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, 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 3,865,247 November 10, 1997
- ----------------------------- --------- -----------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,434,308 $ 17,006,758
Federal funds sold - 4,800,000
------------- --------------
Cash and cash equivalents 20,434,308 21,806,758
Investment securities available for sale (amortized cost -
$291,261,578; 1997 and $97,063,398; 1996) 290,808,157 95,581,384
Loans receivable (net of allowance for loan losses -
$3,760,512; 1997, and $2,595,312; 1996) 388,619,096 295,500,668
Bank properties and equipment 14,819,529 12,222,507
Real estate owned, net 815,768 755,628
Accrued interest receivable 5,331,742 2,850,399
Excess of cost over fair value of assets acquired 11,292,769 5,365,218
Deferred taxes 1,247,286 1,070,535
Other assets
4,755,205 1,641,959
TOTAL $ 738,123,860 $ 436,795,056
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 541,315,879 $ 385,986,905
Advances from the Federal Home Loan Bank
16,500,000 10,000,000
Loan payable 6,000,000
Securities sold under agreements to repurchase 117,613,451 5,253,048
Other liabilities 2,857,529 2,140,527
------------- --------------
Total liabilities 678,286,859 409,380,480
------------ -------------
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: 2,935,014 in 1997; and 2,773,393 in 1996; 2,935,014 1,848,929
Surplus 18,329,919 18,124,359
Retained earnings 10,121,325 8,419,417
Unrealized loss on securities available for sale, net of income taxes (299,257) (978,129)
------------- --------------
Total shareholders' equity 31,087,001 27,414,576
------------ ------------
TOTAL $738,123,860 $436,795,056
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 8,870,169 $ 6,042,729 $23,658,785 $15,639,104
Interest on investment securities 3,612,713 1,874,270 6,905,332 5,583,751
Interest on federal funds sold 268,563 466 332,792 65,489
---------- ---------- ---------- ----------
Total interest income 12,751,445 7,917,465 30,896,909 21,288,344
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 4,582,168 3,222,283 11,138,384 8,733,467
Interest on short-term borrowed funds 1,508,491 207,165 2,818,927 294,233
Interest on guaranteed preferred beneficial interest in
subordinated debt 726,374 - 1,551,606 -
---------- ---------- ---------- ----------
Total interest expense 6,817,033 3,429,448 15,508,917 9,027,700
---------- ---------- ---------- ----------
Net interest income 5,934,412 4,488,017 15,387,992 12,260,644
PROVISION FOR LOAN LOSSES 420,000 225,000 1,245,000 675,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 5,514,412 4,263,017 14,142,992 11,585,644
---------- --------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 381,669 262,183 967,148 750,455
Other service charges 10,923 41,527 30,757 86,274
Gain on sale of investment securities 75,316 12,166 90,908 203,454
Other 129,402 137,225 283,625 256,879
---------- ---------- ---------- ----------
Total other income 597,310 453,101 1,372,438 1,297,062
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 2,048,481 1,929,949 5,645,473 4,797,294
Occupancy expense 462,615 304,073 1,171,208 1,074,118
Equipment expense 355,538 232,557 888,463 582,342
Professional fees and services 81,942 88,964 220,237 243,111
Data processing expense 359,398 285,596 1,051,856 800,855
Loss (gain) on sale of fixed assets 54,336 (700) 53,136 (15,229)
Amortization of excess of cost over fair value of assets 424,560 206,606 893,380 620,026
acquired
Postage and supplies 131,411 97,342 321,441 339,880
Insurance 45,487 60,006 196,698 133,970
Other 463,530 404,016 1,316,619 1,138,159
---------- ---------- ---------- ----------
Total other expenses 4,427,298 3,608,409 11,758,511 9,714,526
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,684,424 1,107,709 3,756,919 3,168,180
INCOME TAXES 489,000 333,000 1,079,000 1,001,000
---------- ---------- ---------- ----------
NET INCOME $ 1,195,424 $ 774,709 $ 2,677,919 $ 2,167,180
========== ========== ========== ==========
Earnings per common and common equivalent share
Net income $ 0.37 $ 0.25 $ 0.84 $ 0.74
========== ========== ========== ==========
Earnings per common share - assuming full dilution
Net income $ 0.36 $ 0.25 $ 0.81 $ 0.73
========== ========== ========== ==========
Weighted average shares 2,923,217 2,910,579 2,918,527 2,802,610
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,677,919 $ 2,167,180
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Provision for loan losses 1,245,000 675,000
Provision for losses on real estate owned 15,000
Depreciation and amortization 475,059 351,878
Amortization of excess cost over fair value of assets acquired 893,380 620,026
Gain on sale of investment securities available for sale (90,908) (203,454)
Loss (Gain) on sale of bank properties and equipment 53,136 (15,229)
