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, 1999
--------------------
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)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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 7,229,717 April 30, 1999
- ----------------------------- --------- ----------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 41,827 $ 54,816
Federal funds sold -- 34,700
----------- -----------
Cash and cash equivalents 41,827 89,516
Investment securities available for sale (amortized cost -
$636,765; 1999 and $622,185; 1998) 630,902 621,421
Loans receivable (net of allowance for loan losses -
$7,636; 1999 and $7,143; 1998) 730,264 689,852
Restricted equity investments 28,337 28,337
Bank properties and equipment 26,754 26,007
Real estate owned, net 373 292
Accrued interest receivable 11,598 10,501
Excess of cost over fair value of assets acquired, net 42,153 42,961
Deferred taxes 4,496 2,385
Other assets 4,806 4,131
----------- -----------
TOTAL $ 1,521,510 $ 1,515,403
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,006,904 $ 1,025,398
Advances from the Federal Home Loan Bank 29,256 4,386
Loan payable 1,160 1,160
Federal funds purchased 13,400
Securities sold under agreements to repurchase 326,050 332,118
Other liabilities 8,881 15,358
----------- -----------
Total liabilities 1,385,651 1,378,420
----------- -----------
Guaranteed preferred beneficial interest in Company's subordinated debt 58,595 58,650
SHAREHOLDERS' EQUITY
Preferred stock, none issued - -
Common stock, $1 par value, 25,000,000 shares authorized,
Issued and outstanding: 7,228,768 in 1999; and 7,165,360 in 1998 7,229 7,165
Surplus 62,794 61,710
Retained earnings 11,590 10,243
Accumulated other comprehensive income (3,870) (504)
Treasury stock at cost, 26,133 shares (479) (281)
----------- -----------
Total shareholders' equity 77,264 78,333
----------- -----------
TOTAL $ 1,521,510 $ 1,515,403
=========== ===========
</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,
----------------------------------------
1999 1998
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $15,152 $10,189
Interest on taxable investment securities 9,007 7,895
Interest on non-taxable investment securities 544 466
Dividends on restricted equity investments 464 465
Interest on federal funds sold 101 44
-------- -------
Total interest income 25,268 19,059
-------- -------
INTEREST EXPENSE:
Interest on deposits 7,954 5,598
Interest on short-term borrowed funds 4,124 4,003
Interest on guaranteed preferred beneficial interest in
Company's subordinated debt 1,391 721
-------- -------
Total interest expense 13,469 10,322
-------- -------
Net interest income 11,799 8,737
PROVISION FOR LOAN LOSSES 667 483
-------- -------
Net interest income after provision for loan losses 11,132 8,254
-------- -------
OTHER INCOME:
Service charges on deposit accounts 1,149 665
Other service charges 26 22
Gain on sale of fixed assets 5
Gain on sale of loans 12 79
Gain on sale of investment securities 49 331
Other 1,085 174
------- -------
Total other income 2,326 1,271
------- -------
OTHER EXPENSES:
Salaries and employee benefits 4,599 3,174
Occupancy expense 1,169 731
Equipment expense 705 516
Professional fees and services 96 154
Data processing expense 746 521
Amortization of excess of cost over fair value of assets acquired 1,468 944
Postage and supplies 367 235
Insurance 83 69
Other 864 630
-------- --------
Total other expenses 10,097 6,974
-------- --------
INCOME BEFORE INCOME TAXES 3,361 2,551
INCOME TAXES 965 746
-------- -------
NET INCOME $ 2,396 $ 1,805
======== =======
Basic earnings per share $ 0.33 $ 0.30
======= ======
Diluted earnings per share $ 0.31 $ 0.27
======= ======
Weighted average shares 7,188 6,021
===== =====
</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,
-----------------------------
1999 1998
---- ----
(In thousands)
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,396 $ 1,805
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 667 483
Depreciation and amortization 454 234
Amortization of excess cost over fair value of assets acquired 1,468 944
Gain on sale of loans (12) (79)
