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, 1998
-------------
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 6,370,271 July 31, 1998
- ----------------------------- --------- -------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 37,721,435 $ 34,060,747
Federal funds sold 9,500,000 -
-------------- --------------
Cash and cash equivalents 47,221,435 34,060,747
Investment securities available for sale (amortized cost -
$556,731,127; 1998 and $576,045,766; 1997) 557,391,747 576,278,353
Loans receivable (net of allowance for loan losses -
$5,134,916; 1998 and $4,193,801; 1997) 486,059,269 427,761,049
Bank properties and equipment 25,341,809 24,479,854
Real estate owned, net 396,169 270,114
Accrued interest receivable 8,233,945 6,752,163
Excess of cost over fair value of assets acquired 25,065,280 26,174,146
Deferred taxes 1,510,512 1,314,043
Other assets 2,342,166 2,882,356
-------------- --------------
TOTAL $1,153,562,332 $1,099,972,825
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES
Deposits $ 753,507,541 $ 695,387,536
Advances from the Federal Home Loan Bank 35,700,000 75,000,000
Federal funds purchased 15,000,000 5,500,000
Securities sold under agreements to repurchase 256,799,936 235,813,503
Other liabilities 4,681,135 4,889,487
-------------- --------------
Total liabilities 1,065,688,612 1,016,590,526
-------------- --------------
Guaranteed preferred beneficial interest in subordinated debt 28,750,000 28,750,000
SHAREHOLDERS' EQUITY
Preferred stock, none issued - -
Common stock, $1 par value, 10,000,000 shares authorized,
issued and outstanding: 6,340,811 in 1998; and 4,013,791 in 1997 6,340,811 4,013,791
Surplus 38,935,186 38,850,245
Retained earnings 13,411,713 11,614,755
Net unrealized gain on securities available for sale, net of income taxes 436,010 153,508
-------------- --------------
Total shareholders' equity 59,123,720 54,632,299
-------------- --------------
TOTAL $1,153,562,332 $1,099,972,825
============== ==============
</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,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $11,084,987 $ 7,866,567 $21,477,957 $14,788,616
Interest on investment securities 8,736,500 1,963,046 17,562,644 3,292,619
Interest on federal funds sold 137,546 63,362 181,835 64,229
----------- ----------- ----------- -----------
Total interest income 19,959,033 9,892,975 39,222,436 18,145,464
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 6,262,645 3,363,689 11,860,176 6,556,216
Interest on short-term borrowed funds 3,671,652 877,198 7,674,593 1,310,436
Interest on guaranteed preferred beneficial interest in subordinated debt 718,803 728,007 1,440,271 825,232
----------- ----------- ----------- -----------
Total interest expense 10,653,100 4,968,894 20,975,040 8,691,884
----------- ----------- ----------- -----------
Net interest income 9,305,933 4,924,081 18,247,396 9,453,580
PROVISION FOR LOAN LOSSES 527,398 405,000 1,010,292 825,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 8,778,535 4,519,081 17,237,104 8,628,580
----------- ----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 897,736 267,320 1,563,123 585,479
Other service charges 16,779 2,956 38,623 19,834
Gain on sale of fixed assets 1,200
Gain on sale of loans 31,525 110,441
Gain on sale of investment securities 258,189 10,289 588,917 15,592
Other 229,791 88,166 403,829 154,223
----------- ----------- ----------- -----------
Total other income 1,434,020 368,731 2,704,933 776,328
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 3,332,665 1,850,190 6,710,641 3,596,992
Occupancy expense 802,007 359,235 1,532,663 708,593
Equipment expense 541,970 294,461 1,057,679 532,925
Professional fees and services 100,051 81,603 254,517 138,295
Data processing expense 560,302 306,371 1,081,447 692,458
Amortization of excess of cost over fair value of assets acquired 961,655 262,156 1,905,179 468,820
Postage and supplies 128,191 105,409 363,587 190,030
Insurance 78,222 74,842 147,344 151,211
Other 866,703 425,287 1,496,899 853,089
----------- ----------- ----------- -----------
Total other expenses 7,371,766 3,759,554 14,549,956 7,332,413
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,840,789 1,128,258 5,392,081 2,072,495
