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, 1997
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- --------------------
Commission file number 0 - 20957
-----------------------------------------------------.
SUN BANCORP, INC.
-----------------
(Exact name of registrant as specified in its charter)
New Jersey 52-1382541
- --------------------------------------------- -----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification)
226 Landis Avenue, Vineland, New Jersey 08360
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
(609) 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
------- -------
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 1,945,417 August 7, 1997
- ----------------------------- --------- --------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 26,687,834 $ 17,006,758
Federal funds sold 11,150,000 4,800,000
------------- -------------
Cash and cash equivalents 37,837,834 21,806,758
Investment securities available for sale (amortized cost -
$151,893,592; 1997 and $97,063,398; 1996) 150,580,632 95,581,384
Loans receivable (net of allowance for loan losses -
$3,350,989; 1997, and $2,595,312; 1996) 363,705,188 295,500,668
Bank properties and equipment 14,211,001 12,222,507
Real estate owned, net 665,544 755,628
Accrued interest receivable 4,587,432 2,850,399
Excess of cost over fair value of assets acquired 9,557,830 5,365,218
Deferred taxes 1,226,529 1,070,535
Other assets 2,846,982 1,641,959
------------- -------------
TOTAL $ 585,218,972 $ 436,795,056
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 467,393,739 $ 385,986,905
Advances from the Federal Home Loan Bank 48,500,000 10,000,000
Loan payable -- 6,000,000
Securities sold under agreements to repurchase 8,925,585 5,253,048
Other liabilities 2,578,771 2,140,527
------------- -------------
Total liabilities 527,398,095 409,380,480
------------- -------------
Guaranteed preferred beneficial interest in subordinated debt 28,750,000
SHAREHOLDERS' EQUITY
Preferred stock, none issued -- --
Common stock, $1 par value, 10,000,000 shares authorized,
issued and outstanding: 1,945,417 in 1997; and 1,848,929 in 1996; . 1,945,417 1,848,929
Surplus 18,090,101 18,124,359
Retained earnings 9,901,912 8,419,417
Unrealized loss on securities available for sale, net of income taxes (866,553) (978,129)
------------- -------------
Total shareholders' equity 29,070,877 27,414,576
------------- -------------
TOTAL $ 585,218,972 $ 436,795,056
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
1
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,866,567 $ 5,033,756 $14,788,616 $ 9,596,375
Interest on investment securities 1,963,046 1,848,700 3,292,619 3,709,481
Interest on federal funds sold 63,362 34,710 64,229 65,023
----------- ----------- ----------- -----------
Total interest income 9,892,975 6,917,166 18,145,464 13,370,879
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 3,363,689 2,955,195 6,556,216 5,511,184
Interest on short-term funds borrowed 877,198 46,090 1,310,436 87,068
Interest on guaranteed preferred beneficial interest in subordinated debt 728,007 -- 825,232 --
----------- ----------- ----------- -----------
Total interest expense 4,968,894 3,001,285 8,691,884 5,598,252
----------- ----------- ----------- -----------
Net interest income 4,924,081 3,915,881 9,453,580 7,772,627
PROVISION FOR LOAN LOSSES 405,000 225,000 825,000 450,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 4,519,081 3,690,881 8,628,580 7,322,627
----------- ----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 267,320 247,505 585,479 488,272
Other service charges 2,956 26,743 19,834 44,747
Gain on sale of fixed assets -- 3,000 1,200 14,529
Gain on sale of investment securities 10,289 31,484 15,592 191,288
Other 88,166 47,444 154,223 119,654
----------- ----------- ----------- -----------
Total other income 368,731 356,176 776,328 858,490
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 1,850,190 1,370,700 3,596,992 2,867,345
Occupancy expense 359,235 375,040 708,593 770,045
Equipment expense 294,461 179,329 532,925 349,785
Professional fees and services 81,603 79,250 138,295 154,147
