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 March 31, 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
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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 6,032,081 May 4, 1998
- ----------------------------- --------- -----------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 30,699,425 $ 34,060,747
Federal funds sold 11,500,000 -
-------------- --------------
Cash and cash equivalents 42,199,425 34,060,747
Investment securities available for sale (amortized cost -
$463,757,702; 1998 and $576,045,766; 1997 464,000,918 576,278,353
Loans receivable (net of allowance for loan losses -
$4,620,679; 1998 and $4,193,801; 1997) 456,010,143 427,761,049
Bank properties and equipment 24,779,849 24,479,854
Real estate owned, net 270,114 270,114
Accrued interest receivable 8,997,930 6,752,163
Excess of cost over fair value of assets acquired 26,088,138 26,174,146
Deferred taxes 1,625,430 1,314,043
Receivable for investment securities sold 29,347,975
Other assets 3,946,168 2,882,356
-------------- --------------
TOTAL $1,057,266,090 $1,099,972,825
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 731,436,161 $ 695,387,536
Advances from the Federal Home Loan Bank - 75,000,000
Federal funds purchased - 5,500,000
Securities sold under agreements to repurchase 235,494,425 235,813,503
Other liabilities 4,936,896 4,889,487
-------------- --------------
Total liabilities 971,867,482 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: 6,029,228 in 1998; and 4,013,791 in 1997 6,029,228 4,013,791
Surplus 39,048,933 38,850,245
Retained earnings 11,409,924 11,614,755
Net Unrealized gain on securities available for sale, net of income taxes 160,523 153,508
-------------- --------------
Total shareholders' equity 56,648,608 54,632,299
-------------- --------------
TOTAL $1,057,266,090 $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
Ended March 31,
--------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $10,392,970 $ 6,922,049
Interest on investment securities 8,826,144 1,329,573
Interest on federal funds sold 44,289 867
----------- -----------
Total interest income 19,263,403 8,252,489
----------- -----------
INTEREST EXPENSE:
Interest on deposits 5,597,531 3,192,527
Interest on short-term borrowed funds 4,002,941 433,238
Interest on guaranteed preferred beneficial interest in subordinated debt 721,468 97,225
----------- -----------
Total interest expense 10,321,940 3,722,990
----------- -----------
Net interest income 8,941,463 4,529,499
PROVISION FOR LOAN LOSSES 482,894 420,000
----------- -----------
Net interest income after provision for loan losses 8,458,569 4,109,499
----------- -----------
OTHER INCOME:
Service charges on deposit accounts 665,387 318,159
Other service charges 21,844 16,878
Gain on sale of fixed assets 1,200
Gain on sale of loans 78,916
Gain on sale of investment securities 330,728 5,303
Other 174,038 66,057
----------- -----------
Total other income 1,270,913 407,597
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 3,377,976 1,746,802
Occupancy expense 730,656 349,358
Equipment expense 515,709 238,464
Professional fees and services 154,466 56,692
Data processing expense 521,145 386,087
Amortization of excess of cost over fair value of assets acquired 943,524 206,664
Postage and supplies 235,396 84,621
Insurance 69,122 76,369
Other 630,196 427,802
----------- -----------
Total other expenses 7,178,190 3,572,859
----------- -----------
INCOME BEFORE INCOME TAXES 2,551,292 944,237
INCOME TAXES 746,000 265,000
----------- -----------
NET INCOME $ 1,805,292 $ 679,237
=========== ===========
Basic earnings per share $ 0.30 $ 0.16
=========== ===========
Diluted earnings per share $ 0.27 $ 0.15
=========== ===========
Weighted average shares 6,021,609 4,371,952
=========== ===========
</TABLE>
- ---------------------------------
See notes to consolidated financial statements
2
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,805,292 $ 679,237
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 482,894 420,000
Depreciation and amortization 233,560 136,581
Amortization of excess cost over fair value of assets acquired 943,524 206,664
Gain on sale of loans (78,916)
Gain on sale of investment securities available for sale (330,728) (5,303)
Gain on sale of bank properties and equipment (1,200)
Deferred income taxes (315,001) (175,000)
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (3,309,579) (1,958,365)
Accounts payable and accrued expenses 47,409 (202,784)
------------ ------------
Net cash used in operating activities (521,545) (900,170)
------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (28,478,878) (2,584,787)
Purchases of mortgage-backed securities available for sale (8,457,393)
Proceeds from maturities of investment securities available for sale 16,500,000 553
Proceeds from maturities of mortgage-backed securities available for sale 9,952,513
Proceeds from sale of investment securities available for sale 64,356,843 1,894,015
Proceeds from sale of mortgage-backed securities available for sale 29,438,756
Proceeds from sale of loans 2,381,983
Net increase in loans (31,000,576) (24,618,239)
Increase in loans resulting from branch acquisitions (34,479)
Purchase of bank properties and equipment (457,285) (178,288)