INCOME TAXES 839,000 325,000 1,585,000 590,000
----------- ----------- ----------- -----------
NET INCOME $ 2,001,789 $ 803,258 $ 3,807,081 $ 1,482,495
=========== =========== =========== ===========
Basic earnings per share $ 0.32 $ 0.17 $ 0.60 $ 0.32
=========== =========== =========== ===========
Diluted earnings per share $ 0.28 $ 0.16 $ 0.53 $ 0.30
=========== =========== =========== ===========
Weighted average shares 6,336,074 4,594,164 6,329,271 4,592,368
========= ========= ========= =========
</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,
---------------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,807,081 $ 1,482,495
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 1,010,292 825,000
Depreciation and amortization 409,065 300,846
Amortization of excess cost over fair value of assets acquired 1,905,179 468,820
Gain on sale of loans (110,441)
Gain on sale of investment securities available for sale (588,917) (15,592)
Gain on sale of bank properties and equipment (1,200)
Deferred income taxes (342,000) (213,472)
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (941,592) (2,942,056)
Accounts payable and accrued expenses (208,352) 438,244
------------- -------------
Net cash used in operating activities 4,940,315 343,085
------------- -------------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (119,383,183) (68,259,460)
Purchases of mortgage-backed securities available for sale (111,591,832)
Proceeds from maturities of investment securities available for sale 22,300,062 1,055,674
Proceeds from maturities of mortgage-backed securities available for sale 65,067,675
Proceeds from sale of investment securities available for sale 114,460,646 12,389,184
Proceeds from sale of mortgage-backed securities available for sale 49,209,048
Proceeds from sale of loans 3,302,708
Net increase in loans (62,466,300) (66,716,228)
Increase in loans resulting from branch acquisitions (34,479) (2,313,292)
Purchase of bank properties and equipment (1,312,586) (534,516)
Increase in bank properties and equipment resulting from branch acquisitions (117,294) (1,754,824)
Proceeds from sale of bank properties and equipment 1,200
Proceeds from guaranteed preferred beneficial interest in subordinated debt 28,750,000
Excess of cost over fair value of assets acquired (796,313) (4,661,432)
(Increase) decrease in real estate owned, net (126,055) 90,084
------------- -------------
Net cash used in investing activities (41,487,903) (101,953,610)
------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits 32,971,076 14,855,165
Increase in deposits resulting from branch acquisitions 25,148,929 66,551,669
Net (payments) borrowings under line of credit and repurchase agreements (8,813,567) 42,172,537
Principal payments on borrowed funds (6,000,000)
Proceeds from exercise of stock options 15,746 29,560
Payments for fractional interests resulting from stock dividend (7,251) (3,123)
Proceeds from issuance of common stock 393,343 35,793
------------- -------------
Net cash provided by financing activities 49,708,276 117,641,601
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,160,688 16,031,076
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,060,747 21,806,758
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,221,435 $ 37,837,834
============= =============
</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
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 that, in the opinion of management, are
necessary for a fair presentation of the financial statements, have
been included. These financial statements should be read in
conjunction with the audited financial statements and the accompanying
notes thereto included in the Company's Annual Report for the period
ended December 31, 1997. The results for the six months ended June 30,
1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1998 or any other
period.
(2) Acquisitions
On February 26, 1998, the Bank purchased the Eatontown branch from
First Savings Bank, Woodbridge, NJ. The Bank acquired approximately
$25,228,000 of deposit liabilities plus accrued interest, $118,000 in
equipment, $34,000 in loans and $119,000 in cash. The Bank paid a
premium of $1,085,000, which is being amortized over seven years.