Gain on sale of investment securities available for sale (49) (331)
Gain on sale of bank properties and equipment (5)
Deferred income taxes (417) (315)
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (1,771) (3,310)
Accounts payable and accrued expenses (6,477) 47
-------- --------
Net cash used in operating activities (3,746) (522)
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (47,508) (27,902)
Purchases of mortgage-backed securities available for sale (22,036) (8,457)
Purchases of restricted equity securities (577)
Proceeds from maturities of investment securities available for sale 7,000 16,500
Proceeds from maturities of mortgage-backed securities available for sale 38,883 9,952
Proceeds from sale of investment securities available for sale 9,112 64,357
Proceeds from sale of mortgage-backed securities available for sale 29,439
Proceeds from sale of loans 676 2,382
Net increase in loans (41,724) (31,001)
Increase in loans resulting from branch acquisitions (20) (34)
Purchase of bank properties and equipment (970) (457)
Increase in bank properties and equipment resulting from branch acquisitions (177) (117)
Proceeds from the sale of bank properties and equipment 8
Repurchases of Company's trust preferred securities (55)
Excess of cost over fair value of branch assets acquired (660) (858)
Increase in real estate owned, net (80) -
-------- --------
Net cash (used in) provided by investing activities (57,551) 53,227
-------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (34,305) 10,900
Increase in deposits resulting from branch acquisitions 15,810 25,149
Net advances (repayments) under line of credit and repurchase agreements 32,202 (80,819)
Payments for fractional interests resulting from stock dividend (3)
Treasury stock purchased (198)
Proceeds from issuance of common stock 99 207
--------- ---------
Net cash provided by (used in) financing activities 13,608 (44,566)
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (47,689) 8,139
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 89,516 34,061
------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,827 $ 42,200
========= =========
</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 ("Sun
Trust I"), Sun Capital Trust II ("Sun Trust II"), Sun National Bank,
Delaware ("Sun Delaware"), Sun National Bank (the "Sun") and Sun's
wholly-owned subsidiaries, Sun Mortgage Company ("Sun Mortgage") and
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, 1998. The results for the three months ended March 31,
1999 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 1999 or any other period.
(2) Acquisitions
On January 15, 1999, Sun purchased two branch offices from Summit Bank,
Hackensack, N.J ("Summit"). Sun acquired approximately $15,845,000 of
deposit liabilities, $177,000 in real estate and equipment, $20,000 in
loans and $229,000 in cash. Sun paid a premium of $660,000, which is
being amortized over seven years.
On January 22, 1999, Sun acquired Eastern Financial Inc., a
full-service mortgage company located in Northfield, N.J., in exchange
for 60,294 shares of the Company's common stock. The transaction was
accounted for as a pooling of interests.
(3) Loans
The components of loans as of March 31, 1999 and December 31, 1998
were as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands)
(Unaudited)
Commercial and industrial $586,611 $548,645
Real estate-residential mortgages 78,521 79,188
Installment 72,768 69,162
-------- -------
Total gross loans 737,900 696,995
Allowance for loan losses (7,636) (7,143)
------- -------
Net Loans $730,264 $689,852
======== ========
Non-accrual loans $ 1,572 $ 1,608
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, 1999 December 31, 1998
-------------- -----------------
(In thousands)
(Unaudited)
<S> <C> <C>
Balance, beginning of period $7,143 $4,194
Charge-offs ( 177) (297)
Recoveries 3 33
----- -----
Net charge-offs ( 174) ( 264)
Increase due to branch acquisition 1,000
Provision for loan losses 667 2,213
----- -----
Balance, end of period $7,636 $7,143
====== ======
</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 Company will be unable to collect all
amounts due according to the contractual terms of the loan.