Deferred income taxes (526,472) 549,083
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (5,594,589) (1,907,659)
Accounts payable and accrued expenses 717,002 190,383
--------------- --------------
Net cash (used in) provided by operating activities (135,473) 2,427,208
--------------- --------------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (238,743,619) (154,241,179)
Proceeds from maturities of investment securities available for sale 12,120,113 68,156,579
Proceeds from sale of investment securities available for sale 19,611,643 53,881,713
Proceeds from sale of mortgage-backed securities available for sale 12,904,591 50,850,000
Net increase in loans (92,050,136) (82,352,053)
Increase in loans resulting from branch acquisitions (2,313,292)
Purchase of bank properties and equipment (855,098) (492,810)
Increase in bank properties and equipment resulting from branch acquisitions (2,302,006)
Proceeds from sale of bank properties and equipment 31,887
15,229
Proceeds from guaranteed preferred beneficial interest in subordinated debt 28,750,000
Excess of cost over fair value of assets acquired (6,820,931)
(Increase) decrease in real estate owned, net (75,140) 302,439
--------------- --------------
Net cash used in investing activities (269,741,988) (63,880,082)
--------------- --------------
FINANCING ACTIVITIES:
Net increase in deposits 54,855,145 44,911,817
Increase in deposits resulting from branch acquisitions 100,473,829
Net borrowings under line of credit and repurchase agreements 118,860,403 20,212,841
Principal payments on borrowed funds (6,000,000)
Proceeds from exercise of stock options 37,768 1,009,446
Payments for fractional interests resulting from stock dividend (4,742)
Proceeds from issuance of common stock
282,608 -
--------------- --------------
Net cash provided by financing activities 268,505,011 66,134,104
--------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,372,450) 4,681,230
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 21,806,758 17,242,366
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,434,308 $ 21,923,596
============ ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
<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
the Company 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 nine months ended September 30,
1997 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 1997 or any other period.
(2) Acquisitions
On July 24, 1997, 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.
On June 5, 1997, 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 September 30, 1997 and December 31, 1996
were as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Commercial and industrial $ 308,025,551 $ 223,116,474
Real estate-residential mortgages 51,458,568 53,846,436
Installment 32,895,489 21,133,070
------------- -------------
Total gross loans 392,379,608 298,095,980
Allowance for loan losses (3,760,512) (2,595,312)
------------ -------------
Net Loans $ 388,619,096 $ 295,500,668
============= =============
Non-accrual loans $ 936,777 $ 1,277,208
</TABLE>
(4) Allowance For Loan Losses
<PAGE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the nine month
period ended For the year ended
September 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 2,595,312 $ 2,064,640
Charge-offs (97,200) (400,387)
Recoveries 17,400 31,059
----------- -----------
Net charge-offs (79,800) (369,328)
Provision for loan losses 1,245,000 900,000
----------- -----------
Balance, end of period $ 3,760,512 $ 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>
September 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 nine
months ended For the year ended
September 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Average impaired loans $ 449,596 $ 596,519
Interest income recognized on impaired loans $ 43,809 $ 18,284
Cash basis interest income recognized on impaired loans $ 42,075 $ 15,414
</TABLE>
<PAGE>
(5) Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
Demand deposits $ 175,523,229 $ 133,624,391
Savings deposits 73,228,558 63,506,894
Time certificates under $100,000 231,571,597 151,615,202
Time certificates $100,000 or more 60,992,495 37,240,418
------------- -------------
Total $ 541,315,879 $ 385,986,905
============= =============
</TABLE>
Of the total demand deposits, approximately, $92,427,000 (unaudited)
and $76,500,000 are non-interest bearing at September 30, 1997 and
December 31, 1996.
(6) Guaranteed Preferred Beneficial Interest in Subordinated Debt
On March 17, 1997, 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. The 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.
The Trust is a wholly-owned subsidiary of the Company, has no
independent operations and issued the Preferred Securities which
contain a full and unconditional guarantee of the Trust's obligations
thereunder by the Company.