(3) Loans
The components of loans as of June 30, 1998 and December 31, 1997 were
as follows:
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
Commercial and industrial $ 400,796,855 $ 346,475,157
Real estate-residential mortgages 49,348,271 50,178,260
Installment 41,049,059 35,301,433
------------- -------------
Total gross loans 491,194,185 431,954,850
Allowance for loan losses (5,134,916) (4,193,801)
------------- -------------
Net Loans $ 486,059,269 $ 427,761,049
============= =============
Non-accrual loans $ 1,604,960 $ 896,902
4
<PAGE>
(4) Allowance For Loan Losses
Changes in the allowance for loan losses were as follows:
For the six month
period ended For the year ended
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
Balance, beginning of period $4,193,801 $2,595,312
Charge-offs (81,958) (102,408)
Recoveries 12,781 35,897
---------- ----------
Net charge-offs (69,177) (66,511)
Provision for loan losses 1,010,292 1,665,000
---------- ----------
Balance, end of period $5,134,916 $4,193,801
========== ==========
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 Statements of Financial Accounting Standards ("SFAS") Nos. 114
and 118 issued by the Financial Accounting Standards Board. 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. 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 follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------------------
(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 $1,114,439 $1,157,838
Total impaired loans $1,114,439 $1,157,838
</TABLE>
<TABLE>
<CAPTION>
For the six
months ended For the year ended
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
Average impaired loans $1,121,941 $1,244,522
Interest income recognized on impaired loans $ 38,488 $ 106,715
Cash basis interest income recognized on impaired loans -- $ 82,544
</TABLE>
5
<PAGE>
(5) Deposits
Deposits consist of the following major classifications:
June 30, 1998 December 31, 1997
------------ -----------------
(Unaudited)
Demand deposits $290,372,087 $268,655,067
Savings deposits 113,568,943 117,879,048
Time certificates under $100,000 257,172,134 243,257,829
Time certificates $100,000 or more 92,394,377 65,595,592
------------ ------------
Total $753,507,541 $695,387,536
============ ============
Of the total demand deposits, approximately, $161,579,000 (unaudited)
and $149,499,000 are non-interest bearing at June 30, 1998 and
December 31, 1997, respectively.
(6) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
effective January 1, 1998. This statement requires disclosure of
amounts from transactions and other events which are currently
excluded from the statement of income and are recorded directly to
shareholders' equity. The following table sets forth the components of
comprehensive income for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during
period before the effect of income taxes $ 417,404 $1,310,707 $ 428,033 $ 169,054
Income tax effect 141,917 445,640 145,531 57,478
---------- ---------- ---------- ----------
Net unrealized holding gains arising
during period $ 275,487 $ 865,067 $ 282,502 $ 111,576
========== ========== ========== ==========
</TABLE>
(7) 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 outstanding during the year. Diluted earnings per share
is calculated by dividing net income by the weighted average number of
shares of common stock 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). These purchases
were assumed to have been made at the average market price of the
common stock, which is based on the average price received on common
shares sold. 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 and stock splits, as well
as for the adoption of SFAS No. 128.
6
<PAGE>
<TABLE>
<CAPTION>
For the For the
Three Months Six Months For the
Ended Ended Year Ended
June 30, 1998 June 30, 1998 December 31, 1997
------------- ------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Net income $2,001,789 $3,807,081 $4,171,349
Average dilutive stock options outstanding 1,127,732 1,127,732 1,053,873
Average exercise price per share $ 6.51 $ 6.51 $ 6.56
Average market price - diluted basis $ 28.57 $ 26.34 $ 11.87
Average common shares outstanding 6,336,074 6,329,271 4,607,533
Increase in shares due to exercise of options
- diluted basis 870,960 849,167 471,736
--------- --------- ---------
Adjusted shares outstanding - diluted 7,207,033 7,178,438 5,079,269
========= ========= =========
Net income per share - basic $ 0.32 $ 0.60 $ 0.91
Net income per share - diluted $ 0.28 $ 0.53 $ 0.82
</TABLE>
(8) Guaranteed Preferred Beneficial Interest in Subordinated Debt
The sole asset of the Trust is $28,750,000 principal amount of 9.85%
Junior Subordinated Debentures issued by the Company. The Junior
Subordinated Debentures mature on March 31, 2027.
(9) Pending Acquisitions
On July 20, 1998, the Company entered into a purchase and assumption
agreement with Household Bank, f.s.b., whereby the Company will assume
certain deposit liabilities of eight branches of Beneficial Bank,
Wilmington, Delaware (the "Beneficial Acquisition"). At March 31,
1998, the branches had deposits of approximately $168 million. In
addition, the Company will acquire approximately $140 million of loans
as well as equipment pertaining to the branches. Subject to regulatory
approval and raising additional capital, a separate banking entity,
Sun National Bank, Delaware ("Sun Delaware") will be established. Upon
completion of the acquisition, the deposits, loans and equipment will
be combined into Sun Delaware. The acquisition is expected to be
completed during the fourth quarter of 1998.