An insignificant delay or insignificant shortfall in amount of payments
does not necessarily result in a loan being identified as impaired. For
this purpose, delays less than 90 days are considered to be
insignificant.
Impairment losses are included in the provision for loan losses. Large
groups of smaller balance, homogeneous loans are collectively evaluated
for impairment, except for those loans restructured under a troubled
debt restructuring. Loans collectively evaluated for impairment include
consumer loans and residential real estate loans, and are not included
in the data that follow:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands)
(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 $1,077 $ 1,251
------ -------
Total impaired loans $1,077 $ 1,251
====== =======
</TABLE>
<TABLE>
<CAPTION>
For the three
months ended For the year ended
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands)
(Unaudited)
<S> <C> <C>
Average impaired loans $ 1,105 $ 1,115
Interest income recognized on impaired loans $ 8 $ 61
Cash basis interest income recognized on impaired loans - $ 33
</TABLE>
5
<PAGE>
(5) Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands)
(Unaudited)
<S> <C> <C>
Demand deposits $397,569 $ 423,938
Savings deposits 132,013 140,168
Time certificates under $100,000 322,744 317,192
Time certificates $100,000 or more 154,578 144,100
------- -------
Total $1,006,904 $ 1,025,398
========== ===========
</TABLE>
Of the total demand deposits, approximately, $217,565,000 (unaudited)
and $211,652,000 are non-interest bearing at March 31, 1999 and
December 31, 1998, respectively.
(6) Other 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. Comprehensive (loss) income for the three-month periods ended
March 31, 1999 and 1998 amounted to ($3,870,000) and $7,000,
respectively.
(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 period. 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, 1999 December 31, 1998
-------------- -----------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C>
Net income $ 2,396 $ 8,784
Dilutive stock options outstanding 1,116 1,410
Average exercise price per share $ 6.38 $ 9.23
Average market price - diluted basis $ 18.38 $ 24.20
Average common shares outstanding 7,188 6,443
Increase in shares due to exercise of options - diluted basis 653 872
------ -----
Adjusted shares outstanding - diluted 7,842 7,315
Net income per share - basic $ 0.33 $ 1.36
Net income per share - diluted $ 0.31 $ 1.20
</TABLE>
6
<PAGE>
(8) Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
The sole asset of Sun Trust I is $28,750,000 principal amount of 9.85%
Junior Subordinated Debentures issued by the Company that mature on
March 31, 2027.
The sole asset of Sun Trust II is $29,900,000 principal amount of
8.875% Junior Subordinated Debentures issued by the Company that mature
on December 31, 2028.
During the first quarter of 1999, the Company repurchased 2,200 shares
of Sun Trust I preferred securities.
(9) Pending Acquisition
On May 10, 1999, the Company entered into a purchase and assumption
agreement with First Union National Bank ("First Union") whereby the
Company will assume certain deposit liabilities of fourteen New Jersey
branch offices from First Union. At April 30, 1999, the branches had
deposits of approximately $250,000,000. In addition, the Company will
acquire account loans as well as property and equipment pertaining to
the branches. The transaction is expected to be completed during the
third quarter of 1999. The agreement is subject to regulatory approval.
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 March 31, 1999 increased by $6.1 million to $1.522
billion as compared to $1.515 billion at December 31, 1998. The increase was
primarily due to an increase in investment securities portfolio of $9.5 million,
an increase in net loans of $40.4 million offset by a decrease in cash and due
from banks of $13.0 million and federal funds sold of $34.7 million.
Cash and cash equivalents decreased $47.7 million, from $89.5 million
at December 31, 1998 to $41.8 million at March 31, 1999. These funds were
primarily used to fund investment purchases and loan originations.
Investment securities available for sale increased $9.5 million, from
$621.4 million at December 31, 1997 to $630.9 million at March 31, 1999. The
increase was primarily a result of purchases of investment securities using cash
received from the December, 1998 acquisition of eight Delaware branches from
Household Bank, fsb.