Data processing expense 306,371 264,123 692,458 515,259
Amortization of excess of cost over fair value of assets acquired 262,156 206,745 468,820 413,420
Postage and supplies 105,409 111,059 190,030 242,538
Insurance 74,842 41,250 151,211 73,964
Other 425,287 363,650 853,089 734,143
----------- ----------- ----------- -----------
Total other expenses 3,759,554 2,991,146 7,332,413 6,120,646
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,128,258 1,055,911 2,072,495 2,060,471
INCOME TAXES 325,000 332,000 590,000 668,000
----------- ----------- ----------- -----------
NET INCOME $ 803,258 $ 723,911 $ 1,482,495 $ 1,392,471
=========== =========== =========== ===========
Earnings per common and common equivalent share
Net income $ 0.38 $ 0.37 $ 0.71 $ 0.73
=========== =========== =========== ===========
Earnings per common share - assuming full dilution
Net income $ 0.38 $ 0.37 $ 0.70 $ 0.72
=========== =========== =========== ===========
Weighted average shares 1,944,620 1,854,584 1,943,859 1,842,342
=========== =========== =========== ===========
</TABLE>
- -----------------------------------------------------------------------------
See notes to consolidated financial statements
2
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,482,495 $ 1,392,471
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses 825,000 450,000
Depreciation and amortization 300,846 233,192
Amortization of excess cost over fair value of assets acquired 468,820 413,420
Gain on sale of investment securities available for sale (15,592) (191,288)
Gain on sale of bank properties and equipment (1,200) (14,529)
Deferred income taxes (213,472) 516,413
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (2,942,056) (2,567,387)
Accounts payable and accrued expenses 438,244 470,449
------------- -------------
Net cash (used in) provided by operating activities 343,086 702,741
------------- -------------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (68,259,460) (125,543,579)
Proceeds from maturities of investment securities available for sale 1,055,674 47,965,005
Proceeds from sale of investment securities available for sale 12,389,184 33,899,410
Proceeds from sale of mortgage-backed securities available for sale - 50,850,000
Net increase in loans (66,716,228) (51,485,050)
Increase in loans resulting from branch acquisitions (2,313,292)
Purchase of bank properties and equipment (534,516) (302,228)
Increase in bank properties and equipment resulting from branch acquisitions (1,754,824)
Proceeds from sale of bank properties and equipment 1,200 14,529
Proceeds from guaranteed preferred beneficial interest in subordinated debt 28,750,000
Excess of cost over fair value of assets acquired (4,661,432)
Decrease in real estate owned, net 90,084 85,924
------------- -------------
Net cash used in investing activities (101,953,611) (44,515,989)
------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits 14,855,165 35,767,281
Increase in deposits resulting from branch acquisitions 66,551,669
Net borrowings under line of credit and repurchase agreements 42,172,537 6,236,197
Principal payments on borrowed funds (6,000,000)
Proceeds from exercise of stock options 29,560 1,009,446
Payments for fractional interests resulting from stock dividend (3,123)
Proceeds from issuance of common stock 35,793 -
------------- -------------
Net cash provided by financing activities 117,641,601 43,012,924
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,031,076 (800,324)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 21,806,758 17,242,366
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 37,837,834 $ 16,442,042
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
3
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The audited and unaudited consolidated financial statements
contained herein for Sun Bancorp, Inc. (the "Company") include
the accounts of Sun Bancorp, Inc. and its wholly-owned
subsidiaries, Sun Capital Trust (the "Trust"), Sun National Bank
(the "Bank") and the Bank's wholly-owned subsidiary, Med-Vine,
Inc. All significant inter-company balances and transactions have
been eliminated.