<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
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Assumptions:
Net income for the period $ 1,195,424 $ 774,709 $ 1,195,424 $ 774,709
Average common shares outstanding 2,923,217 2,910,579 2,923,217 2,910,579
Dilutive options outstanding to purchase
equivalent shares 699,484 359,927 699,484 359,927
Average exercise price per share $ 9.77 $ 6.82 $ 9.77 $ 6.82
Average market value per common share
to be used $ 18.56 $ 12.72 $ 22.00 $ 12.72
Computations:
Application of assumed proceeds:
Towards repurchase of outstanding
common shares at applicable market value $ 6,830,811 $ 2,455,448 $ 6,830,811 $ 2,455,448
Adjustment of shares outstanding:
Actual average shares outstanding 2,923,217 2,910,579 2,923,217 2,910,579
Net additional shares issuable 331,356 166,959 388,993 166,959
----------- --------- ---------- -----------
Adjusted shares outstanding 3,254,574 3,077,537 3,312,210 3,077,537
=========== ========= ========== ===========
Earnings per share: $ 0.37 $ 0.25 $ 0.36 $ 0.25
=========== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
For the Nine Month Periods Ended For the Nine Month Periods Ended
September 30, September 30,
--------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Assumptions:
<S> <C> <C> <C> <C>
Net income for the period $ 2,677,919 $ 2,167,180 $ 2,677,919 $ 2,167,180
Average common shares outstanding 2,918,527 2,802,610 2,918,527 2,802,610
Dilutive options outstanding to purchase
equivalent shares 699,484 359,927 699,484 359,927
Average exercise price per share $ 9.77 $ 6.82 $ 9.77 $ 6.82
Average market value per common share
to be used $ 15.65 $ 11.40 $ 22.00 $ 12.70
Computations:
Application of assumed proceeds:
Towards repurchase of outstanding
common shares at applicable market value $ 6,830,811 $ 2,455,448 $ 6,830,811 $ 2,455,448
Adjustment of shares outstanding:
Actual average shares outstanding 2,918,527 2,802,610 2,918,527 2,802,610
Net additional shares issuable 262,881 144,480 388,993 166,561
------------ ------------ ----------- ------------
Adjusted shares outstanding 3,181,408 2,947,090 3,307,519 2,969,170
============ ============ =========== ============
Earnings per share: $ 0.84 $ 0.74 $ 0.81 $ 0.73
============ ============ =========== ============
</TABLE>
<PAGE>
In February, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. This statement, which is effective for
periods 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 Nine Month
Periods Ended Periods Ended
September 30, September 30,
--------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share: $ 0.41 $ 0.27 $ 0.91 $ 0.77
======= ======= ======= =======
Earnings per share - assuming dilution $ 0.37 $ 0.25 $ 0.84 $ 0.74
======= ======= ======= =======
</TABLE>
(8) Pending Acquisitions
On November 4, 1997, the Bank entered into a purchase and assumption
agreement with First Savings Bank, Woodbridge, New Jersey ("First
Savings"), whereby the Bank will assume certain deposit liabilities of
one branch office of First Savings. At September 30, 1997, the branch
had deposits of approximately $28 million. The transaction is expected
to be completed during the first quarter of 1998 and is subject to
regulatory approval.
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 June 30, 1997, the branches had deposits of approximately $177
million. In addition, the Bank will acquire approximately $29 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.
(9) Subsequent Event
On November 4, 1997 the Company sold 930,233 shares of common stock for
a purchase price of $21.50 per share through an initial public
offering. The net proceeds from the offering of approximately $18.6
million are expected to be contributed to the Bank as capital, in part
to support the acquisition of the BNY branches.
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at September 30, 1997 increased by $301.3 million to
$738.1 million as compared to $436.8 million at December 31, 1996, an increase
of approximately 69.0%. The increase was due, in part, to the acquisition of
four branch offices, related deposits and certain assets from First Union
National Bank, Avondale, Pennsylvania ("First Union") and three branch offices
and related deposits from Oritani Savings Bank, Hackensack, New Jersey
("Oritani"). The branch purchases included approximately $100 million of
deposits.
Investment securities available for sale increased $195.2 million, from
$95.6 million at December 31, 1996 to $290.8 million at September 30, 1997. The
increase was primarily a result of the investment of excess funds created from
the First Union and Oritani branch purchases, as well as an increase of $96.5
million of U. S. Government Agency securities acquired with funds borrowed from
the FHLB.
Net loans at September 30, 1997 amounted to $388.6 million, an increase
of $93.1 million from $295.5 million at December 31, 1996. The increase was
primarily from increased originations of commercial and industrial loans. The
ratio of non-performing assets to total loans and real estate owned for the
three months ended September 30, 1997 was 0.52% compared to 1.06% for the year
ended December 31, 1996. The ratio of allowance for loan losses to total
non-performing loans was 192.47% at September 30, 1997 compared to 107.26% at
December 31, 1996. The ratio of allowance for loan losses to total loans was
0.96% at September 30, 1997 compared to 0.87% at December 31, 1996.
