) increased by $815,000, to
$28.6 million for the three months ended June 30, 2004 compared to $27.8 million
for the same period in 2003. The increase in interest income was due to the
combined 14.1% increase in the average balance of loans receivable, investment
securities and federal funds sold which produced an increase in interest income
of $3.6 million offset by a continued drop in interest rates, which lowered the
yield on average interest-earning assets by 54 basis points, or $2.7 million.
Interest expense decreased $2.0 million, or 20.0%, to $7.8 million for
the three months ended June 30, 2004 compared to $9.8 million for the same
period in 2003. The decrease in interest expense was due in part to a continued
drop in interest rates, which lowered the yield on average interest-bearing
liabilities by 68 basis points, or $3.1 million, offset by the 13.1% increase in
the average balance of interest-earning deposits which produced an increase in
interest expense $1.2 million.
20
Provision for Loan Losses. For the three months ended June 30, 2004,
the provision for loan losses was $735,000, an increase of $25,000, compared to
$710,000 for the same period in 2003. The Company focuses on its loan portfolio
management and credit review process to effectively address the current risk
profile of the portfolio and manage troubled credits. This analysis includes
evaluations of concentrations of credit, past loss experience, current economic
conditions, amount and composition of the loan portfolio, estimated fair value
of underlying collateral, loan commitments outstanding, delinquencies and other
factors.
Non-Interest Income. Non-interest income increased $3.0 million, or
76.6% for the three-month period ended June 30, 2004 compared to the three-month
period ended June 30, 2003. The increase was primarily the result of a $2.3
million increase in gain on sale of branch real estate, a $277,000 increase in
service charges on deposit accounts resulting primarily from the Company's
overdraft privilege program, a revised ATM service fee structure, and the
December 2003 acquisition of branches of which $180,000 is attributable, a
$105,000 increase in gain on sale of SBA loans, an increase of $356,000 in other
income primarily resulting from an increase of $249,000 in BOLI investment
income and an increase of $49,000 in investment company income, offset by a
decrease in the gain on sale of investment securities of $247,000.
Non-Interest Expenses. Non-interest expenses increased $2.9 million, or
18.0% to $19.3 million for the three months ended June 30, 2004 as compared to
$16.4 million for the same period in 2003. Of this increase, $1.1 million is due
to the December 2003 branch acquisition consisting primarily of salaries and
employee benefits ($528,000), amortization of intangible assets expense
($257,000), occupancy expense ($199,000) and equipment expense ($130,000). Of
the remaining increase, $406,000 was in salaries and employee benefits, $346,000
was in occupancy expense primarily resulting from $378,000 in lease buyout costs
pertaining to recent branch closures, $474,000 was a decrease in gain on sale
other real estate and $178,000 increase was in professional fees in the managed
loan portfolio.
Income Taxes. Income taxes increased $974,000 for the three months
ended June 30, 2004 as compared to the same period in 2003. The increase
resulted from higher pre-tax earnings.
Comparison of Operating Results for the Six Months Ended June 30, 2004 and 2003
Net income increased by $1.6 million, or 22.7% for the six months ended
June 30, 2004 to $8.5 million from $6.9 million for the six months ended June
30, 2003. The increase in net income was primarily due to a net of tax gain on
sale of branch real estate of $1.4 million offset by net of tax branch closing
charges of $300,000. Excluding the gain on sale of branch real estate and the
branch closing charges, net income decreased slightly compared to the quarter
ended June 30, 2003.
Net Interest Income. Net interest income (on a tax-equivalent basis)
increased $5.1 million, or 14.0% to $41.1 million for the six months ended June
30, 2004 from $36.0 million for the same period in 2003. Net interest income (on
a tax-equivalent basis) increased $4.6 million due to volume, the majority of
which is due to an increase of $312.8 million in the average balance of
interest-earning assets. The rate component increased net interest income by
$435,000.