The accompanying consolidated financial statements were prepared
in accordance with instructions to Form 10-Q, and therefore, do
not include information or footnotes necessary for a complete
presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting
principles. However, all normal recurring adjustments which, in
the opinion of management, are necessary for a fair presentation
of the financial statements, have been included. These financial
statements should be read in conjunction with the audited
financial statements and the accompanying notes thereto included
in the Company's Annual Report for the period ended December 31,
1996. The results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1997.
(2) Acquisition
On June 5, 1997, the Bank purchased four branches from First
Union National Bank. The Bank acquired approximately $66,552,000
of deposit liabilities plus $222,000 of accrued interest,
$1,755,000 of real estate and equipment, $2,313,000 of loans plus
related accrued interest and $1,203,000 in cash. The bank paid a
premium of approximately $4,661,000, which is being amortized
over seven years.
(3) Loans
The components of loans as of June 30, 1997 and December 31,
1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Commercial and industrial $ 284,903,534 $ 223,116,474
Real estate-residential mortgages 53,823,687 53,846,436
Installment 28,328,956 21,133,070
------------------------------
Total gross loans 367,056,177 298,095,980
Allowance for loan losses (3,350,989) (2,595,312)
------------- -------------
Net Loans $ 363,705,188 $ 295,500,668
============= =============
Non-accrual loans $ 1,096,793 $ 1,277,208
</TABLE>
4
<PAGE>
(4) Allowance For Loan Losses
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the six month
period ended For the year ended
June 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 2,595,312 $ 2,064,640
Charge-offs ( 81 ,975) (400,387)
Recoveries 12,652 31,059
------------ -----------
Net charge-offs ( 69,323) (369,328)
Provision for loan losses 825,000 900,000
------------ ------------
Balance, end of period $ 3,350,989 $ 2,595,312
============ ============
</TABLE>
The provision for loan losses charged to expense is based upon
past loan and loss experience and an evaluation of potential
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 Bank 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.
SFAS Nos. 114 and 118 do not apply to large groups of smaller
balance, homogeneous loans that 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 follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Impaired loans with related reserve for loan
losses calculated under SFAS No. 114 -- --
Impaired loans with no related reserve for loan
losses calculated under SFAS No. 114 $ 454,170 $ 584,114
------------ ----------
Total impaired loans $ 454,170 $ 584,114
============ ==========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended For the year ended
June 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Average impaired loans $ 459,319 $ 596,519
Interest income recognized on impaired loans $ 5,242 $ 18,284
Cash basis interest income recognized on impaired loans $ 31,615 $ 15,414
</TABLE>
5
<PAGE>
(5) Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Demand deposits $ 165,349,497 $ 133,624,391
Savings deposits 70,922,212 63,506,894
Time certificates under $100,000 176,792,945 151,615,202
Time certificates $100,000 or more 54,329,085 37,240,418
-------------- --------------
Total $ 467,393,739 $ 385,986,905
============== ==============
</TABLE>
Of the total demand deposits, approximately, $86,700,000 (unaudited) and
$76,500,000 are non-interest bearing at June 30, 1997 and December 31, 1996.
(6) Guaranteed Preferred Beneficial Interest in Subordinated Debt
On March 17, 1997, Sun Capital Trust (the "Trust"), a statutory
business trust created under Delaware law that is a subsidiary of
the Company, issued $25 million, 9.85% Preferred Securities
("Preferred Securities") with a stated value and liquidation
preference of $25 per share. This Trust's obligations under the
Preferred Securities issued are fully and unconditionally
guaranteed by the Company. The proceeds from the sale of the
Preferred Securities of the Trust were utilized by the Trust to
invest in $25 million of 9.85% Junior Subordinated Debentures
(the "Debentures") of the Company. The Debentures are unsecured
and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The
Debentures represent the sole assets of the Trust. Interest on
the Preferred Securities is cumulative and payable quarterly in
arrears. The Company has the right to optionally redeem the
Debentures prior to the maturity date of March 31, 2027, on or
after March 31, 2002, at 100% of the stated liquidation amount,
plus accrued and unpaid distributions, if any, to the redemption
date. Under the occurrence of certain events, the Company may
redeem in whole, but not in part, the Debentures prior to March
31, 2002. Proceeds from any redemption of the Debentures would
cause a mandatory redemption of the Preferred Securities and the
common securities having an aggregate liquidation amount equal to
the principal amount of the Debentures redeemed.