Excess of cost over fair value of assets acquired increased $5.9
million, from $5.4 million at December 31, 1996 to $11.3 million at September
30, 1997. The increase was a result of the premium paid for the First Union and
Oritani acquisitions, less related amortization.
Total liabilities at September 30, 1997 amounted to $678.3 million
compared to $409.4 million at December 31, 1996, an increase of $268.9 million.
Total deposits grew to $541.3 million at September 30, 1997, a $155.3
million increase over December 31, 1996 deposits of $386.0 million. The increase
was primarily the result of deposits acquired from First Union and Oritani , as
well as approximately $40 million from internal deposit growth.
Advances from the Federal Home Loan Bank were $16.5 million at
September 30, 1997 compared to $10.0 million at December 31, 1996. The increase
in Federal Home Loan Bank advances was used to help fund the Company's loan
growth. Federal funds purchased and securities sold under agreements to
repurchase grew $112.3 million, from $5.3 million at December 31, 1996, to
$117.6 million at September 30, 1997. Of the increase, $96.5 million were
repurchase agreements from the Federal Home Loan Bank to fund securities
purchases in an arbitrage designed to enhance net interest income by leveraging
the Bank's available capital.
Total shareholders' equity grew by $3.7 million, from $27.4 million at
December 31, 1996, to $31.1 million at September 30, 1997. The increase was a
result of net earnings of $2.7 million for the nine months ended September 30,
1997 augmented by an improvement in the net unrealized loss on securities
available for sale, net of income taxes of $679,000.
<PAGE>
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 and borrowings 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 increasing the level
of risk-based assets and thus 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. The rate at which
commercial loans have grown has outpaced the internal growth rate of the
Company's capital.
Because the Bank management is required to maintain certain risk-based
capital levels, subsequent to the end of the third quarter, and in anticipation
of its growth, the Company issued $20 million of its common stock through an
initial public offering. 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 September 30, 1997
and 1996.
General. Net income increased by $425,000 for the three months ended
September 30, 1997 to $1.2 million from $775,000 for the three months ended
September 30, 1996. Net interest income increased $1.4 million and the provision
for loan losses increased $195,000 for the three months ended September 30, 1997
compared to the same period in 1996. Other income increased by $144,000 to
$597,000 for the three months ended September 30, 1997 as compared to $453,000
for the three months ended September 30, 1996. Other expenses increased by
$819,000 to $4.4 million for the three months ended September 30, 1997 as
compared to $3.6 million for the three months ended September 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 $3.4 million
increase in interest expense.
Interest Income. Interest income for the three months ended September
30, 1997 increased approximately $4.8 million , or 61.1%, from $7.9 million for
the same period in 1996 to $12.7 million in 1997. The increase was primarily the
result of an increase of $2.8 million in interest and fees on loans and
resulting from internal growth and $1.7 million in interest on investment
securities augmented by the branch acquisitions from First Union and Oritani
Interest Expense. Interest expense for the three months ended September
30, 1997 increased approximately $3.4 million, from $3.4 million for the same
period in 1996 to $6.8 million in 1997. This increase was primarily due to a
$1.4 million increase in interest on deposit accounts and $1.3 million increase
on short-term borrowed funds.
For the three months ended September 30, 1997, the Company incurred
$726,000 of interest expense on the Preferred Securities.
<PAGE>
Provision for Loan Losses. For the three months ended September 30,
1997, the provision for loan losses amounted to $420,000, an increase of
$195,000, or 86.7%, 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 due to internal growth. Management continually reviews the adequacy of
the loan loss reserve using guidelines promulgated by the Bank's primary
regulator.
Other Income. Other income increased $144,000 for the three month
period ended September 30, 1997 compared to the three month period ended
September 30, 1996. The increase was a result of fees generated by a larger
deposit base acquired in the First Union and Oritani deposit acquisitions.
Other Expenses. Other expenses increased approximately $819,000, to
$4.4 million for the three months ended September 30, 1997 as compared to $3.6
million for the same period in 1996. Of the increase, $119,000 was in salaries
and employee benefits, $159,000 in occupancy expense, $123,000 in equipment
expense, $74,000 in data processing expense, $34,000 in postage and supplies,
and $218,000 in amortization of excess of cost over fair value of assets
acquired. The increase in other expenses reflects the Company's strategy to
support planned expansion. Salaries and benefits increased due to additional
staff positions in financial service centers, lending, loan review, compliance
and audit departments. The increase in occupancy, equipment and data processing
expenses were the result of internal growth and the First Union and Oritani
acquisitions.
