UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
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
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(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 17,106,708 November 8, 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 3
at September 30, 2004 and December 31, 2003
Unaudited Condensed Consolidated Statements of Income 4
for the Three and Nine Months Ended September 30, 2004 and 2003
Unaudited Condensed Consolidated Statement of Shareholders' Equity 5
for the Nine Months Ended September 30, 2004
Unaudited Condensed Consolidated Statements of Cash Flows 6
for the Nine Months Ended September 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 25
ITEM 4. CONTROLS AND PROCEDURES 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
ITEM 3. Defaults upon Senior Securities 27
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 27
ITEM 6. Exhibits 27
SIGNATURES 28
CERTIFICATIONS 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except par value amounts)
September 30, December 31,
2004 2003
---- ----
ASSETS
Cash and due from banks $ 75,746 $ 78,841
Interest-bearing bank balances 15,084 2,789
Federal funds sold 26,671 487
---------- ----------
Cash and cash equivalents 117,501 82,117
Investment securities available for sale (amortized cost -
$855,376; 2004 and $960,877; 2003) 853,442 963,428
Investment securities held to maturity (fair value approximates $43,179) 43,264 -
Loans receivable (net of allowance for loan losses -
$21,824; 2004 and $17,614; 2003) 1,739,451 1,364,465
Restricted equity investments 13,150 12,551
Bank properties and equipment, net 36,371 34,093
Real estate owned, net 1,860 4,444
Accrued interest receivable 13,302 11,266
Goodwill 99,810 50,600
Intangible assets, net 36,179 26,195
Deferred taxes, net 10,070 8,465
Bank owned life insurance 39,888 32,785
Other assets 8,968 9,078
---------- ----------
TOTAL $3,013,256 $2,599,487
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $2,429,364 $2,111,125
Advances from the Federal Home Loan Bank 149,569 163,964
Federal funds purchased - 2,500
Securities sold under agreements to repurchase - customers 69,930 55,934
Junior subordinated debentures 77,322 72,167
Other liabilities 11,243 8,079
---------- ----------
Total liabilities 2,737,428 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: 17,184,793; 2004 and 13,381,310; 2003 17,185 13,381
Additional paid in capital 243,837 151,631
Retained earnings 17,033 20,062
Accumulated other comprehensive (loss) income (1,181) 1,690
Treasury stock at cost, 90,562 shares (1,046) (1,046)
---------- ----------
Total shareholders' equity 275,828 185,718
---------- ----------
TOTAL $3,013,256 $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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $25,911 $20,558 $68,856 $62,662
Interest on taxable investment securities 6,289 4,993 18,439 16,411
Interest on non-taxable investment securities 468 638 1,479 1,879
Interest and dividends on restricted equity investments 134 88 359 470
Interest on federal funds sold 183 106 266 135
------- ------- ------- -------
Total interest income 32,985 26,383 89,399 81,557
------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits 6,264 5,197 16,922 18,534
Interest on short-term borrowed funds 1,838 1,856 5,426 6,205
Interest on debentures 939 - 2,560 -
Interest on guaranteed preferred beneficial interest in
Company's subordinated debt - 1,044 - 3,150
------- ------- ------- -------
Total interest expense 9,041 8,097 24,908 27,889
------- ------- ------- -------
Net interest income 23,944 18,286 64,491 53,668
PROVISION FOR LOAN LOSSES 300 2,275 1,660 3,660
------- ------- ------- -------
Net interest income after provision for loan losses 23,644 16,011 62,831 50,008
------- ------- ------- -------
NON-INTEREST INCOME:
Service charges on deposit accounts 2,387 1,975 6,758 5,661
Other service charges 27 98 333 304
Gain on sale of bank properties and equipment 152 155 2,473 164
Gain on sale of loans 70 - 181 -
Gain on sale of investment securities 277 788 1,180 1,658
Gain on sale of branch deposits - 1,314 - 2,629
Other 1,336 1,157 3,928 2,930
------- ------- ------- -------
Total non-interest income 4,249 5,487 14,853 13,346
------- ------- ------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 10,598 8,659 29,213 24,840
Occupancy expense 2,876 2,123 8,041 6,734
Equipment expense 1,871 1,272 5,147 4,046
Data processing expense 976 821 2,959 2,450
Amortization of intangible assets 1,522 910 3,842 2,760
Other 3,394 2,874 9,866 7,747
------- ------- ------- -------
Total non-interest expenses 21,237 16,659 59,068 48,577
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 6,656 4,839 18,616 14,777
INCOME TAXES 2,164 1,522 5,674 4,575
------- ------- ------- -------
NET INCOME $4,492 $ 3,317 $12,942 $10,202
====== ======= ======= =======
Basic earnings per share $ 0.27 $ 0.27 $ 0.87 $ 0.83
====== ====== ====== =======
Diluted earnings per share $ 0.25 $ 0.25 $ 0.80 $ 0.77
====== ====== ====== =======
Weighted average shares - basic 16,816,930 12,356,248 14,928,773 12,342,229
========== ========== ========== ==========
Weighted average shares - diluted 18,041,028 13,443,786 16,119,718 13,200,043
========== ========== ========== ==========
- -----------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
4
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Nine Months Ended September 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 - - 12,942 - - 12,942
Net change in unrealized gain on securities
available for sale, net of taxes of $1,614 - - - (2,871) - (2,871)
--------
Comprehensive income - - - - - 10,071
--------
Exercise of stock options 27 210 - - - 237
Issuance of common stock 3,112 76,700 - - - 79,812
Stock dividends 665 15,296 (15,961) - - -
Cash paid for fractional interest
resulting from stock dividend - - (10) - - (10)
------- -------- ------- ------- ------- --------
BALANCE, SEPTEMBER 30, 2004 $17,185 $243,837 $17,033 $(1,181) $(1,046) $275,828
======= ======== ======= ======= ======= ========
- ------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements.