On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional $3,750,000 of the
Preferred Securities on the same terms as the original issuance
to cover over-allotments. The proceeds from the sale of the
Preferred Securities were utilized by the Trust to invest in
$3,750,000 of Debentures of the Company.
On behalf of the Trust, the Company requested relief from the
Office of Chief Counsel of the Division of Corporation Finance of
the Securities and Exchange Commission, exempting the Trust from
the reporting requirements of the Securities Exchange Act of
1934. The Trust is a wholly-owned subsidiary of the Company, has
no independent operations and issued securities that contained a
full and unconditional guarantee of its parent, the Company.
6
<PAGE>
(7) Earnings Per Share
Earnings per share were calculated as follows:
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
For the Three Month Periods Ended For the Three Month Periods Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assumptions:
Net income for the period $ 803,258 $ 723,911 $ 803,258 $ 723,911
Average common shares outstanding 1,944,620 1,854,584 1,944,620 1,854,584
Dilutive options outstanding to purchase
equivalent shares 368,623 228,525 368,623 228,525
Average exercise price per share $ 12.47 $ 10.74 $ 12.47 $ 10.74
Estimated market value per common share
to be used $ 21.73 $ 16.82 $ 23.50 $ 17.62
Computations:
Application of assumed proceeds:
Towards repurchase of outstanding
common shares at applicable market value $4,596,913 $2,455,448 $4,596,913 $2,455,448
Adjustment of shares outstanding:
Actual average shares outstanding 1,944,620 1,854,584 1,944,620 1,854,584
Net additional shares issuable 157,103 82,194 173,010 89,162
------- --------- ------ -------
Adjusted shares outstanding 2,101,723 1,773,807 2,117,630 1,943,745
========= ========== ========= =========
Earnings per share: $ 0.38 $ 0.37 $ 0.38 $ 0.37
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
For the Six Month Periods Ended For the Six Month Periods Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Assumptions:
Net income for the period $1,482,495 $1,392,471 $1,482,495 $1,392,471
Average common shares outstanding 1,943,859 1,842,342 1,943,859 1,842,342
Dilutive options outstanding to purchase
equivalent shares 368,623 228,525 368,623 228,525
Average exercise price per share $ 12.47 $ 10.74 $ 12.47 $ 10.74
Estimated market value per common share
to be used $ 21.29 $ 16.10 $ 23.50 $ 17.62
Computations:
Application of assumed proceeds:
Towards repurchase of outstanding
common shares at applicable market value $4,596,913 $2,455,448 $4,596,913 $2,455,448
Adjustment of shares outstanding:
Actual average shares outstanding 1,943,859 1,842,342 1,943,859 1,842,342
Net additional shares issuable 152,658 76,011 173,010 89,162
---------- ---------- ---------- ----------
Adjusted shares outstanding 2,096,517 1,918,353 2,116,869 1,931,504
========== ========== ========== ==========
Earnings per share: $ 0.71 $ 0.73 $ 0.70 $ 0.72
========== ========== ========== ==========
</TABLE>
7
<PAGE>
In February, 1997, the Financial Accounting Standards Board
issued SFAS No. 128, Earnings Per Share. This statement, which is
effective for fiscal years ending after December 15, 1997, will
require an institution to change the method by which it
calculates its earnings per share. Earlier application of this
statement is not permitted, however, pro forma earnings per share
amounts computed using SFAS No. 128 is permitted.