Income Taxes. Applicable income taxes increased $156,000 for the three
months ended September 30, 1997 as compared to the same period in 1996. The
increase resulted from a higher pre-tax earnings.
Comparison of Operating Results for the Nine Months Ended September 30, 1997 and
1996.
General. Net income increased by $511,000 for the nine months ended
September 30, 1997 to $2.7 million from $2.2 million for the nine months ended
September 30, 1996. Net interest income increased $3.1 million and the provision
for loan losses increased $570,000 for the nine months ended September 30, 1997
compared to the same period in 1996. Other income increased by $75,000 to $1.4
million for the nine months ended September 30, 1997 as compared to $1.3 million
for the nine months ended September 30, 1996. Other expenses increased by $2.0
million to $11.7 million for the nine months ended September 30, 1997 as
compared to $9.7 million for the nine months ended September 30, 1996.
Net Interest Income. The increase in net interest income was due to a
$9.6 million increase in interest income partially offset by a $6.5 million
increase in interest expense.
Interest Income. Interest income for the nine months ended September
30, 1997 increased approximately $9.6 million , or 45.1%, from $21.3 million for
the same period in 1996 to $30.9 million in 1997. The increase was primarily the
result of an increase of $8.0 million in interest and fees on loans and $1.3
million in interest on investment securities due to internal growth augmented by
the First Union and Oritani branch purchases.
Interest Expense. Interest expense for the nine months ended September
30, 1997 increased approximately $6.5 million, or 71.8%, from $9.0 million for
the same period in 1996 to $15.5 million in 1997. This increase was primarily
due to a $2.4 million increase in interest on deposit accounts and a $2.5
million increase in interest on short-term borrowed funds. These increases were
the result of internal growth and the addition of the First Union and Oritani
branches. The growth in interest expense was also influenced by a $1.6 million
increase in interest on guaranteed preferred beneficial interest in subordinated
debt resulting from the issuance of the Preferred Securities.
<PAGE>
Provision for Loan Losses. For the nine months ended September 30,
1997, the provision for loan losses amounted to $1.2 million, an increase of
$570,000, or 84.4%, compared to $675,000 for the same period in 1996. The
increase was primarily the result of the internal growth of the Company's loan
portfolio. Management continually reviews the adequacy of the loan loss reserve
using guidelines promulgated by the Bank's primary regulator.
Other Income. Other income increased $75,000 for the nine month period
ended September 30, 1997 compared to the nine month period ended September 30,
1996. The increase was a primarily a result of an increase of $217,000 in
service charges on deposit accounts resulting from a larger customer base. This
increase was partially offset by lower gains on the sale of investment
securities of $112,000.
Other Expenses. Other expenses increased approximately $2.0 million, to
$11.7 million for the nine months ended September 30, 1997 as compared to $9.7
million for the same period in 1996. The increase, resulting from operating a
larger organization, was evidenced by a growth of $843,000 in salaries and
employee benefits, $306,000 in equipment expense, $251,000 in data processing
expense, $273,000 in amortization of excess of cost over fair value of assets
acquired, and $178,000 of other expenses. The increase in other expenses
reflects the Company's strategy to support planned expansion. Salaries and
benefits increased due to additional staff positions in financial service
centers, lending, loan review, compliance and audit departments. The increase in
occupancy, equipment and data processing expenses were the result of internal
growth and the recent branch acquisitions.
Income Taxes. Applicable income taxes increased $78,000 for the nine
months ended September 30, 1997 as compared to the same period in 1996. The
increase resulted from a higher pre-tax earnings.
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at September 30, 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
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(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 current reports on Form 8-K were filed during
the quarter ended September 30, 1997:
</TABLE>
Form 8-K dated August 28, 1997, announcing a 3 for 2 stock
split in the form of a stock dividend.
<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 November 13, 1997 Sun Bancorp, Inc.
(Registrant)
/s/ Philip W. Koebig, III
---------------------------------------
Philip W. Koebig, III
Executive Vice President
Date November 13, 1997 /s/ Robert F. Mack
---------------------------- ---------------------------------------
Robert F. Mack
Controller
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,434
<INT-BEARING-DEPOSITS> 0
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28,750
0
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