5
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months
Ended September 30,
-----------------------
2004 2003
---- ----
OPERATING ACTIVITIES:
Net income $ 12,942 $ 10,202
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 1,660 3,660
Depreciation 2,741 1,964
Net amortization of investments securities 1,609 2,504
Amortization of intangible assets 3,842 2,760
Write down of book value of fixed assets 177 115
Gain on sale of investment securities available for sale (1,180) (1,658)
Gain on sale of bank properties and equipment (2,473) (164)
Gain on sale of branch deposits - (2,629)
Gain on sale of loans (181) -
Increase in cash value of BOLI (1,219) -
Deferred income taxes 1,015 (503)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (578) (116)
Other assets (589) (23,013)
Other liabilities 3,097 (4,106)
--------- ---------
Net cash provided by (used in) operating activities 20,863 (10,984)
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (398,131) (466,973)
Repayments (purchases) of restricted equity securities 411 (1,176)
Proceeds from maturities, prepayments or calls of investment securities
available for sale 442,740 393,265
Proceeds from sale of investment securities available for sale 131,776 93,386
Net increase in loans (145,035) (71,531)
Purchase of bank properties and equipment (3,613) (2,395)
Proceeds from the sale of bank properties and equipment 7,260 84
Proceeds from the sale of bank properties and equipment resulting from branch sales - 664
Net proceeds from sale of real estate owned 2,936 679
--------- ---------
Net cash provided by (used in) investing activities 38,344 (53,997)
--------- ---------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (23,765) 160,377
Increase (decrease) in cash resulting from bank acquisitions / branch sales 11,963 (39,316)
Purchase price adjustment of branch assets purchased 19 -
Net (repayments) borrowings under line of credits, advances and repurchase agreements (12,599) 41,918
Principal payments on loan payable - (1,160)
Proceeds from exercise of stock options 238 259
Payments of fractional interests resulting from stock dividend (10) (7)
Proceeds from issuance of common stock 330 246
--------- ---------
Net cash (used in) provided by financing activities (23,823) 162,317
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 35,384 97,336
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 82,117 65,614
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 117,501 $ 162,950
========= =========
- --------------------------------------------------------------------------
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 subsidiaries. Its principally owned subsidiary is Sun National
Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with instructions to Form 10-Q, and
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations,
changes in equity and cash flows in conformity with accounting
principles generally accepted in the United States of America. However,
all normal recurring adjustments that, in the opinion of management,
are necessary for a fair presentation of the consolidated financial
statements have been included. These financial statements should be
read in conjunction with the audited consolidated financial statements
and the accompanying notes thereto included in the Company's Annual
Report on Form 10-K for the period ended December 31, 2003. The results
for the three and nine months ended September 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.
Investment Securities - The Company accounts for debt securities as
follows:
Held to Maturity - Debt securities that management has the
positive intent and ability to hold until maturity are classified as
held to maturity and carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts. Premiums
are amortized and discounts are accreted using the interest method over
the estimated remaining term of the underlying security.
Available for Sale - Debt securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes to market interest or prepayment rates, needs for
liquidity, and changes in the availability of and the yield of
alternative investments, are classified as available for sale. These
assets are carried at fair value. Fair value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and are reported net of tax as other
comprehensive income or loss until realized. Realized gains and losses
on the sale of investment securities are recorded as of trade date,
reported in the consolidated statement of income and determined using
the adjusted cost of the specific security sold.
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
7
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.
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 September 30, 2004, the Company had four 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 For the Nine Months
Ended Ended
September 30, September 30,
-------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Reported net income available to shareholders $4,492 $3,317 $12,942 $10,202
Add: Total stock-based employee compensation
expense included in reported net income 6 10 26
(net of tax) 11
Deduct: Total stock-based employee
compensation expense determined under
fair value method (net of tax) (141) (259) (554) (952)
------ ------ ------- ------
Pro forma net income available to shareholders $4,357 $3,068 $12,414 $9,261
====== ====== ======= ======
Earnings per share:
Basic - as reported $0.27 $0.27 $0.87 $0.83
Basic - pro forma $0.26 $0.25 $0.83 $0.75
Diluted - as reported $0.25 $0.25 $0.80 $0.77
Diluted - pro forma $0.24 $0.23 $0.77 $0.70
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 below market 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 was effective for the
Company's reporting periods beginning after June 15, 2004. In September
2004, the FASB delayed the measurement and recognition provisions
relating to debt and equity securities of EITF 03-1 until the FASB
issues additional guidance. The EITF 03-1 disclosures provisions are
effective for the Company's fiscal year ending December 31, 2004.
Management does not expect the adoption of to have a material effect on
the Company's operating results or financial condition.
8
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.
(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 $63 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. 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 $342 million. Goodwill of
approximately $49 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) Investment Securities Held to Maturity
During the quarter, the Company established a held to maturity
investment portfolio. Investments classified as held to maturity are
carried at amortized cost. The securities designated as held to
maturity will have characteristics consistent with the Company's
investment policy guidelines.