On July 28, 1998, the Bank entered into a purchase and assumption
agreement with Summit Bank ("Summit"), whereby the Bank will assume
certain deposit liabilities of two branch offices from Summit. At
March 31, 1998, the branches had deposits of approximately
$14,800,000. In addition, the Bank will acquire account loans as well
as property and equipment pertaining to the branches. The transaction
is expected to be completed during the first quarter of 1999. The
agreement is subject to regulatory approval.
(10) Recent Acquisition
On July 30,1998, the Bank acquired Allegiance Mortgage Company, Cherry
Hill, NJ ("Allegiance"). Allegiance originates residential mortgage
loans, primarily in New Jersey, for resale in the secondary market.
The Company issued 28,302 shares of common stock in exchange for all
the outstanding shares of Allegiance common stock. The transaction was
accounted for as a pooling of interests. At June 30, 1998, Allegiance
had approximately $397,000 in total assets.
7
<PAGE>
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
FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS FROM THE
ACQUISITIONS NOT BEING FULLY REALIZED OR REALIZED WITHIN THE EXPECTED
TIME FRAME; (2) REVENUES FOLLOWING THE ACQUISITIONS BEING LOWER THAN
EXPECTED; (3) A SIGNIFICANT INCREASE IN COMPETITIVE PRESSURES AMONG
DEPOSITORY AND OTHER FINANCIAL INSTITUTIONS; (4) COSTS OR DIFFICULTIES
RELATED TO THE INTEGRATION OF THE ACQUIRED BUSINESS BEING GREATER THAN
EXPECTED; (5) CHANGES IN THE INTEREST RATE ENVIRONMENT RESULTING IN
REDUCED MARGINS; (6) GENERAL ECONOMIC OR BUSINESS CONDITIONS, EITHER
NATIONALLY OR IN THE STATES IN WHICH THE COMPANY WILL BE DOING
BUSINESS, BEING LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG
OTHER THINGS, A DETERIORATION IN CREDIT QUALITY OR A REDUCED DEMAND
FOR CREDIT; (7) LEGISLATIVE OR REGULATORY CHANGES ADVERSELY AFFECTING
THE BUSINESSES IN WHICH THE COMPANY WILL BE ENGAGED; (8) CHANGES IN
THE SECURITIES MARKETS; AND (9) CHANGES IN THE BANKING INDUSTRY
INCLUDING THE EFFECTS OF CONSOLIDATION RESULTING FROM POSSIBLE MERGERS
OF FINANCIAL INSTITUTIONS.
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.
8
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at June 30, 1998 increased by $53.6 million to $1.154
billion as compared to $1.1 billion at December 31, 1997. The growth was
primarily due to an increase in net loans of $58.3 million, an increase in
federal funds sold of $9.5 million and offset by a decrease in the investment
securities portfolio of $18.9 million.
Investment securities available for sale decreased $18.9 million, from
$576.3 million at December 31, 1997 to $557.4 million at June 30, 1998. The
decrease was primarily a result of net sales of investment securities, the
proceeds of which funded loan growth and repayment of short-term borrowings.
Net loans at June 30, 1998 amounted to $486.1 million, an increase of
$58.3 million from $427.8 million at December 31, 1997. Of the increase, only
$34,000 was the result of loans purchased from First Savings Bank. 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 at June
30, 1998 was 0.50% compared to 0.51% at December 31, 1997. The ratio of
allowance for loan losses to total non-performing loans was 208.39% at June 30,
1998 compared to 189.81% at December 31, 1997. The increase in this ratio was
the result of a higher allowance for loan losses at June 30, 1998. The ratio of
allowance for loan losses to total loans was 1.05% at June 30, 1998 compared to
0.97% at December 31, 1997.
Excess of cost over fair value of assets acquired decreased $1.1
million, from $26.2 million at December 31, 1997 to $25.1 million at June 30,
1998. The decrease was a result of related amortization and a $289,000 refund of
the purchase premium from the purchase of The Bank of New York branches,
substantially offset by the addition of a $1.1 million premium paid for the
acquisition of the Eatontown office of First Savings.
Total liabilities at June 30, 1998 amounted to $1.066 billion compared
to $1.017 billion at December 31, 1997, an increase of $49.1 million.
Total deposits grew to $753.5 million at June 30, 1998, a $58.1 million
increase over December 31, 1997 deposits of $695.4 million. The increase was the
result of approximately $25.1 million in deposits acquired from First Savings
Bank, as well as from internal deposit growth of 4.74%.