Increase in bank properties and equipment resulting from branch acquisitions (117,294)
Proceeds from sale of bank properties and equipment 1,200
Proceeds from guaranteed preferred beneficial interest in subordinated debt 25,000,000
Excess of cost over fair value of assets acquired (857,516)
Decrease in real estate owned, net - 217,978
------------ ------------
Net cash provided by (used in) investing activities 53,226,674 (267,568)
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 10,899,696 (14,721,042)
Increase in deposits resulting from branch acquisitions 25,148,929
Net (repayments) borrowings under line of credit and repurchase agreements (80,819,078) 18,224,674
Proceeds from exercise of stock options 29,560
Payments for fractional interests resulting from stock dividend (2,694)
Proceeds from issuance of common stock 206,696 -
------------ ------------
Net cash (used in) provided by financing activities (44,566,451) 3,533,192
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,138,678 2,365,454
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,060,747 21,806,758
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,199,425 $ 24,172,212
============ ============
</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 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, 1997. The
results for the three months ended March 31, 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 one branch from First Savings
Bank, Woodbridge, N.J. 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 March 31, 1998 and December 31, 1997
were as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Commercial and industrial $ 372,552,722 $ 346,475,157
Real estate-residential mortgages 51,426,548 50,178,260
Installment 36,651,552 35,301,433
-------------- --------------
Total gross loans 460,630,822 431,954,850
Allowance for loan losses (4,620,679) (4,193,801)
-------------- --------------
Net Loans $ 456,010,143 $ 427,761,049
============== ==============
Non-accrual loans $ 947,695 $ 896,902
</TABLE>
4
<PAGE>
(4) Allowance For Loan Losses
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the three month
period ended For the year ended
March 31, 1998 December 31, 1997
-------------- ------------------
(Unaudited)
<S> <C> <C>
Balance, beginning of period $ 4,193,801 $ 2,595,312
Charge-offs ( 64,293) (102,408)
Recoveries 8,277 35,897
------------ ------------
Net charge-offs ( 56,016) ( 66,511)
Provision for loan losses 482,894 1,665,000
------------ ------------
Balance, end of period $ 4,620,679 $ 4,193,801
============ ============
</TABLE>
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>
March 31, 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 $ 1,117,942 $ 1,157,838
losses calculated under SFAS No. 114 ------------ -----------
Total impaired loans $ 1,117,942 $ 1,157,838
============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the three months For the year ended
ended March 31, 1998 December 31, 1997
-------------------- -----------------
(Unaudited)
<S> <C> <C>
Average impaired loans $ 1,127,278 $ 1,244,522
Interest income recognized on impaired loans $ 27,071 $ 106,715
Cash basis interest income recognized on impaired loans - $ 82,544
</TABLE>
5
<PAGE>
(5) Deposits
Deposits consist of the following major classifications:
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
Demand deposits $267,469,730 $268,655,067
Savings deposits 113,901,757 117,879,048
Time certificates under $100,000 257,997,501 243,257,829
Time certificates $100,000 or more 92,067,173 65,595,592
------------ ------------
Total $731,436,161 $695,387,536
============ ============
Of the total demand deposits, approximately, $149,372,000 (unaudited) and
$149,499,000 are non-interest bearing at March 31, 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 ended March 31,
------------------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
before the effect of income taxes $ 10,629 $ 1,141,653
Income tax effect 3,614 388,162
------------ -----------
Net unrealized holding gains (losses) arising during period $ 7,015 $ 753,491
============ ===========
</TABLE>
6
<PAGE>
(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.
<TABLE>
<CAPTION>
For the
Three Months For the
Ended Year Ended
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Net income $ 1,805,292 $ 4,171,349
Average dilutive stock options outstanding 1,077,573 1,053,873
Average exercise price per share $ 6.82 $ 6.56
Average market price - diluted basis $ 25.37 $ 11.87
Average common shares outstanding 6,021,609 4,607,533
Increase in shares due to exercise of options - diluted basis 787,761 471,736
Adjusted shares outstanding - diluted 6,809,370 5,079,269
Net income per share - basic $ 0.30 $ 0.91
Net income per share - diluted $ 0.27 $ 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.
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). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
8
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 1998 decreased by $42.7 million to $1.057
billion as compared to $1.1 billion at December 31, 1997. The decrease was
primarily due to a reduction in investment securities portfolio of $112.3
million, offset by an increase in federal funds sold of $11.5 million, an
increase in net loans of $28.2 million and an increase in a receivable for
investment securities sold of $29.3 million.