Net loans at March 31, 1999 amounted to $730.3 million, an increase of
$40.4 million from $689.9 million at December 31, 1998. 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,
1999 was 0.44% compared to 0.40% at December 31, 1998. The ratio of allowance
for loan losses to total non-performing loans was 262.94% at March 31, 1999
compared to 286.41% at December 31, 1998. The decreases in these two ratios were
the result of slightly higher amount of accruing loans contractually past due 90
days or more at March 31, 1999. The ratio of allowance for loan losses to total
loans was 1.03% at March 31, 1999 compared to 1.02% at December 31, 1998.
Excess of cost over fair value of assets acquired decreased $808,000,
from $43.0 million at December 31, 1998 to $42.2 million at March 31, 1999. The
decrease was a result of scheduled amortization of $1.5 million offset by the
addition of a $660,000 premium paid for the acquisition of the Summit offices.
Total liabilities at March 31, 1999 amounted to $1,386 million compared
to $1,378 million at December 31, 1998, an increase of $7.2 million.
Total deposits amounted to $1.007 billion at March 31, 1999 an $18.5
million decrease over December 31, 1998 deposits of $1.025 billion. The increase
was the result of approximately $34.3 million decrease in deposits partially
offset by $15.8 million of deposits acquired in connection with the Summit
branch transaction.
Advances from the Federal Home Loan Bank amounted to $29.3 million at
March 31, 1999 compared to $4.4 million at December 31, 1998, an increase of
$24.9 million. Federal funds purchased at March 31, 1999 amounted to $13.4
million. There were no federal funds purchased at December 31, 1998. These
liabilities were increased, in part, to fund new loans and deposit withdrawals.
Total shareholders' equity declined by $1.0 million, from $78.3 million
at December 31, 1998, to $77.3 million at March 31, 1999. The net decrease was a
result of a $3.4 million increase in the unrealized loss on securities available
for sale, net of taxes, partially offset by earnings of $2.4 million for the
three months ended March 31, 1999.
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. Historically, 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. 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, 1999 and
1998.
General. Net income increased by $591,000 for the three months ended
March 31, 1999 to $2.4 million from $1.8 million for the three months ended
March 31, 1998. Net interest income increased $3.1 million and the provision for
loan losses increased $184,000 for the three months ended March 31, 1999
compared to the same period in 1998. Other income increased by $965,000 to $2.3
million for the three months ended March 31, 1999 as compared to $1.3 million
for the three months ended March 31, 1998. Other expenses increased by $3.1
million to $10.1 million for the three months ended March 31, 1999 as compared
to $7.0 million for the three months ended March 31, 1998.
Net Interest Income. The increase in net interest income was due to a
$6.2 million increase in interest income partially offset by a $3.1 million
increase in interest expense.
Interest Income. Interest income for the three months ended March 31,
1999 increased approximately $6.2 million , or 32.6%, from $19.1 million for the
same period in 1998 to $25.3 million in 1999. The increase was primarily the
result of an increase of $5.0 million in interest and fees on loans resulting
from acquisitions and internal growth and $1.2 million in interest on investment
securities resulting from the deployment of cash received from branch
acquisitions and internal growth into the Company's investment portfolio.
Interest Expense. Interest expense for the three months ended March 31,
1999 increased approximately $3.1 million, from $10.3 million for the same
period in 1998 to $13.4 million in 1999. 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 and internal growth, a
$121,000 increase on short-term borrowed funds resulting from higher levels of
securities sold under agreements to repurchase and a $670,000 increase in
interest on guaranteed preferred beneficial interest in subordinated debt,
resulting from the issuance of additional trust preferred securities during
1998.
Provision for Loan Losses. For the three months ended March 31, 1999,
the provision for loan losses amounted to $667,000, an increase of $184,000,
compared to $483,000 for the same period in 1998.
10
<PAGE>
Management continually reviews the adequacy of the loan loss reserve using
guidelines promulgated by the Bank's primary regulator.