The interest rate spread and margin for the six months ended June 30,
2004 was 3.27% and 3.52%, respectively, compared to 3.21% and 3.57%,
respectively, for the same period 2003. The yield on the average
interest-earning assets declined 65 basis points from 5.53% for the six months
ended June 30, 2003 to 4.88% for the same period in 2004, while the cost of
funds on average interest-bearing liabilities decreased 71 basis points from
2.32% for the six months ended June 30, 2003 to 1.61% for the same period in
2004.
21
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances.
At or for the six months ended At or for the six months ended
June 30, 2004 June 30, 2003
------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- --------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,210,809 $36,656 6.05 % $1,065,250 $35,652 6.69 %
Home equity 86,543 1,638 3.79 52,253 1,086 4.15
Second mortgage 49,263 1,548 6.28 47,463 1,656 6.98
Residential real estate 31,020 1,068 6.89 40,664 1,527 7.51
Other 52,925 2,035 7.69 53,053 2,183 8.23
---------- ------- ---------- -------
Total loans receivable 1,430,560 42,945 6.00 1,258,683 42,104 6.69
Investment securities (3) 876,964 13,891 3.17 748,655 13,648 3.65
Interest-bearing deposit with banks 7,645 15 0.39 7,816 28 0.71
Federal funds sold 17,697 83 0.94 4,888 29 1.19
---------- ------- ---------- -------
Total interest-earning assets 2,332,866 56,934 4.88 2,020,042 55,809 5.53
---------- ------- ---------- -------
Cash and due from banks 71,915 62,142
Bank properties and equipment 33,872 29,500
Goodwill and intangible assets 75,764 38,642
Other assets 68,363 47,582
---------- ----------
Non-interest-earning assets 249,914 177,866
---------- ----------
Total Assets $2,582,780 $2,197,908
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 770,961 3,023 0.78 % $ 662,448 4,252 1.28 %
Savings deposits 382,324 1,420 0.74 323,595 2,420 1.50
Time deposits 514,091 6,215 2.42 402,951 6,665 3.31
---------- ------- ---------- -------
Total interest-bearing
deposit accounts 1,667,376 10,658 1.28 1,388,994 13,337 1.92
---------- ------- ---------- -------
Borrowed money:
Federal funds purchased 6,449 47 1.46 8,369 72 1.72
Securities sold under agreements to
repurchase 60,373 111 0.37 69,261 207 0.60
FHLB advances 161,057 3,430 4.26 177,474 4,070 4.59
Junior subordinated debentures 72,167 1,621 4.49 - - -
---------- ------- ---------- -------
Total borrowings 300,046 5,209 3.47 255,104 4,349 6.80
Guaranteed preferred beneficial interest in
Company's subordinated debt - - - 59,274 2,106 7.11
---------- ------- ---------- -------
Total interest-bearing liabilities 1,967,422 15,867 1.61 1,703,372 19,792 2.32
---------- ------- ---------- -------
Non-interest-bearing demand deposits 399,128 311,139
Other liabilities 27,496 33,841
---------- ----------
Non-interest-bearing liabilities 426,624 344,980
---------- ----------
Total liabilities 2,394,046 2,048,352
Shareholders' equity 188,734 149,556
----------- -----------
Total liabilities and shareholders' equity $2,582,780 $2,197,908
========== ==========
Net interest income $41,067 $36,017
======= =======
Interest rate spread (4) 3.27 % 3.21 %
==== ====
Net interest margin (5) 3.52 % 3.57 %
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 118.57 % 118.59 %
====== ======
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans.
(2) Loan fees are included in interest income and the amount is not material
for this analysis.