The amortized cost of investment securities held to maturity and the
approximate fair value were as follows:
September 30, 2004
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury obligations - - - -
U.S. Government agencies and
mortgage-backed securities $ 28,954 - $ (66) $ 28,888
State and municipal obligations - - - -
Other 14,310 $ 14 (33) 14,291
-------- ---- ----- --------
Total $ 43,264 $ 14 $ (99) $ 43,179
======== ==== ===== ========
(4) Loans
The components of loans as of September 30, 2004 and December 31, 2003
were as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
Commercial and industrial $1,494,528 $1,169,164
Home equity 121,480 80,292
Second mortgages 51,417 51,531
Residential real estate 31,669 29,788
Other 62,181 51,304
---------- ----------
Total gross loans 1,761,275 1,382,079
Allowance for loan losses (21,824) (17,614)
---------- ----------
Net Loans $1,739,451 $1,364,465
========== ==========
Non-accrual loans $11,528 $21,568
======= =======
9
The decrease in non-accrual loans at September 30, 2004 represents the
complete repayment of the Bank's largest non-accrual loan which had a
book balance of $9.1 million.
(5) Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
For the nine month
period ended For the year ended
September 30, 2004 December 31, 2003
------------------ -----------------
Balance, beginning of period $17,614 $16,408
Charge-offs (1,050) (4,380)
Recoveries 663 761
------- -------
Net charge-offs (387) (3,619)
Provision for loan losses 1,660 4,825
Allowance on acquired loans 2,937 -
------- -------
Balance, end of period 21,824 $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.
Impairment losses are included in the provision for loan losses. Large
groups of smaller balance, homogeneous loans are collectively evaluated
for impairment, except for those loans restructured under a troubled
debt restructuring. Loans collectively evaluated for impairment include
consumer loans and residential real estate loans, and are not included
in the data that follow:
September 30, 2004 December 31, 2003
------------------ -----------------
Impaired loans with related reserve for loan
losses calculated under SFAS No. 114 $30,878 $31,463
Impaired loans with no related reserve for loan
losses calculated under SFAS No. 114 1,662 6,147
------- -------
Total impaired loans $32,540 $37,610
======= =======
Valuation allowance related to impaired loans $ 3,631 $ 3,439
======= =======
For the nine For the
months ended year ended
September 30, 2004 December 31, 2003
------------------ -----------------
Average impaired loans $37,304 $34,715
======= =======
Interest income recognized on impaired loans $1,563 $2,177
====== ======
Cash basis interest income recognized on impaired loans $1,407 $2,311
====== ======
10
(6) Real estate owned
September 30, 2004 December 31, 2003
------------------ -----------------
Commercial properties $1,550 $4,013
Residential properties - 122
Bank properties 310 309
------ ------
Total $1,860 $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.
(7) Deposits
Deposits consist of the following major classifications:
September 30, 2004 December 31, 2003
------------------ -----------------
Demand deposits - interest bearing $ 792,521 $ 784,453
Demand deposits - non-interest bearing 542,029 399,538
Savings deposits 480,534 392,784
Time certificates under $100,000 412,766 390,312
Time certificates $100,000 or more 201,514 144,038
---------- ----------
Total $2,429,364 $2,111,125
========== ==========
(8) Junior Subordinated Debentures Held by Trusts that Issued Capital Debt
The following is a summary of the outstanding capital securities issued
by each Issuer Trust and the junior subordinated debentures issued by
the Company to each Trust as of September 30, 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
3-mo LIBOR
CBNJ Trust I December 19, 2002 5,000 plus 3.35% 5,155 January 7, 2033 January 7, 2008
------- -------
$75,000 $77,322
======= =======
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. CBNJ Trust I was acquired in
the July 2004 acquisition. CBNJ Trust I variable annual rate will not
exceed 12.5% through five years from its issuance.
(9) 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 income (loss) for the three-months
ended September 30, 2004 and 2003 amounted to $10,735,000 and
$(3,437,000), respectively. Total comprehensive income for the
nine-months ended September 30, 2004 and 2003 amounted to $10,071,000
and $6,782,000, respectively.
(10) 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 Nine Months
Ended September 30, Ended September 30,
--------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $4,492 $3,317 $12,942 $10,202
Dilutive stock options outstanding 3,099,334 2,875,754 2,929,505 2,869,002
Average exercise price per share $9.62 $9.71 $9.72 $9.69
Average market price $21.44 $20.36 $22.40 $16.49
Average common shares outstanding 16,816,930 12,767,855 14,928,773 12,342,229
Increase in shares due to exercise of
options - diluted basis 1,087,538
1,224,098 1,190,945 857,814
---------- ---------- ---------- ----------
Adjusted shares outstanding - diluted 18,041,028 13,855,393 16,119,718 13,200,043
========== ========== ========== ==========
Net earnings per share - basic $0.27 $0.26 $0.87 $0.83
Net earnings per share - diluted $0.25 $0.24 $0.80 $0.77
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 35,112 - 16,120 5,769
========== ========== ========== ==========
(11) Commitments
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
The guarantees are primarily issued to support private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. In the event of a draw by the beneficiary that complies with
the terms of the letter of credit, the Company would be required to
honor the commitment. The Company takes various forms of collateral,
such as real estate assets and customer business assets to secure the
commitment. Additionally, all letters of credit are supported by
indemnification agreements executed by the customer. The maximum
undiscounted exposure related to these commitments at September 30,
2004 was $50.3 million, and the portion of the exposure not covered by
collateral was approximately $14.2 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
THE COMPANY MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING
STATEMENTS," INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS QUARTERLY REPORT ON FORM 10-Q
AND THE EXHIBITS THERETO), IN ITS REPORTS TO SHAREHOLDERS AND IN OTHER
COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES'
LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, RISK-BASED
CAPITAL GUIDELINES AND REPORTING INSTRUCTIONS, SECURITIES AND INSURANCE);
TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING
HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE
FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of the financial condition and results of
operations are based on the unaudited Consolidated Financial Statements, which
are prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenue and expenses. Management evaluates these estimates
and assumptions on an ongoing basis, including those described below. Management
bases its estimates on historical experience and various other factors and
assumptions that are believed to be reasonable under the circumstances. These
form the bases for making judgments on the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Allowance for loan losses. Through the Bank, the Company originates
loans that it intends to hold for the foreseeable future or until maturity or
repayment. The Bank may not be able to collect all principal and interest due on
these loans. Allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio as of the balance sheet
date. 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
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 seven branches during the third quarter bringing the total closed
year to date to eleven with anticipated action on 3 branches in the fourth
quarter. During the quarter, the Company incurred net pre-tax branch closing
costs of $283,000. These closing costs are part of the previously disclosed
estimated total branch rationalization closing costs of $2.3 million. By year
end 2004, the Company anticipates an elimination of a total of twenty-one
branches since December 2001.