The following pro forma information reflects the Company's
earnings per share calculation as if this statement was
implemented:
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Periods Ended Periods Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share: $ 0.41 $ 0.39 $ 0.76 $ 0.72
======= ======= ======= =======
Earnings per share - assuming dilution $ 0.38 $ 0.37 $ 0.71 $ 0.73
======= ======= ======= =======
</TABLE>
(8) Subsequent Event
On July 24, 1997, the Bank purchased three branches from Oritani
Savings Bank. The Bank acquired approximately $33,922,000 of
deposit liabilities plus $144,000 of accrued interest, $547,000
of real estate and equipment and $180,000 in cash. The bank paid
a premium of $2,151,000, which is being amortized over seven
years.
(9) Pending Acquisition
On June 5, 1997, the Bank entered into a purchase and assumption
agreement with The Bank of New York ("BNY"), whereby the Bank
will assume certain deposit liabilities of eleven branch offices
from BNY. At May 31, 1997, the branches had deposits of
approximately $180 million. In addition, the Bank will acquire
approximately $30 million of loans as well as property and
equipment pertaining to the branches. The transaction is expected
to be completed during the fourth quarter of 1997. The agreement
is subject to raising additional capital and regulatory approval.
8
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total Assets at June 30, 1997 increased by $148.4 million to
$585.2 million as compared to $436.8 million at December 31, 1996, representing
growth of about 34.0%. The increase was due, in part, to the acquisition of four
branch offices from First Union National Bank, Avondale, Pennsylvania ("First
Union"). The Company experienced a growth of $68.2 million in loans, primarily
commercial loans, augmented by a $6.4 million increase in federal funds sold.
Approximately $2.3 million in loans were acquired from First Union. Cash and due
from banks increased $9.7 million as a result of higher branch cash, increased
cash letter balances and higher reserve balance requirements. Investment
securities available for sale increased $55.0 million. Bank properties and
equipment increased by $2.0 million primarily as a result of the First Union
acquisition. The excess of cost over fair value of assets acquired increased
$4.2 million, also as a result of the First Union acquisition. The increase in
total assets was funded by an increase of $81.4 million in deposits. Advances
from the Federal Home Loan Bank increased $38.5 million, securities sold under
agreements to repurchase increased $3.7 million, Federal funds purchased
declined $6.0. Additional funding was provided by the issuance of $28.8 million
of trust preferred securities.
Deposit accounts increased approximately $81.4 million or 21.18% from $386.0
million at December 31, 1996 to $467.4 million at June 30, 1997. The increase
was a result of increases in demand deposits of $31.7 million, savings deposits
of $7.4 million, time certificates under $100,000 of $25.2 million and time
certificates of deposit of $100,000 or more of $17.1 million. Approximately
$66.6 million in deposits were acquired from First Union comprised of $25.0 in
demand deposits, $17.8 million of savings deposits and $23.8 million of time
certificates of deposit under $100,000.
At June 30, 1997, the $6.0 million loan payable at December 31,
1996 was repaid with a portion of the proceeds received from the sale of the
Junior Subordinated Debentures to the Company's subsidiary, Sun Capital Trust.
Total capital decreased $1.7 million from December 31, 1996 to
March 31, 1997. The increase resulted from the Company's six month earnings of
$1.5 million, exercises of stock options of $30,000 and a decrease in unrealized
losses on securities available for sale, net of income taxes, of $112,000.
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 of loans, maturities of investment securities, net income and
increases in deposits are the primary sources of liquidity of the Company.
The Company has experienced a significant increase in commercial
loan demand and expects such demand to continue for the remainder of the current
fiscal year. Management has demonstrated the ability to meet this increased need
for funds by attracting higher levels of time deposits, engaging in repurchase
agreements, raising capital and utilizing its lines of credit with other
financial institutions. It also has the ability to liquidate portions of its
investment portfolio.
The increase of commercial loans has the effect of lowering the
Company's risk-based capital ratios. In general, commercial loans are
categorized as having a 100% risk-weighting using the calculations required by
the Company's regulators. Until its recent issuance of Trust Preferred
Securities, the rate at which commercial loans have grown has outpaced the
growth rate of the Company's capital.