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
22
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Six Months Ended June 30,
2004 vs. 2003
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Volume Rate Net
------ ---- ---
Interest income
Loans receivable:
Commercial and industrial $ 4,598 $(3,594) $ 1,004
Home equity 656 (104) 552
Second mortgage 61 (169) (108)
Residential real estate (341) (118) (459)
Other (5) (143) (148)
------- ------- -------
Total loans receivable 4,969 (4,128) 841
Investment securities 2,165 (1,922) 243
Interest-bearing deposits accounts (1) (12) (13)
Federal funds sold 61 (7) 54
------- ------- -------
Total interest-earning assets $ 7,194 $(6,069) $ 1,125
------- ------- -------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 616 $(1,845) $(1,229)
Savings deposits 380 (1,380) (1,000)
Time deposits 1,588 (2,038) (450)
------- ------- -------
Total interest-bearing deposit accounts 2,584 (5,263) (2,679)
Borrowed money:
Federal funds purchased (15) (10) (25)
Securities sold under agreements to repurchase (24) (72) (96)
FHLB advances (361) (279) (640)
Debentures and trust securities 395 (880) (485)
------- ------- -------
Total borrowed money (5) (1,241) (1,246)
Total interest-bearing liabilities $ 2,579 $(6,504) $(3,925)
------- ------- -------
Net change in net interest income $ 4,615 $ 435 $ 5,050
======= ======= =======
Interest income (on a tax-equivalent basis) increased by $1.1 million,
to $56.9 million for the six months ended June 30, 2004 compared to $55.8
million for the same period in 2003. The increase in interest income was due to
the combined 15.5% increase in the average balance of loans receivable,
investment securities and federal funds sold which produced an increase in
interest income of $7.2 million offset by a continued drop in interest rates,
which lowered the yield on average interest-earning assets by 65 basis points,
or $6.1 million.
Interest expense decreased $3.9 million, or 19.8%, to $15.9 million for
the six months ended June 30, 2004 compared to $19.8 million for the same period
in 2003. The decrease in interest expense was primarily due to a continued drop
in interest rates, which lowered the yield on average interest-bearing
liabilities by 71 basis points, or $6.5 million, offset by the 20.0% increase in
the average balance of interest-earning deposits which produced an increase in
interest expense $2.6 million.
23
Provision for Loan Losses. For the six months ended June 30, 2004, the
provision for loan losses was $1.4 million compared to $1.4 million for the same
period in 2003. The Company focuses on its loan portfolio management and credit
review process to effectively address the current risk profile of the portfolio
and manage troubled credits. This analysis includes evaluations of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio, estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies and other factors.
Non-Interest Income. Non-interest income increased $2.7 million, or
35.0% for the six-month period ended June 30, 2004 compared to the six-month
period ended June 30, 2003. The increase was in part the result of a $2.3
million increase in gain on sale of branch real estate, a $685,000 increase in
service charges on deposit accounts resulting primarily from the Company's
overdraft privilege program, changes in ATM pricing, and the December 2003
branch acquisition of which $351,000 is attributable, an increase in the gain on
sale of loans of $111,000, and an increase of $819,000 in other income primarily
resulting from an increase of $681,000 in BOLI investment income. In addition,
non-interest income for the six months ended June 30, 2003 included a $1.3
million gain on sale of branches.
Non-Interest Expenses. Non-interest expenses increased $5.9 million, or
18.5% to $37.8 million for the six months ended June 30, 2004 as compared to
$31.9 million for the same period in 2003. Of this increase, $2.3 million is due
to the December 2003 branch acquisition consisting primarily of salaries and
employee benefits ($995,000), amortization of intangible assets expense
($514,000), occupancy expense ($372,000) and equipment expense ($253,000). Of
the remaining increase, $1.4 million was in salaries and employee benefits due
to an increase in staffing during 2003, $181,000 was in occupancy expense
primarily resulting from $378,000 in lease buyout costs pertaining to recent
branch closures offset by a $206,000 decrease in snow removal costs, $474,000
was a decrease in gain on sale other real estate and $225,000 increase was in
professional fees in the managed loan portfolio.
Income Taxes. Income taxes increased $456,000 for the six months ended
June 30, 2004 as compared to the same period in 2003. The increase resulted from
higher pre-tax earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
Interest rate, credit and operational risks are among the most
significant market risks impacting the performance of the Company. Interest risk
is reviewed monthly by the Asset Liability Committee ("ALCO"), composed of
senior management representatives from a variety of areas within the Company.