Financial Condition
Total assets at September 30, 2004 increased by $413.8 million, or
15.9% to $3.01 billion as compared to $2.60 billion at December 31, 2003. This
increase was primarily the result of increases in cash and cash equivalents of
$35.4 million, net loans receivable of $375.0 million, goodwill and intangibles
of $59.2 partially offset by a decrease in total investment securities of $66.7
million. During the quarter, the Company acquired assets of approximately $374
million and recorded purchase adjustments of approximately $63 million from the
Community Bank of New Jersey ("Community") acquisition.
Cash and cash equivalents increased $35.4 million, from $82.1 million
at December 31, 2003 to $117.5 million at September 30, 2004, resulting
primarily from the increases in Federal Funds Sold of $26.2 million and interest
bearing deposits with the FHLB of $12.3 million.
Investment securities available for sale decreased $110.0 million or
11.4%, from $963.4 million at December 31, 2003 to $853.4 million at September
30, 2004. A portion of the decrease resulted from certain cash flows from the
available for sale portfolio that were reinvested in a new held to maturity
portfolio during the quarter. At September 30, 2004, the held to maturity
portfolio amounted to $43.2 million. The remaining decrease was primarily the
result of the planned reinvestment of excess short term securities from
investments to loans. These short term securities were purchased as a result of
increased liquidity resulting from the December 2003 acquisition of branches
from New York Community Bank ("NYCB"). During the nine months ended September
30, 2004, loan demand outpaced deposit growth and the majority of these funds
were reinvested into the loan portfolio. Also, as a result of the July 2004
Community acquisition, the Company acquired approximately $115 million in
investment securities of which, approximately $60 million were sold and used
primarily to pay off a $50 million short term FHLB advance.
16
Net loans receivable at September 30, 2004 were $1.74 billion, an
increase of $375.0 million from $1.36 billion at December 31, 2003. During the
quarter, the Company acquired approximately $230 million in loans as a result of
the Community acquisition. The Company experienced strong internal loan growth
primarily in commercial and industrial loans and home equity consumer loans. The
ratio of allowance for loan losses to total loans was 1.24% at September 30,
2004 compared to 1.27% at December 31, 2003.
Non-performing loans were $12.1 million at September 30, 2004 compared
to $21.8 million at December 31, 2003. The ratio of allowance for loan losses to
total non-performing loans was 180.90% at September 30, 2004 compared to 80.74%
at December 31, 2003. The decrease in non-performing loans at September 30, 2004
represents the complete repayment of the Bank's largest non-performing loan
which had a book balance of $9.1 million. Real estate owned decreased $2.6
million to $1.9 million at September 30, 2004, resulting from the sale of one
commercial property with a carrying value of $2.5 million that resulted in a
gain of $188,000. The ratio of non-performing assets to total loans and real
estate owned was 0.79% at September 30, 2004 compared to 1.89% at December 31,
2003.
Total deposits were $2.43 billion at September 30, 2004, reflecting a
$318.2 million increase from December 31, 2003. During the quarter the Company
acquired approximately $342 million in deposits as a result of the Community
acquisition. In addition, the Company acquired approximately $340 million in the
December 2003 NYCB branch acquisition and consolidated an additional eleven
branches during 2004 as a result of the branch rationalization program. Net
deposit growth from acquisitions and internal growth net of deposit attrition
from the branch rationalization program resulted in an increase in core deposits
(demand and savings) of $238.3 million or 15.1% at September 30, 2004 over the
December 31, 2003, and non-core deposits (CD's) growth of $79.9 million or 15.0%
over the same period. Core deposits represented 74.7% of total deposits at both
September 30, 2004 and December 31, 2003.
Total shareholders' equity increased $90.1 million, from $185.7 million
at December 31, 2003, to $275.8 million at September 30, 2004. The increase was
primarily the result of the Community acquisition resulting in an increase of
shareholders' equity of approximately $79 million, net income amounting to $12.9
million, offset slightly by a $2.9 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 $117.5 million at September 30, 2004,
the Company had additional secured borrowing capacity with the FHLB of
approximately $46 million and other sources of approximately $25 million.
The Company's largest cash flows are investing activities. During the
nine months ended September 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 $23.8 million of net cash, was primarily the
result of the net decrease in deposits and a net decrease in short term
borrowings offset by a net increase in cash resulting from acquisitions. 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. 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, through its trust
subsidiaries, issued trust preferred securities that qualify as Tier 1 or core
capital of the Company, subject to a 25% capital limitation under risk-based
capital guidelines developed by the Federal Reserve Board. The portion that
exceeds the 25% capital limitation qualifies as Tier 2, or supplementary capital
of the Company. At September 30, 2004, the full amount of the Company's $75.0
million in trust preferred securities qualify as Tier 1.