9
<PAGE>
Because management intends to maintain risk-based capital levels
that are acceptable to its regulators, it issued an additional $3.75 million of
Trust Preferred Securities during the quarter, making a total of $28.75 million.
The Federal Reserve Board recognizes Trust Preferred Securities to comprise up
to 25% of the Company's Tier 1 capital. The Company raised more than the amount
allowed as Tier 1 capital. As a result, as the Company's Tier 1 capital
increases from earnings, additional Tier 1 capital will accrete into the
calculation from the Trust Preferred Securities that do not now so qualify.
Management monitors the Company's capital levels, and when appropriate, will
recommend additional capital raising efforts to the Company's board of
directors.
Comparison of Operating Results for the Three Months Ended June 30, 1997 and
1996.
General. Net income increased by $79,000 for the three months
ended June 30, 1997 to $803,000 from $724,000 for the three months ended June
30, 1996. Net interest income increased $1.0 million and the provision for loan
losses increased $180,000 for the three months ended June 30, 1997 compared to
the same period in 1996. Other income increased by $13,000 to $369,000 for the
three months ended June 30, 1997 as compared to $356,000 for the three months
ended June 30, 1996. Other expenses increased by $768,000 to $3.8 million for
the three months ended June 30, 1997 as compared to $3.0 million for the three
months ended June 30, 1996.
Net Interest Income. The increase in net interest income was due
to a $3.0 million increase in interest income partially offset by a $2.0 million
increase in interest expense.
Interest Income. Interest income for the three months ended June
30, 1997 increased approximately $3.0 million , or 43.0%, from $6.9 million for
the same period in 1996 to $9.9 million in 1997. The increase was primarily the
result of an increase of $2.8 in interest and fees on loans due to the $130.2
million in loan growth from June 30, 1996, primarily from commercial loans.
Interest Expense. Interest expense for the three months ended
June 30, 1997 increased approximately $2.0 million, or 65.6%, from $3.0 million
for the same period in 1996 to $5.0 million in 1997. This increase was primarily
due to a $408,000 increase in interest on deposit accounts resulting from a
$96.4 million increase in deposits from June 30, 1996; and a $831,000 increase
in interest on short-term funds borrowed resulting from an increase in borrowed
funds from June 30, 1996.
On March 17, 1997 the Company's subsidiary, Sun Capital Trust
(the "Trust") issued $25 million of 9.85% Preferred Securities with a stated
value and liquidation preference of $25 per share. The proceeds from the sale of
the Preferred Securities were utilized by the Trust to invest in $25 million of
9.85% Junior Subordinated Debentures (the "Debentures") of the Company, due in
March 2027. On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional $3,750,000 of the Preferred
Securities on the same terms as the original issuance to cover over-allotments.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $3,750,000 of the Debentures of the Company. In view of these
transactions, the Company may incur increased interest expense in future
periods. For the three months ended June 30, 1997, the Company incurred $728,000
of such interest expense.
Provision for Loan Losses. For the three months ended June 30,
1997, the provision for loan losses amounted to $405,000, an increase of
$180,000, or 80.0%, compared to $225,000 for the same period in 1996. The
increase was primarily the result of the increase in the Company's loan
portfolio of approximately $130.2 million at June 30, 1997 compared with June
30, 1996, primarily from commercial loans. Management continually reviews the
adequacy of the loan loss reserve using guidelines promulgated by the Bank's
primary regulator.
10
<PAGE>
Other Income. Other income increased $12,000 for the three month
period ended June 30, 1997 compared to the three month period ended June 30,
1996. The increase was a result of higher levels of service charges on deposit
accounts of $20,000, caused by a higher fee structure and from a larger deposit
base resulting from previous branch acquisitions as well as internal growth; and
an increase of $41,000 in other income resulting from higher levels of fees
resulting from an increased customer base. This was partially offset by a
reduction in gains on sales of investment securities by $21,000 and a $24,000
reduction in other service charges.