ALCO devises strategies and tactics to maintain the net interest income of the
Company within acceptable ranges over a variety of interest rate scenarios.
Should the Company's risk modeling indicate an undesired exposure to changes in
interest rates, there are a number of remedial options available including
changing the investment portfolio characteristics, and changing loan and deposit
pricing strategies. Two of the tools used in monitoring the Company's
sensitivity to interest rate changes are gap analysis and net interest income
simulation.
Gap Analysis
Banks are concerned with the extent to which they are able to match
maturities or repricing characteristics of interest-earning assets and
interest-bearing liabilities. Such matching is facilitated by examining the
extent to which such assets and liabilities are interest-rate sensitive and by
monitoring the bank's interest rate sensitivity gap. An asset or liability is
considered to be interest-rate sensitive if it will mature or reprice within a
specific time period, over the interest-bearing liabilities maturing or
repricing within that same time period. On a monthly basis the Company and the
Bank monitor their gap, primarily cumulative through both six months and one
year maturities.
At June 30, 2004, the Company had a positive position with respect to
its exposure to interest rate risk maturing or repricing within one year. Total
interest-earning assets maturing or repricing within one year exceeded
interest-bearing liabilities maturing or repricing during the same time period
by $94.9 million, representing a positive one-year gap ratio of 3.68%.
24
The following table sets forth the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at June 30, 2004. All amounts are categorized by their actual
maturity, anticipated call 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 $ 18,499 - - - $ 18,499
Loans receivable 567,930 $ 158,544 $ 713,003 $ 59,675 1,499,152
Investment securities 126,089 139,763 509,882 60,091 835,825
Federal funds sold 51 - - - 51
-------- --------- ---------- ---------- ----------
Total interest-earning assets 712,569 298,307 1,222,885 119,766 2,353,527
-------- --------- ---------- ---------- ----------
Interest-bearing demand deposits 236,198 87,238 340,066 70,967 734,469
Savings deposits 33,613 62,272 231,251 45,737 372,873
Time certificates 122,147 153,173 221,549 12,466 509,335
Federal Home Loan Bank advances 4,848 24,856 118,908 5,806 154,418
Securities sold under agreements
to repurchase - FHLB 50,000 - - - 50,000
Securities sold under agreements
to repurchase 69,425 - - - 69,425
Trust preferred securities 51,548 20,619 - - 72,167
-------- --------- ---------- ---------- ----------
Total interest-bearing liabilities 567,779 348,158 911,774 134,976 1,962,687
-------- --------- ---------- ---------- ----------
Periodic Gap $144,790 $ (49,851) $ 311,111 $ (15,210) $ 390,840
======== ========= ========== ========== ==========
Cumulative Gap $144,790 $ 94,939 $ 406,050 $ 390,840
======== ========= ========== ==========
Cumulative Gap Ratio 5.61% 3.68% 15.73% 15.14%
======== ========= ========== =========
Net Interest Income Simulation
The Company also uses simulation models to measure the impact of
changing interest rates on its operations. The simulation model attempts to
capture the cash flow and repricing characteristics of the current assets and
liabilities on the Company's balance sheet. Assumptions regarding such things as
prepayments, rate change behaviors, level and composition of new balance sheet
activity and new product lines are incorporated into the simulation model. Net
interest income is simulated over a twelve month horizon under a variety of
linear yield curve shifts, subject to certain limits agreed to by ALCO. The
Company uses a base interest rate scenario provided by Data Resources, Inc.
("DRI") a third party econometric modeling service.
Actual results may differ from the simulated results due to such
factors as the timing, magnitude and frequency of interest rate changes, changes
in market conditions, management strategies and differences in actual versus
forecasted balance sheet composition and activity.