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
Net income increased by $1.2 million, or 35.4% for the three months
ended September 30, 2004 to $4.5 million from $3.3 million for the three months
ended September 30, 2003. The increase in net income was primarily due to an
increase in net interest income of $5.7 million, a decrease in the provision for
loan losses of $2.0 million offset by a decrease in non-interest income of $1.2
million which includes a third quarter 2003 gain on branch sale of $1.3 million,
and an increase in non-interest expense of $4.6 million. These three month ended
comparisons were also materially impacted by the acquisitions of Community Bank
of New Jersey in July 2004 and the branches of New York Community Bank in
December 2003 as is discussed below.
Net Interest Income. Net interest income (on a tax-equivalent basis)
increased $5.6 million, or 29.9% to $24.2 million for the three months ended
September 30, 2004 from $18.6 million for the same period in 2003. Net interest
income (on a tax-equivalent basis) increased $5.7 million due to volume the
majority of which is due to an increase of $620.4 million in the average balance
of interest-earning assets. The rate component offset this increase in net
interest income by $64,000. During the quarter, the Company acquired
approximately $345 million in interest earning assets as a result of the
Community acquisition.
The interest rate spread and margin (on a tax-equivalent basis) for the
three months ended September 30, 2004 was 3.31% and 3.61%, respectively,
compared to 3.30% and 3.61%, respectively, for the same period 2003. The yield
on the average interest-earning assets declined 23 basis points from 5.19% for
the three months ended September 30, 2003 to 4.96% for the same period in 2004,
while the cost of funds on average interest-bearing liabilities decreased 24
basis points from 1.89% for the three months ended September 30, 2003 to 1.65%
for the same period in 2004.
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances.
18
At or for the three months ended At or for the three months ended
September 30, 2004 September 30, 2003
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,457,918 $ 22,261 6.11 % $1,086,150 $17,344 6.39 %
Home equity 115,961 1,114 3.84 67,293 637 3.79
Second mortgage 51,302 846 6.60 53,685 874 6.51
Residential real estate 31,893 604 7.58 36,944 665 7.20
Other 60,039 1,086 7.24 51,746 1,038 8.02
---------- -------- ---------- -------
Total loans receivable 1,717,113 25,911 6.04 1,295,818 20,558 6.35
Investment securities (3) 886,733 7,087 3.20 712,315 6,035 3.39
Interest-bearing deposit with banks 19,665 44 0.89 6,299 11 0.68
Federal funds sold 57,075 183 1.28 45,735 106 0.93
---------- -------- ---------- -------
Total interest-earning assets 2,680,586 33,225 4.96 2,060,167 26,710 5.19
---------- -------- ---------- -------
Cash and due from banks 83,126 69,294
Bank properties and equipment 38,875 29,336
Goodwill and intangible assets 116,409 37,189
Other assets 55,946 49,328
---------- ----------
Non-interest-earning assets 294,356 185,147
---------- ----------
Total Assets $2,974,942 $2,245,314
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 798,397 1,830 0.92 % $ 678,879 1,566 0.92 %
Savings deposits 485,133 1,011 0.83 324,434 824 1.02
Time deposits 597,233 3,423 2.29 412,106 2,807 2.72
---------- -------- ---------- -------
Total interest-bearing deposit accounts 1,880,763 6,264 1.33 1,415,419 5,197 1.47
---------- -------- ---------- -------
Borrowed money:
Federal funds purchased - - - 1,424 7 1.95
Securities sold under agreements to
repurchase 68,534 138 0.81 77,782 77 0.39
FHLB advances 166,985 1,700 4.07 163,075 1,772 4.35
Junior subordinated debentures 76,874 939 4.89 - - -
---------- -------- ---------- -------
Total borrowings 312,393 2,777 3.56 242,281 1,856 3.06
Guaranteed preferred beneficial interest in
Company's subordinated debt - - - 59,274 1,044 7.05
---------- -------- ---------- -------
Total interest-bearing liabilities 2,193,156 9,041 1.65 1,716,974 8,097 1.89
---------- -------- ---------- -------
Non-interest-bearing demand deposits 512,643 355,810
Other liabilities 21,403 18,318
---------- ----------
Non-interest-bearing liabilities 534,046 374,128
---------- ----------
Total liabilities 2,727,202 2,091,102
Shareholders' equity 247,740 154,212
---------- ----------
Total liabilities and shareholders' equity $2,974,942 $2,245,314
========== ==========
Net interest income $24,184 $18,613
======= =======
Interest rate spread (4) 3.31 % 3.30 %
====== ======
Net interest margin (5) 3.61 % 3.61 %
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 122.23 % 119.99 %
====== ======
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans.
(2) Loan fees are included in interest income and the amount is not material
for this analysis.