Other Income. Other income increased $1.1 million for the three-month
period ended March 31, 1999 compared to the three-month period ended March 31,
1998. In most part, the increase was a result of $484,000 in additional service
charges generated by a larger deposit base due to acquisitions and internal
growth, augmented by $695,000 in loan fees generated by Sun Mortgage, slightly
offset by lower gains from the sale of loans of $67,000 and a decrease of
$282,000 in gains on the sale of investment securities from the first quarter of
1998.
Other Expenses. Other expenses increased approximately $3.1 million, to
$10.1 million for the three months ended March 31, 1999 as compared to $7.0
million for the same period in 1998. Of the increase, $1.4 million was in
salaries and employee benefits, $438,000 was in occupancy expense, $189,000 was
in equipment expense, $225,000 was in data processing expense, $132,000 was in
postage and supplies, and $524,000 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 and audit departments. The increase in occupancy, equipment, data
processing expenses and postage and supplies were the result of internal growth
and the effect of the Company's acquisitions.
Income Taxes. Applicable income taxes increased $219,000 for the three
months ended March 31, 1999 as compared to the same period in 1998. The increase
resulted from higher pre-tax earnings.
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 March 31, 1999, the Company had completed the assessment and initial
testing phases of the plan. The Company has successfully tested substantially
all of its systems and applications. It intends to continue such testing, as
well as completing its customer awareness phase during the remainder of 1999.
The Company's primary system software is licensed from Kirchman
Corporation. Kirchman Corporation has represented to the Company that it is Year
2000 compliant. In 1998, the Company received the results of an independent
testing group that verified such compliance.
It is expected that Year 2000 compliance will cost approximately
$180,000, of which about $120,000 has been spent at March 31, 1999. The primary
expenditure of funds is 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 compliance costs have been, and are expected to
continue to be, derived from current earnings. Management believes the cost of
non-information technology expenses related to Year 2000 compliance will not
have a material adverse effect on the Company's financial statements.
11
<PAGE>
The company will be reliant upon the software of Kirchman Corporation for data
processing. Rapid and accurate data processing is essential to the operations of
the Company. If Kirchman Corporation software malfunctions in the year 2000,
these malfunctions could adversely effect the operations of the Company. To a
much lesser extent, the Company risks the effects of a malfunction by
telecommunication service providers. The Company could experience a slowing of
operations if the telecommunication service providers suffer malfunctions. In
addition, the inability of loan customers to adequately address Year 2000 issues
or borrowers who experience Year 2000 disruptions and are unable to repay their
loans on time may adversely affect the Company.
In the event that the Kirchman Corporation is not Year 2000 compliant, the
Company will attempt to locate an alternative service bureau. A disruption of
this type in the Company's data processing ability may have a material adverse
effect on the Company. If very few financial institution service bureaus are
operating in the year 2000, replacement costs, assuming the Company could
negotiate an agreement, could be material to the Company.
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 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%.
Management and the Board of Directors monitor its gap position at quarterly
meetings. The Asset/Liability Committee of the Banks' Board of Directors meets
to discuss interest rate risk. The Banks use 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 Company's results of
operations. Should the Banks 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.
For a discussion of the potential impact of interest rate changes on the
Company's balance sheet, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 1998 Annual Report. There
has been no material change in the Company's asset and liability position since
December 31, 1998.
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, 1999. 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
(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, 1999:
On January 15, 1999 the Company filed Form 8-K/A to report the
consummation of the acquisition of eight branch offices from
Household Bank, fsb.
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 13, 1999 Sun Bancorp, Inc.
------------ -----------------
(Registrant)
/s/ Philip W. Koebig, III
-------------------------
Philip W. Koebig, III
President and Chief Executive Officer
Date May 13, 1999 /s/ Robert F. Mack
------------- ------------------
Robert F. Mack
Executive Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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