There were $35.7 million in advances from the Federal Home Loan Bank
and $15 million in federal funds purchased at June 30, 1998 compared to $75.0
million and $5.5 million, respectively, at December 31, 1997. The combined net
decrease in these liabilities was due to the availability of funds from
increased deposit levels combined with the proceeds from sales of investment
securities.
Total shareholders' equity grew by $4.5 million, from $54.6 million at
December 31, 1997, to $59.1 million at June 30, 1998. The increase was a result
of net earnings of $3.8 million for the six months ended June 30, 1998 augmented
by proceeds received from the issuance of common stock amounting to
approximately $409,000 and an improvement in the net unrealized gains on
securities available for sale, net of income taxes of $283,000.
9
<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 continues to experience 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 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. It is the Company's
intent to maintain adequate levels of regulatory capital. Management monitors
the Company's capital levels, and when appropriate, will recommend additional
capital raising efforts to the Company's board of directors. At June 30, 1998,
the Company's Tier 1 risk- based capital, total risk-based capital and leverage
capital ratios were 8.49%, 10.78% and 4.96%, respectively.
As discussed in Note (9) above, the Company has entered into a purchase
and assumption agreement with Household Bank, f.s.b. in connection with the
Beneficial Acquisition. As a result, it will be necessary for the Company to
issue additional securities in order to capitalize Sun Delaware. The Beneficial
Acquisition and the organization of Sun Delaware must receive the approval of
state and federal banking regulators. The Company plans to issue securities in a
public offering not later than the fourth fiscal quarter of this year.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
1997.
General. Net income increased by $1.2 million for the three months
ended June 30, 1998 to $2.0 million from $803,000 for the three months ended
June 30, 1997. Net interest income increased $4.4 million and the provision for
loan losses increased $122,000 for the three months ended June 30, 1998 compared
to the same period in 1997. Other income increased by $1.1 million to $1.4
million for the three months ended June 30, 1998 as compared to $369,000 for the
three months ended June 30, 1997. Other expenses increased by $3.6 million to
$7.4 million for the three months ended June 30, 1998 as compared to $3.8million
for the three months ended June 30, 1997. The return on average assets for the
three months ended June 30, 1998 and 1997 were 0.73% and 0.61%, respectively.
The return on average equity for the three months ended June 30, 1998 and 1997
were 14.00% and 11.53%, respectively.
Net Interest Income. The increase in net interest income was due to a
$10.1 million increase in interest income partially offset by a $5.7 million
increase in interest expense.
Interest Income. Interest income for the three months ended June 30,
1998 increased approximately $10.1 million, or 101.7%, from $9.9 million for the
same period in 1997 to $20.0 million in 1998. The increase was primarily the
result of an increase of $3.2 million in interest and fees on loans resulting
from acquisitions and internal growth and $6.8 million in interest on investment
securities resulting from the deployment of cash received from branch
acquisitions into the Company's investment portfolio.
10
<PAGE>
Interest Expense. Interest expense for the three months ended June 30,
1998 increased approximately $5.7 million, from $5.0 million for the same period
in 1997 to $10.7 million in 1998. This increase was primarily due to a $2.9
million increase in interest on deposit accounts resulting from significantly
higher deposit balances due to acquisitions and a $2.8 million increase in
interest on borrowed funds resulting from higher levels of securities sold under
agreements to repurchase.
Provision for Loan Losses. For the three months ended June 30, 1998,
the provision for loan losses amounted to $527,000, an increase of $122,000,
compared to $405,000 for the same period in 1997. Management continually reviews
the adequacy of the loan loss reserve based on management's review of the
quality of loans and the risks inherent in the loan portfolio in conjunction
with guidelines promulgated by the Bank's primary regulator. The increase in the
provision for loan losses was due to higher levels of loans outstanding.
Other Income. Other income increased $1.1 million for the three-month
period ended June 30, 1998 compared to the three-month period ended June 30,
1997. Most of the increase was a result of fees generated by a larger base due
to deposit acquisitions amounting to $630,000. This was augmented by an increase
of $32,000 in gains from the sale of loans, an increase of $248,000 in gains on
the sale of investment securities and an increase of $142,000 in other income.