Other Expenses. Other expenses increased approximately $768,000,
to $3.8 million for the three months ended June 30, 1997 as compared to $3.0
million for the same period in 1996. The increase was a result of operating a
larger organization. Of the increase, $479,000 was in salaries and employee
benefits, $115,000 in equipment expense, $62,000 in miscellaneous expenses,
$55,000 in amortization of excess of cost over fair value of assets acquired,
$42,000 in data processing expense and $34,000 in insurance expense. This was
offset by decreases of $6,000 in postage and supplies and $16,000 in occupancy
expense. The increase in other expenses reflects the Company's strategy to
support planned expansion. Salaries and benefits increased due to additional
staff positions in lending, loan review, compliance and audit departments. The
increase in data processing expense and equipment expense was the result of
operating a larger institution than in the previous year. The increase in
insurance expense resulted from higher premium payments to the Federal Deposit
Insurance Corporation ("FDIC") in 1997. The higher amount was a result of the
Bank being assessed a premium based on a capital level of "adequately
capitalized." As a result of the Company's increased capital, the FDIC is
expected to be reduced in future periods. The decreased occupancy expense is
related to lower utility usage and grounds maintenance from a milder winter in
1997 and savings resulting from real estate tax appeals.
Income Taxes. Applicable income taxes decreased $7,000 for the
three months ended June 30, 1997 as compared to the same period in 1996. The
decrease resulted from a lower effective tax rate.
Comparison of Operating Results for the Six Months Ended June 30, 1997 and 1996.
General. Net income increased by $90,000 for the six months ended
June 30, 1997 to $1.5 million from $1.4 million for the six months ended June
30, 1996. Net interest income increased $1.7 million and the provision for loan
losses increased $375,000 for the six months ended June 30, 1997 compared to the
same period in 1996. Other income decreased by $82,000 to $776,000 for the six
months ended June 30, 1997 as compared to $858,000 for the six months ended June
30, 1996. Other expenses increased by $1.2 million to $7.3 million for the six
months ended June 30, 1997 as compared to $6.1 million for the six months ended
June 30, 1996.
Net Interest Income. The increase in net interest income was due
to a $4.8 million increase in interest income partially offset by a $3.1 million
increase in interest expense.
Interest Income. Interest income for the six months ended June
30, 1997 increased approximately $4.8 million , or 35.7%, from $13.4 million for
the same period in 1996 to $18.1 million in 1997. The increase was primarily the
result of an increase of $5.2 in interest and fees on loans due to the $130.2
million in loan growth from June 30, 1996, primarily from commercial loans. This
was partially offset by a decrease in interest on investment securities of
$417,000 , from $3.7 million for the six months ended June 30, 1996 to $3.3
million for the same period in 1997. The decrease was a result of a lower volume
investment portfolio.
11
<PAGE>
Interest Expense. Interest expense for the six months ended June
30, 1997 increased approximately $3.1 million, or 55.3%, from $5.6 million for
the same period in 1996 to $8.7 million in 1997. This increase was primarily due
to a $1 million increase in interest on deposit accounts resulting from a $96.4
million increase in deposits from June 30, 1996; and a $1.2 million increase in
interest on short-term funds borrowed resulting from a sharp increase in average
borrowed funds from June 30, 1996.
On March 17, 1997 the Company's subsidiary, Sun Capital Trust
(the "Trust") issued $25 million of 9.85% Preferred Securities with a stated
value and liquidation preference of $25 per share. The proceeds from the sale of
the Preferred Securities were utilized by the Trust to invest in $25 million of
9.85% Junior Subordinated Debentures (the "Debentures") of the Company, due in
March 2027. On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional $3,750,000 of the Preferred
Securities on the same terms as the original issuance to cover over-allotments.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $3,750,000 of the Debentures of the Company. In view of these
transactions, the Company may incur increased interest expense in future
periods. For the six months ended June 30, 1997, the Company incurred $825,000
of such interest expense.