Investment securities available for sale decreased $112.3 million, from
$576.3 million at December 31, 1997 to $464.0 million at March 31, 1998. The
decrease was primarily a result of sales of investment securities, the proceeds
of which funded loan grown and retired short-term borrowings.
Net loans at March 31, 1998 amounted to $456.0 million, an increase of
$28.2 million from $427.8 million at December 31, 1997. 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 March 31,
1998 was 0.55% compared to 0.51% at December 31, 1997. The ratio of allowance
for loan losses to total non-performing loans was 181.84% at March 31, 1998
compared to 189.81% at December 31, 1997. The increases in these two ratios were
the result of slightly higher accruing loans contractually past due 90 days or
more at March 31, 1998. The ratio of allowance for loan losses to total loans
was 1.00% at March 31, 1998 compared to 0.97% at December 31, 1997.
Excess of cost over fair value of assets acquired decreased $86,000, from
$26.2 million at December 31, 1997 to $26.1 million at March 31, 1998. The
decrease was a result of related amortization and a $228,000 refund of 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 March 31, 1998 amounted to $971.9 million compared to
$1,016.6 million at December 31, 1997, a decrease of $44.7 million.
Total deposits grew to $731.4 million at March 31, 1998, a $36.0 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 ,
as well from internal deposit growth.
There were no advances from the Federal Home Loan Bank nor federal funds
purchased at March 31, 1998 compared to $75.0 million and $5.5 million,
respectively, at December 31, 1997. The decrease in these liabilities were due
to the availability of funds from increased deposit levels combined with the
proceeds from sales of investment securities.
Total shareholders' equity grew by $2.0 million, from $54.6 million at
December 31, 1997, to $56.6 million at March 31, 1998. The increase was a result
of net earnings of $1.8 million for the three months ended March 31, 1998
augmented by proceeds received from the issuance of common stock amounting to
approximately $207,000.
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 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. Until its recent issuance
of Trust Preferred Securities and additional issuance of common shares, the rate
at which commercial loans have grown has outpaced the internal growth rate of
the Company's capital.
It is the Company's intent to maintain adequate levels of risk-based
capital. 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 March 31, 1998 and
1997.
General. Net income increased by $1.1 million for the three months ended
March 31, 1998 to $1.8 million from $679,000 for the three months ended March
31, 1997. Net interest income increased $4.4 million and the provision for loan
losses increased $63,000 for the three months ended March 31, 1998 compared to
the same period in 1997. Other income increased by $863,000 to $1.3 million for
the three months ended March 31, 1998 as compared to $407,000 for the three
months ended March 31, 1997. Other expenses increased by $3.6 million to $7.2
million for the three months ended March 31, 1998 as compared to $3.6 million
for the three months ended March 31, 1997.
Net Interest Income. The increase in net interest income was due to a
$11.0 million increase in interest income partially offset by a $6.6 million
increase in interest expense.
Interest Income. Interest income for the three months ended March 31, 1998
increased approximately $11.0 million , or 133.4%, from $8.3 million for the
same period in 1997 to $19.3 million in 1998. The increase was primarily the
result of an increase of $3.5 million in interest and fees on loans resulting
from acquisitions and internal growth and $7.5 million in interest on investment
securities resulting from the deployment of cash received from branch
acquisitions into the Company's investment portfolio.
Interest Expense. Interest expense for the three months ended March 31,
1998 increased approximately $6.6 million, from $3.7 million for the same period
in 1997 to $10.3 million in 1998. This increase was primarily due to a $2.4
million increase in interest on deposit accounts resulting from significantly
higher deposit balances due to acquisitions, a $3.6 million increase on
short-term borrowed funds resulting from higher levels of securities sold under
agreements to repurchase and a $624,000 increase in interest on guaranteed
preferred beneficial interest in subordinated debt.
10
<PAGE>
Provision for Loan Losses. For the three months ended March 31, 1998, the
provision for loan losses amounted to $483,000, an increase of $63,000, compared
to $420,000 for the same period in 1997. Management continually reviews the
adequacy of the loan loss reserve using guidelines promulgated by the Bank's
primary regulator.
Other Income. Other income increased $863,000 for the three month period
ended March 31, 1998 compared to the three month period ended March 31, 1997.
The increase was a result of fees generated by a larger deposit base due to
acquisitions, augmented by $79,000 in gains from the sale of loans and an
increase of $325,000 in gains on the sale of investment securities.
Other Expenses. Other expenses increased approximately $3.6 million, to
$7.2 million for the three months ended March 31, 1998 as compared to $3.6
million for the same period in 1997. Of the increase, $1.6 million was in
salaries and employee benefits, $381,000 was in occupancy expense, $277,000 was
in equipment expense, $98,000 was in professional fees and services, $135,000
was in data processing expense, $151,000 was in postage and supplies, and
$737,000 was 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 professional fees
and services and data processing expenses were the result of internal growth and
the effect of the Company's acquisitions.