Other Expenses. Other expenses increased approximately $3.6 million, to
$7.4 million for the three months ended June 30, 1998 as compared to $3.8
million for the same period in 1997. Of the increase, $1.5 million was in
salaries and employee benefits, $442,000 was in occupancy expense, $248,000 was
in equipment expense, $254,000 was in data processing expense, $699,000 was in
amortization of excess of cost over fair value of assets acquired and $441,000
was in other operating 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, branch
expansion and the effect of the Company's acquisitions.
Income Taxes. Applicable income taxes increased $514,000 for the three
months ended June 30, 1998 as compared to the same period in 1997. The increase
resulted from higher pre-tax earnings.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997.
General. Net income increased by $2.3 million for the six months ended
June 30, 1998 to $3.8 million from $1.5 million for the six months ended June
30, 1997. Net interest income increased $8.8 million and the provision for loan
losses increased $185,000 for the six months ended June 30, 1998 compared to the
same period in 1997. Other income increased by $1.9 million to $2.7 million for
the six months ended June 30, 1998 as compared to $776,000 for the six months
ended June 30, 1997. Other expenses increased by $7.2 million to $14.5 million
for the six months ended June 30, 1998 as compared to $7.3 million for the six
months ended June 30, 1997. The return on average assets for the six months
ended June 30, 1998 and 1997 were 0.70% and 0.62%, respectively. The return on
average equity for the six months ended June 30, 1998 and 1997 were 13.49% and
10.69%, respectively.
Net Interest Income. The increase in net interest income was due to a
$21.1 million increase in interest income partially offset by a $12.3 million
increase in interest expense.
Interest Income. Interest income for the six months ended June 30, 1998
increased approximately $21.1 million, or 116.2%, from $18.1 million for the
same period in 1997 to $39.2 million in 1998. The increase was primarily the
result of an increase of $6.7 million in interest and fees on loans resulting
from acquisitions and internal growth and $14.3 million in interest on
investment securities resulting from the deployment of cash received from branch
acquisitions and deposit growth into the Company's investment portfolio.
11
<PAGE>
Interest Expense. Interest expense for the six months ended June 30,
1998 increased approximately $12.3 million, from $8.7 million for the same
period in 1997 to $21.0 million in 1998. This increase was primarily due to a
$5.3 million increase in interest on deposit accounts resulting from
significantly higher deposit balances due to acquisitions and internal growth, a
$6.3 million increase in interest on short-term borrowed funds resulting from
higher levels of borrrowings from correspondent banks and securities sold under
agreements to repurchase and a $615,000 increase in interest on guaranteed
preferred beneficial interest in subordinated debt.
Provision for Loan Losses. For the six months ended June 30, 1998, the
provision for loan losses amounted to $1.0 million, an increase of $185,000,
compared to $825,000 for the same period in 1997. The increase in the provision
for loan losses was due to higher levels of loans outstanding. Management
continually reviews the adequacy of the loan loss reserve using guidelines
promulgated by the Bank's primary regulator.
Other Income. Other income increased $1.9 million for the six-month
period ended June 30, 1998 compared to the six-month period ended June 30, 1997.
The increase was a result of approximately $978,000 in fees generated by a
larger base due to deposit acquisitions and internal growth, augmented by
$110,000 in gains from the sale of loans and an increase of $573,000 in gains on
the sale of investment securities and $250,000 in other income.
Other Expenses. Other expenses increased approximately $7.2 million, to
$14.5 million for the six months ended June 30, 1998 as compared to $7.3 million
for the same period in 1997. Of the increase, $3.1 million was in salaries and
employee benefits, $824,000 was in occupancy expense, $525,000 was in equipment
expense, $116,000 was in professional fees and services, $389,000 was in data
processing expense, $174,000 was in postage and supplies, $1.4 million was in
amortization of excess of cost over fair value of assets acquired and $644,000
was in 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
professional fees and services and data processing expenses were the result of
internal growth and the effect of the Company's acquisitions. As described in
Note 9 of the Notes to Consolidated Financial Statements, the Company has
entered into two purchase and assumption agreements which, when completed, will
result in the acquisition of a total of ten branch locations. As a result, the
Company expects the level of amortization of excess of cost over fair value of
assets acquired to increase in periods subsequent to the completion of the
transactions.
Income Taxes. Applicable income taxes increased $995,000 for the six
months ended June 30, 1998 as compared to the same period in 1997. The increase
resulted from higher pre-tax earnings.