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
19
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Three Months Ended September 30,
2004 vs. 2003
--------------------------------
Increase (Decrease)
Due to
--------------------------------
Volume Rate Net
------ ---- ---
Interest income
Loans receivable:
Commercial and industrial $5,706 $ (789) $4,917
Home equity 468 10 478
Second mortgage (39) 11 (28)
Residential real estate (94) 33 (61)
Other 155 (107) 48
------ -------- -------
Total loans receivable 6,196 (842) 5,354
Investment securities 1,410 (358) 1,052
Interest-bearing deposits accounts 29 4 33
Federal funds sold 30 47 77
------ -------- ------
Total interest-earning assets $7,665 $ (1,149) $6,516
------ -------- ------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 274 $ (10) $ 264
Savings deposits 354 (167) 187
Time deposits 1,113 (497) 616
------ -------- ------
Total interest-bearing deposit accounts 1,741 (674) 1,067
Borrowed money:
Federal funds purchased (7) - (7)
Securities sold under agreements
to repurchase (10) 71 61
FHLB advances 42 (114) (72)
Debentures and trust securities 263 (368) (105)
------ -------- ------
Total borrowed money 288 (411) (123)
Total interest-bearing liabilities $2,029 $ (1,085) $ 944
------ -------- ------
Net change in net interest income $5,636 $ (64) $5,572
====== ======== ======
Interest income (on a tax-equivalent basis) increased by $6.5 million,
to $33.2 million for the three months ended September 30, 2004 compared to $26.7
million for the same period in 2003. The increase in interest income was due to
a 30.1% increase in the average balance of interest earning assets which
produced an increase in interest income of $7.7 million offset by a continued
drop in interest rates, which lowered the yield on average interest-earning
assets by 23 basis points, or $1.1 million.
Interest expense increased $945,000, or 11.7%, to $9.0 million for the
three months ended September 30, 2004 compared to $8.1 million for the same
period in 2003. The increase in interest expense was due to a 27.7% increase in
the average balance of interest bearing liabilities which produced an increase
in interest expense of $2.0 million offset by a continued drop in interest
rates, which lowered the yield on average interest-earning assets by 24 basis
points, or $1.1 million. During the quarter, the Company acquired approximately
$357 million in interest bearing liabilities as a result of the Community
acquisition.
20
Provision for Loan Losses. For the three months ended September 30,
2004, the provision for loan losses was $300,000, a decrease of $2.0 million,
compared to $2.3 million for the same period in 2003. During the third quarter
2003, the Company provided a special provision of $1.4 million to specifically
reserve for two lending relationships with loans approximating $13.5 million.
During 2004, with the exception of $1.3 million, all of the loans relating to
these relationships have been paid off including the September 2004 repayment of
the Bank's largest non-performing loan which had a book balance of $9.1 million.
The remaining decrease of $600,000 in the provision is due to a general
improvement the credit quality of the Bank's loan portfolio. 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 decreased $1.2 million for the
three-month period ended September 30, 2004 compared to the three-month period
ended September 30, 2003. The decrease was primarily the result of decrease in
gain on sale of branches of $1.3 million and a decrease in gain on sale of
investment securities of $511,000. These decreases were partially offset by an
increase in service charges on deposit accounts of $412,000 from the July 2004
and December 2003 acquisitions, a $179,000 increase in other income primarily
resulting from an increase of $50,000 in BOLI investment income and an increase
of $120,000 in ATM/debit card fee income.
Non-Interest Expenses. Non-interest expenses increased $4.6 million, or
27.5% to $21.2 million for the three months ended September 30, 2004 as compared
to $16.7 million for the same period in 2003. Of this increase, $2.8 million is
due to the July 2004 and December 2003 acquisitions consisting primarily of the
following:
For the Acquisition Internally
Three Months Ended Related Generated
September 30, Expenses Variance
------------- -------- --------
2004 2003
---- ----
NON-INTEREST EXPENSES:
Salaries and employee benefits $10,598 $ 8,659 $ 1,100 $ 869
Occupancy expense 2,876 2,123 485 268
Equipment expense 1,871 1,272 332 267
Data processing expense 976 821 - 155
Amortization of intangible assets 1,522 910 612 -
Other 3,394 2,874 342 178
------- ------- ------ ------
Total non-interest expenses $21,237 $16,659 $2,765 $1,817
======= ======= ====== ======
Of the internally generated $1.8 million in increases, $869,000 was in
salaries and employee benefits due to increased staffing, $268,000 was in
occupancy expense primarily resulting from $306,000 in lease buyout costs
pertaining to recent branch closures, $178,000 was in other expenses resulting
from a $286,000 increase in legal and audit fees, a $120,000 write-off of fixed
assets also related to recent branch closures offset by a $108,000 decrease in
expenses relating to the managed loan portfolio.
Income Taxes. Income taxes increased $642,000 for the three months
ended September 30, 2004 as compared to the same period in 2003. The increase
resulted from higher pre-tax earnings.
Comparison of Operating Results for the Nine Months Ended September 30, 2004 and
2003
Net income increased by $2.7 million, or 26.9% for the nine months
ended September 30, 2004 to $12.9 million from $10.2 million for the nine months
ended September 30, 2003. The increase in net income was primarily due to an
increase in net interest income of $10.8 million, a decrease in the provision
for loan losses of $2.0 million, and an increase in non-interest income of $1.5
million offset by an increase in non-interest expenses of $10.5 million. These
nine month ended comparisons were also materially impacted by the acquisitions
of Community Bank of New Jersey in July 2004 and the branches of New York
Community Bank in December 2003 as will be discussed below.
21
Net Interest Income. Net interest income (on a tax-equivalent basis)
increased $10.6 million, or 19.4% to $65.3 million for the nine months ended
September 30, 2004 from $54.6 million for the same period in 2003. Net interest
income (on a tax-equivalent basis) increased $10.2 million due to volume, the
majority of which is due to an increase of $416.5 million in the average balance
of interest-earning assets. The rate component increased net interest income by
$385,000. During the third quarter 2004, the Company acquired approximately $345
million in interest earning assets as a result of the Community acquisition.