Income Taxes. Applicable income taxes increased $481,000 for the
three months ended March 31, 1998 as compared to the same period in 1997.
The increase resulted from a higher pre-tax 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 have become increasingly concerned with the extent to which they are able
to match maturities of interest-earning assets and interest-bearing liabilities.
Such matching is facilitated by examining the extent to which such assets and
liabilities are interest-rate sensitive and by monitoring 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 Bank 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%.
11
<PAGE>
Management and the Board of Directors monitors its gap position at quarterly
meetings. The Asset/Liability Committee of the Bank's Board of Directors meets
to discuss the Bank's 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 the net interest income of the Company. As described below, sudden
changes to interest rates should not have a material impact to the Bank'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 December 31, 1997, the Bank had a negative position with respect to its
exposure to interest rate risk: total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing during the same time period by $43.0 million, representing a negative
cumulative one-year gap ratio of 3.91%. As a result, the yield on
interest-earning assets of the Bank should adjust to changes in interest rates
at a slower rate than the cost of the Bank's interest-bearing liabilities.
Because the Bank had negligible negative gap characteristics in its shorter
maturity periods, the Bank's one-year gap mismatch would have little effect on
the Bank's 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 December 31,
1997. 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 $ 149,163 $ 52,032 $ 164,327 $ 66,432 $ 431,954
Investment Securities 284,409 130,479 102,977 58,414 576,279
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 433,572 182,511 267,304 124,846 1,008,233
---------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 46,012 -- 73,387 -- 119,399
Savings deposits 11,731 -- 105,578 -- 117,309
Time certificates under $100,000 43,202 178,967 21,687 -- 243,856
Time certificates $100,000 or more 27,415 35,426 2,754 -- 65,595
Federal Home Loan Bank advances 75,000 -- -- -- 75,500
Federal funds purchased 5,500 -- -- -- 5,500
Securities sold under agreements
to repurchase 235,814 -- -- -- 235,814
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 444,674 214,393 203,406 -- 862,473
---------- ---------- ---------- ---------- ----------
Periodic Gap $ (11,102) $ (31,882) $ 63,898 $ 124,846 $ 145,760
========== ========== ========== ========== ==========
Cumulative Gap $ (11,102) $ (42,984) $ 20,914 $ 145,760
========== ========== ========== ==========
Cumulative Gap Ratio (1.01%) (3.91%) (1.90%) 13.27%
========== ========== ========== ==========
</TABLE>
12
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material nature
at March 31, 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
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>
(a) 27 Financial Data Schedule (electronic filing only)
(b) The following current reports on Form 8-K were filed during the quarter ended
March 31, 1998:
Form 8-K dated February 18, 1998, announcing a 3 for 2 stock split in the form of a 50%
stock dividend.
Form 8-K dated March 3,1998, reporting the adoption of amended and restated bylaws.
</TABLE>
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 May 5, 1998 Sun Bancorp, Inc.
----------- -----------------
(Registrant)
/s/ Philip W. Koebig, III
-------------------------
Philip W. Koebig, III
Executive Vice President
Date May 5, 1998 /s/Robert F. Mack
----------- -----------------
Robert F. Mack
Controller
14
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 30,699
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 464,001
<INVESTMENTS-CARRYING> 464,001
<INVESTMENTS-MARKET> 464,001
<LOANS> 460,631
<ALLOWANCE> 4,621
<TOTAL-ASSETS> 1,057,266
<DEPOSITS> 731,436
<SHORT-TERM> 235,494
<LIABILITIES-OTHER> 4,937
<LONG-TERM> 0
28,750
0
<COMMON> 6,029
<OTHER-SE> 50,619
<TOTAL-LIABILITIES-AND-EQUITY> 1,057,266
<INTEREST-LOAN> 10,393
<INTEREST-INVEST> 8,826
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 19,263
<INTEREST-DEPOSIT> 5,598
<INTEREST-EXPENSE> 10,322
<INTEREST-INCOME-NET> 8,941
<LOAN-LOSSES> 483
<SECURITIES-GAINS> 331
<EXPENSE-OTHER> 7,178
<INCOME-PRETAX> 2,551
<INCOME-PRE-EXTRAORDINARY> 2,551
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,805
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 3.66
<LOANS-NON> 948
<LOANS-PAST> 1,593
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,194
<CHARGE-OFFS> 64
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 4,621
<ALLOWANCE-DOMESTIC> 4,621
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 477
</TABLE>