12
<PAGE>
Year 2000 Compliance
The Company's board of directors has approved a Year 2000 compliance
plan designed to address the concerns raised by the Year 2000 problem.
Management provides progress reports at least quarterly to the board.
The areas covered by the plan are hardware, software, customers and
service providers. The Company has identified specific issues related to each
area. At June 30, 1998 the Company has completed the assessment phase of the
plan in which assessment tasks have been completed in each group. The Company
has begun its testing phase and its customer awareness phase. Both are expected
to continue until the end of the current year. The Company has contacted its
critical service providers and will continue to pursue each of their compliance
efforts. Contingency plans have been developed for critical functions provided
by third-party service providers. There have been no data center projects that
have been deferred due to resources applied to the Year 2000 effort.
The Company's primary system software, licensed from Kirchman
Corporation ("Kirchman"), has been represented to be Year 2000 compliant by
Kirchman. During the third quarter of 1998, the Company expects to receive the
results of an independent testing group verifying such compliance.
It is expected that Year 2000 compliance will cost approximately
$180,000, of which about $30,000 has been spent. The primary expenditure of
funds will be for the upgrade of equipment, and to a much lesser extent,
computer software, employee salaries and related employee benefits. The source
of funds for Year 2000 costs are expected to derive from current earnings.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management
The Company's exposure to interest rate risk results from the
difference in maturities on interest-bearing liabilities and interest-earning
assets and the volatility of interest rates. Because the Company's assets have a
longer maturity than its liabilities, the Company's earnings will tend to be
negatively affected during periods of rising interest rates. Conversely, this
mismatch should benefit the Company during periods of declining interest rates.
Management monitors the relationship between the interest rate sensitivity of
the Company's assets and liabilities. In this regard, the Company emphasizes the
origination of short-term commercial loans and revolving home equity loans and
de-emphasizes the origination of long-term mortgage loans.
Gap Analysis
Banks and bank holding companies have become increasingly concerned
with the extent to which they are able to match maturities of interest-earning
assets and interest-bearing liabilities. Examining the extent to which such
assets and liabilities are interest-rate sensitive facilitates such matching and
by monitoring a bank's interest rate sensitivity gap. An asset or liability is
considered to be interest-rate sensitive if it will mature or reprice within a
specific time period. The interest rate sensitivity gap is defined as the excess
of interest-earning assets maturing or repricing within a specific time period
over interest-bearing liabilities maturing or repricing within that time period.
On a quarterly basis, the Company monitors its gap, primarily its six-month and
one-year maturities and works to maintain its gap within a range that does not
exceed a negative 15% of total assets. The Company attempts to maintain its
ratio of rate-sensitive assets to rate-sensitive liabilities between 75% to
125%.
13
<PAGE>
Management and the Board of Directors monitor its gap position at
quarterly meetings. The Asset/Liability Committee of the Bank's Board of
Directors meets to discuss interest rate risk. The Bank uses simulation models
to measure the impact of potential changes of up to 200 basis points in interest
rates on net interest income. As described below, sudden changes to interest
rates should not have a material impact on the Company's results of operations.
Should the Bank experience a positive or negative mismatch in excess of the
approved range, it has a number of remedial options. It has the ability to
reposition its investment portfolio to include securities with more advantageous
repricing and/or maturity characteristics. It can attract variable- or
fixed-rate loan products as appropriate. It can also price deposit products to
attract deposits with maturity characteristics that can lower its exposure to
interest rate risk.
At June 30, 1998, the Bank had a slightly positive position with
respect to its exposure to interest rate risk: total interest-earning assets
maturing or repricing within one year exceeded total interest-bearing
liabilities maturing or repricing during the same time period by $6.5 million,
representing a positive cumulative one-year gap ratio of 0.56%. As a result, the
yield on interest-earning assets of the Bank should adjust to changes in
interest rates at a slightly faster rate than the cost of interest-bearing
liabilities. Because the Bank had negligible negative gap characteristics in its
shorter maturity periods, its one-year gap mismatch would have little effect on
net interest margin during periods of rising or declining market interest rates.