The interest rate spread and margin (on a tax-equivalent basis) for the
nine months ended September 30, 2004 was 3.28% and 3.55%, respectively, compared
to 3.23% and 3.58%, respectively, for the same period 2003. The yield on the
average interest-earning assets declined 50 basis points from 5.41% for the nine
months ended September 30, 2003 to 4.91% for the same period in 2004, while the
cost of funds on average interest-bearing liabilities decreased 55 basis points
from 2.18% for the nine months ended September 30, 2003 to 1.63% for the same
period in 2004.
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances.
At or for the nine months At or for the nine months
ended ended
September 30, 2004 September 30, 2003
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $1,294,084 $58,918 6.07 % $1,072,293 $52,995 6.59 %
Home equity 96,456 2,752 3.81 57,322 1,722 4.01
Second mortgage 49,950 2,393 6.39 49,560 2,530 6.81
Residential real estate 31,314 1,673 7.12 39,410 2,192 7.42
Other 55,323 3,120 7.52 52,612 3,222 8.16
---------- ------- ---------- -------
Total loans receivable 1,527,127 68,856 6.01 1,271,197 62,662 6.57
Investment securities (3) 880,257 20,977 3.18 736,408 19,685 3.56
Interest-bearing deposit with banks 11,696 59 0.67 7,305 39 0.71
Federal funds sold 30,967 266 1.15 18,654 135 0.96
---------- ------- ---------- -------
Total interest-earning assets 2,450,047 90,158 4.91 2,033,564 82,521 5.41
---------- ------- ---------- -------
Cash and due from banks 75,693 64,552
Bank properties and equipment 35,558 29,445
Goodwill and intangible assets 89,461 38,152
Other assets 64,178 48,171
---------- ----------
Non-interest-earning assets 264,890 180,320
---------- ----------
Total Assets $2,714,937 $2,213,884
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 780,207 4,852 0.83 % $ 667,985 5,818 1.16 %
Savings deposits 416,971 2,432 0.78 323,878 3,244 1.34
Time deposits 542,109 9,638 2.37 406,036 9,472 3.11
---------- ------- ---------- -------
Total interest-bearing deposit accounts 1,739,287 16,922 1.30 1,397,899 18,534 1.77
---------- ------- ---------- -------
Borrowed money:
Federal funds purchased 4,276 47 1.47 6,029 79 1.74
Securities sold under agreements to
repurchase 63,123 249 0.53 72,132 283 0.52
FHLB advances 163,055 5,130 4.19 172,622 5,843 4.51
Junior subordinated debentures 73,753 2,560 4.63 - -
---------- ------- ---------- -------
Total borrowings 304,207 7,986 3.50 250,783 6,205 3.30
Guaranteed preferred beneficial interest in
Company's subordinated debt - - - 59,274 3,150 7.09
---------- ------- ---------- -------
Total interest-bearing liabilities 2,043,494 24,908 1.63 1,707,956 27,889 2.18
---------- ------- ---------- -------
Non-interest-bearing demand deposits 437,382 326,193
Other liabilities 25,443 28,610
---------- ----------
Non-interest-bearing liabilities 462,825 354,803
---------- ----------
Total liabilities 2,506,319 2,062,759
Shareholders' equity 208,618 151,125
---------- ----------
Total liabilities and shareholders' equity $2,714,937 $2,213,884
========== ==========
22
At or for the nine months At or for the nine months
ended ended
September 30, 2004 September 30, 2003
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Net interest income $65,250 $54,632
======= =======
Interest rate spread (4) 3.28 % 3.23 %
====== ======
Net interest margin (5) 3.55 % 3.58 %
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 119.89 % 119.06 %
====== ======
- -------------------------------------------------------------------------------
(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.
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Nine Months Ended September 30,
2004 vs. 2003
----------------------------------
Increase (Decrease)
Due to
----------------------------------
Volume Rate Net
Interest income
Loans receivable:
Commercial and industrial $ 10,336 $ (4,413) $ 5,923
Home equity 1,120 (90) 1,030
Second mortgage 20 (157) (137)
Residential real estate (435) (84) (519)
Other 161 (263) (102)
-------- -------- --------
Total loans receivable 11,202 (5,007) 6,195
Investment securities 3,577 (2,285) 1,292
Interest-bearing deposits accounts 22 (2) 20
Federal funds sold 102 131 29
-------- -------- --------
Total interest-earning assets $ 14,903 $ (7,265) $ 7,638
-------- -------- --------
Interest expense
Interest-bearing deposit accounts:
Interest-bearing demand deposit $ 874 $ (1,840) $ (966)
Savings deposits 774 (1,586) (812)
Time deposits 2,733 (2,567) 166
-------- -------- --------
Total interest-bearing deposit accounts 4,381 (5,993) (1,612)
Borrowed money:
Federal funds purchased (21) (11) (32)
Securities sold under agreements to repurchase (36) 2 (34)
FHLB advances (314) (399) (713)
Debentures and trust securities 659 (1,249) (590)
-------- -------- --------
Total borrowed money 288 (1,657) (1,369)
Total interest-bearing liabilities $ 4,669 $ (7,650) $ (2,981)
-------- -------- --------
Net change in net interest income $ 10,234 $ 385 $ 10,619
======== ======== ========
23
Interest income (on a tax-equivalent basis) increased by $7.6 million,
to $90.2 million for the nine months ended September 30, 2004 compared to $82.5
million for the same period in 2003. The increase in interest income was due to
the combined 20.5% increase in the average balance of interest bearing assets
which produced an increase in interest income of $14.9 million offset by a
continued drop in interest rates, which lowered the yield on average
interest-earning assets by 50 basis points, or $7.3 million.