Provision for Loan Losses. For the six months ended June 30,
1997, the provision for loan losses amounted to $825,000, an increase of
$375,000, or 83.3%, compared to $450,000 for the same period in 1996. The
increase was primarily the result of the increase in the Company's loan
portfolio of approximately $130.2 million at June 30, 1997 compared with June
30, 1996, primarily from commercial loans. Management continually reviews the
adequacy of the loan loss reserve using guidelines promulgated by the Bank's
primary regulator.
Other Income. Other income decreased $82,000 for the six month
period ended June 30, 1997 compared to the six month period ended June 30, 1996.
The decrease was a primarily a result of lower gains on sales of investment
securities in 1997. These gains were $191,000 for the first six months of 1996
compared to $16,000 for the same period in 1997. This decrease was partially
offset by an increase of $97,000 on service charges on deposits accounts, from
$488,000 for the six months ended June 30, 1996 to $585,000 for the same period
in 1997. The increase was caused by a higher fee structure and from a larger
deposit base resulting from previous branch acquisitions as well as internal
growth;
Other Expenses. Other expenses increased approximately $1.2
million, to $7.3 million for the six months ended June 30, 1997 as compared to
$6.1 million for the same period in 1996. The increase was a result of operating
a larger organization. Of the increase, $730,000 was in salaries and employee
benefits, $183,000 in equipment expense, $177,000 in data processing expense,
$119,000 in miscellaneous expenses, $77,000 in insurance expense and $55,000 in
amortization of excess of cost over fair value of assets acquired. This was
offset by decreases of $53,000 in postage and supplies and $61,000 in occupancy
expense. The increase in other expenses reflects the Company's strategy to
support planned expansion. Salaries and benefits increased due to additional
staff positions in lending, loan review, compliance and audit departments. The
increase in data processing expense and equipment expense was the result of
operating a larger institution than in the previous year. The increase in
insurance expense resulted from higher premium payments to the Federal Deposit
Insurance Corporation ("FDIC") in 1997. The higher amount was a result of the
Bank being assessed a premium based on a capital level of "adequately
capitalized." As a result of the Company's increased capital, the FDIC is
expected to be reduced in future periods. The decreased occupancy expense is
related to lower utility usage and grounds maintenance from a milder winter in
1997 and savings resulting from real estate tax appeals.
Income Taxes. Applicable income taxes decreased $78,000 for
the six months ended June 30, 1997 as compared to the same period in 1996. The
decrease resulted from a lower effective tax rate.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at March 31, 1997. 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
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) 4.1 Form of Junior Subordinated Debenture *
4.2 Form of Junior Subordinated Debenture (included in
Exhibit 4.1) *
4.3 Form of Trust Agreement *
4.4 Form of Amended and Restated Trust Agreement *
4.5 Form of Preferred Security (included in Exhibit 4.4) *
4.6 Form of Guarantee *
27 Financial Data Schedule (electronic data filing only)
* Incorporated by reference to the registrant's Registration
Statement on Form S-1, file no. 333-21903 and 333-21903-01.
(b) The following Form 8-K reports were filed during the quarter
ended June 30, 1997:
June 14, 1997 (Items 5 and 7)
Reported that Sun National Bank, a subsidiary of
Sun Bancorp, Inc., entered into a Branch Purchase
and Deposit Assumption Agreement to acquire eleven
branch offices located in New Jersey, certain loans
and approximately $175 million of deposits from The
Bank of New York.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date August 7, 1997 Sun Bancorp, Inc.
-------------- --------------------------
(Registrant)
/s/ Philip W. Koebig, III
Philip W. Koebig, III
Executive Vice President
Date August 7, 1997 /s/ Robert F. Mack
-------------- -------------------
Robert F. Mack
Controller
14
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<PERIOD-END> JUN-30-1997
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28,750
0
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