The following table shows the Company's estimated earnings sensitivity
profile versus the most likely DRI rate forecast as of June 30, 2004:
Change in Interest Rates Percentage Change in Net Interest Income
(Basis Points) Year 1
-------------- ------
+200 -2.0%
+100 -1.3%
-100 +1.7%
-200 +2.1%
25
Derivative Financial Instruments
The Company utilizes certain derivative financial instruments to
enhance its ability to manage interest rate risk that exist as part of its
ongoing business operations. Derivative financial instruments are entered into
for periods that match the related underlying exposures and do not constitute
positions independent of these exposures. The Company does not enter into
derivative financial instruments for trading purposes, nor is it a party to any
leveraged derivative financial instruments. The Company accounts for changes in
the fair value of fair value hedges and the corresponding hedged items as a
component of Other Non-Interest Income on the Company's Consolidated Statements
of Income. The gross unrealized gains and gross unrealized losses on the
Company's derivative financial instruments are included as a component of Other
Assets or Other Liabilities, respectively, in the Company's Consolidated
Statements of Financial Condition. The gross unrealized gains and gross
unrealized losses on the corresponding hedged items are included as part of the
carrying value of the hedged item in the Company's Consolidated Statements of
Financial Condition.
Net interest income or net interest expense related to outstanding
interest rate swap agreements are accrued and recognized in earnings as an
adjustment to the related interest income or interest expense of the hedged
asset/liability over the life of the related agreement. Gains and losses
associated with the termination of interest rate swap agreements for identified
positions are deferred and amortized over the remaining lives of the related
underlying assets/liabilities as an adjustment to the yield/rate. Unamortized
deferred gains and losses associated with terminated interest rate swap
agreements are included in the underlying assets/liabilities hedged.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
------------------------------------------------
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the quarter
-------------------------------------------------------
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at June 30, 2004. 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, Use of Proceeds and Issuer Purchases of Equity
Securities
Not applicable
ITEM 3. Defaults upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the shareholders of the Company was held on June
11, 2004 and the following matters were voted on:
1) Approval and adoption of the Agreement and Plan of Merger dated
February 16, 2004, by and between the Company and Community
Bancorp of New Jersey
FOR AGAINST ABSTAINED
--- ------- ---------
9,984,716 1,259,862 20,001
2) Election of directors
FOR WITHHELD
--- --------
Thomas A. Bracken 13,054,823 147,753
Bernard A. Brown 13,043,313 159,263
Ike Brown 13,027,043 175,533
Jeffrey S. Brown 13,042,211 160,365
Sidney R. Brown 13,042,211 160,365
Peter Galetto, Jr. 11,844,621 1,357,955
Douglas J. Heun 12,985,730 216,846
Anne E. Koons 12,784,598 417,978
Alfonse M. Mattia 13,023,746 178,830
Audrey S. Oswell 12,811,514 391,062
George A. Pruitt 12,847,779 354,797
Anthony Russo, III 13,034,589 167,987
Edward H. Salmon 12,847,432 355,144
John D. Wallace 12,847,653 354,923
3) Ratification of the appointment of Deloitte & Touche LLP as the
Company's Independent auditors
FOR AGAINST ABSTAINED
--- ------- ---------
13,028,592 151,543 22,441
27
4) Approval and adoption of the Company's 2004 Stock-Based
Incentive Plan:
FOR AGAINST ABSTAINED
--- ------- ---------
8,891,430 2,277,237 95,912
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 31 Certification Pursuant to ss.302 of the Sarbanes-Oxley Act
of 2003.
Exhibit 32 Certification Pursuant to ss.906 of the Sarbanes-Oxley Act
of 2003.
Form 8-K The Company filed a Current Report on Form 8-K on April
19, 2004, to report earnings for the quarter ended March
31, 2004.
Form 8-K The Company filed a Current Report on Form 8-K on June 11,
2004 announcing the results of the 2004 annual meeting
of stockholders including the approval by stockholders
of the Company's acquisition of Community Bancorp of New
Jersey.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Bancorp, Inc.
-----------------
(Registrant)
/s/Thomas A. Bracken
------------------------------------
Date: August 5, 2004 Thomas A. Bracken
President and Chief Executive Officer
Date: August 5, 2004 /s/Dan A. Chila
------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
29