The following table summarizes the maturity and repricing
characteristics of the Bank's interest-earning assets and interest-bearing
liabilities at June 30, 1998. All amounts are categorized by their actual
maturity or repricing date with the exception of interest-bearing demand
deposits and savings deposits. The Bank's historical experience with both
interest-bearing demand deposits and savings deposits reflects an insignificant
change in deposit levels for these core deposits. As a result, the Bank
allocates approximately 35% to the 0-3 month category and 65% to the 1-5 year
category.
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
(Dollars in Thousands)
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loans Receivable $ 234,235 $ 52,591 $ 165,298 $ 39,070 $ 491,194
Investment Securities 289,635 123,330 96,201 48,226 557,392
Federal funds sold 9,500 - - - 9,500
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 533,370 175,921 261,499 87,296 1,058,086
---------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 51,695 7,444 39,702 29,952 128,793
Savings deposits 13,075 7,730 41,228 51,536 113,569
Time certificates under $100,000 112,970 112,493 31,709 - 257,172
Time certificates $100,000 or more 51,697 38,174 2,523 - 92,394
Federal Home Loan Bank advances 35,700 - - - 35,700
Federal funds purchased 15,000 - - - 15,000
Securities sold under agreements
to repurchase 256,800 - - - 256,800
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 536,937 165,841 115,162 81,488 899,428
---------- ---------- ---------- ---------- ----------
Periodic Gap $ (3,567) $ 10,080 $ 146,337 $ 5,808 $ 145,760
========== ========== ========== ========== ==========
Cumulative Gap $ (3,567) $ 6,513 $ 152,850 $ 158,658
========== ========== ========== ==========
Cumulative Gap Ratio (0.31%) 0.56% 13.25% 13.75%
===== ==== ===== =====
</TABLE>
14
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at June 30, 1998. From time to time, the Company is a party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 2 Changes in Securities and Use of Proceeds
On July 30, 1998, the Company issued 28,302 shares of its common
stock, par value $1.00 per share, in a non-public offering to seven
private investors in connection with the Company's acquisition of
Allegiance. See Note 10 of the Notes to Consolidated Financial
Statements. In the acquisition, the Company exchanged 28,302 shares of
its common stock for all of the issued and outstanding common stock of
Allegiance. This transaction was exempt from registration under the
Securities Act of 1933, as amended, by virtue of Section 4 (2)
thereunder in that, among other things, there were only seven
purchasers of the Company's common stock.
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
If the Company does not receive notice at its principal executive
offices on or before December 11, 1998 of a shareholder proposal for
consideration at the 1999 annual meeting of shareholders, the proxy
named by the Company's board of directors with respect to the meeting
shall have discretionary voting authority with respect to such
proposal.
Item 6 Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule (electronic filing only)
(b) There were no current reports on Form 8-K filed during the
quarter ended June 30, 1998.
15
<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 July 31, 1998 Sun Bancorp, Inc.
------------- -----------------
(Registrant)
/s/Philip W. Koebig, III
-----------------------------------------
Philip W. Koebig, III
Executive Vice President
Date July 31, 1998 /s/Robert F. Mack
------------- -----------------------------------------
Robert F. Mack
Controller
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 37,721
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 557,392
<INVESTMENTS-CARRYING> 557,392
<INVESTMENTS-MARKET> 557,392
<LOANS> 491,194
<ALLOWANCE> 5,135
<TOTAL-ASSETS> 1,153,562
<DEPOSITS> 753,508
<SHORT-TERM> 307,500
<LIABILITIES-OTHER> 4,681
<LONG-TERM> 0
28,750
0
<COMMON> 6,341
<OTHER-SE> 52,783
<TOTAL-LIABILITIES-AND-EQUITY> 1,153,562
<INTEREST-LOAN> 21,478
<INTEREST-INVEST> 17,563
<INTEREST-OTHER> 182
<INTEREST-TOTAL> 39,222
<INTEREST-DEPOSIT> 11,860
<INTEREST-EXPENSE> 20,975
<INTEREST-INCOME-NET> 18,247
<LOAN-LOSSES> 1,010
<SECURITIES-GAINS> 589
<EXPENSE-OTHER> 14,550
<INCOME-PRETAX> 5,392
<INCOME-PRE-EXTRAORDINARY> 5,392
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,807
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 3.68
<LOANS-NON> 1,605
<LOANS-PAST> 843
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,194
<CHARGE-OFFS> 82
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 5,135
<ALLOWANCE-DOMESTIC> 5,135
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 689
</TABLE>