Interest expense decreased $3.0 million, or 10.7%, to $24.9 million for
the nine months ended September 30, 2004 compared to $27.9 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 55 basis points, or $7.6 million, offset by the
24.4% increase in the average balance of interest-earning deposits which
produced an increase in interest expense $4.4 million. During the third quarter
2004, the Company acquired approximately $357 million in interest bearing
liabilities as a result of the Community acquisition.
Provision for Loan Losses. For the nine months ended September 30,
2004, the provision for loan losses was $1.7 million compared to $3.7 million
for the same period in 2003. During the third quarter 2003, the Company provided
a special provision of $1.4 million to specifically reserve for two lending
relationships with loans approximating $13.5 million. During 2004, with the
exception of $1.3 million, all of the loans relating to these relationships have
been paid off including the September 2004 repayment of the Bank's largest
non-performing loan which had a book balance of $9.1 million. The remaining
decrease of approximately $600,000 in the provision is due to a general
improvement the credit quality of the Bank's loan portfolio. 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 $1.5 million, or
11.3% for the nine-month period ended September 30, 2004 compared to the
nine-month period ended September 30, 2003. The increase was in part the result
of a $2.3 million increase in gain on sale of branch real estate during the
second quarter 2004, a $1.1 million increase in service charges on deposit
accounts, an increase in the gain on sale of SBA loans of $181,000, and an
increase of $731,000 in BOLI investment income. The increase in service charges
resulted primarily from the Company's overdraft privilege program, changes in
ATM pricing, and a $748,000 increase in service charges on deposit accounts
resulting from the July 2004 and December 2003 acquisitions. Partially
offsetting these increase, non-interest income for the nine months ended
September 30, 2003 included a $2.6 million gain on sale of branches with no
related gain in the same period in 2004.
Non-Interest Expenses. Non-interest expenses increased $10.5 million,
or 21.6% to $59.1 million for the nine months ended September 30, 2004 as
compared to $48.6 million for the same period in 2003. Of this increase, $5.3
million is due to the July 2004 and December 2003 acquisitions consisting
primarily of the following:
For the Acquisition Internally
Three Months Ended, Related Generated
September 30 Expenses Variance
----------------------------- ----------- ----------
2004 2003
---- ----
NON-INTEREST EXPENSES:
Salaries and employee benefits $29,213 $24,840 $2,262 $2,111
Occupancy expense 8,041 6,734 858 449
Equipment expense 5,147 4,046 585 516
Data processing expense 2,959 2,450 - 509
Amortization of intangible assets 3,842 2,760 1,082 -
Other 9,866 7,747 480 1,639
------- ------- ------ ------
Total non-interest expenses $59,068 $48,577 $5,323 $5,224
======= ======= ====== ======
24
Of the remaining $5.2 million of increases, $2.1 million was in
salaries and employee benefits due to increased staffing, $449,000 was in
occupancy expense primarily resulting from $684,000 in lease buyout costs
pertaining to recent branch closures partially offset by a $198,000 decrease in
miscellaneous grounds maintenance, $516,000 was in equipment expense as a result
of continued system upgrades primarily in computers and telephone systems, $1.6
million was in other expenses the most significant is the decrease of $647,000
in real estate owned expenses.
Income Taxes. Income taxes increased $1.1 million for the nine months
ended September 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 nine months and one
year maturities.
At September 30, 2004, the Company had a positive position with respect
to its exposure to interest rate risk maturing or repricing within one year. All
amounts are categorized by their actual maturity, anticipated call or repricing
date with the exception of interest-bearing demand deposits and savings
deposits. Though the rates on interest bearing demand and savings deposits
generally trend with open market rates, they often do not fully adjust to open
market rates and frequently adjust with a time lag. As a result of prior
experience during periods of rate volatility and management's estimate of future
rate sensitivities, the Company allocates the interest-bearing demand deposits
and savings deposits based on an estimated decay rate for those deposits. Total
interest-earning assets maturing or repricing within one year exceeded
interest-bearing liabilities maturing or repricing during the same time period
by $159.3 million, representing a positive one-year gap ratio of 5.29%.
Net Interest Income Simulation. Due the inherent limitations of Gap
analysis, the Company also uses simulation models to measure the impact of
changing interest rates on its operations. The simulation model attempts to
capture the cash flow and repricing characteristics of the current assets and
liabilities on the Company's balance sheet. Assumptions regarding such things as
prepayments, rate change behaviors, level and composition of new balance sheet
activity and new product lines are incorporated into the simulation model. Net
interest income is simulated over a twelve month horizon under a variety of
linear yield curve shifts, subject to certain limits agreed to by ALCO. The
Company uses a base interest rate scenario provided by Global Insights, 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.
25
The following table shows the Company's estimated earnings sensitivity
profile versus the most likely rate forecast from Global Insights as of
September 30, 2004:
Change in Interest Rates Percentage Change in Net Interest Income
(Basis Points) Year 1
-------------- ------
+200 -0.2%
+100 -0.0%
-100 +0.5%
-200 -0.3%
Derivative Financial Instruments
The Company utilizes certain derivative financial instruments to
enhance its ability to manage interest rate risk that exist as part of its
ongoing business operations. At September 30, 2004, the Company's derivative
financial instruments were not significant. 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 September 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. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits
Exhibit 31 Certification Pursuant to ss.302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32 Certification Pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Bancorp, Inc.
-----------------
(Registrant)
/s/Thomas A. Bracken
-------------------------------------
Date: November 8, 2004 Thomas A. Bracken
President and Chief Executive Officer
Date: November 8, 2004 /s/Dan A. Chila
-------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
28