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, 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
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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)
(856) 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 10,070,344 August 12, 1999
- ----------------------------- ---------- ---------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 52,777 $ 54,816
Federal funds sold 4,900 34,700
----------- -----------
Cash and cash equivalents 57,677 89,516
Investment securities available for sale (amortized cost -
$619,444; 1999 and $622,185; 1998) 599,350 621,421
Loans receivable (net of allowance for loan losses -
$8,102; 1999 and $7,143; 1998) 774,860 689,852
Restricted equity investments 28,337 28,337
Bank properties and equipment, net 26,975 26,007
Real estate owned, net 381 292
Accrued interest receivable 11,128 10,501
Excess of cost over fair value of assets acquired, net 40,598 42,961
Deferred taxes 9,731 2,385
Other assets 4,742 4,131
----------- -----------
TOTAL $ 1,553,778 $ 1,515,403
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,055,937 $ 1,025,398
Advances from the Federal Home Loan Bank 4,325 4,386
Loan payable 1,160 1,160
Federal funds purchased 15,500
Securities sold under agreements to repurchase 341,266 332,118
Other liabilities 6,789 15,358
----------- -----------
Total liabilities 1,424,977 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: 7,594,819 in 1999; and 7,165,360 in 1998 7,595 7,165
Surplus 68,980 61,710
Retained earnings 7,539 10,243
Accumulated other comprehensive income (13,262) (504)
Treasury stock at cost, 36,750 in 1999; and 15,000 in 1998 shares (646) (281)
----------- -----------
Total shareholders' equity 70,206 78,333
----------- -----------
TOTAL $ 1,553,778 $ 1,515,403
- ------------------------------------------------------------------------ =========== ===========
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 15,955 $ 10,884 $ 31,108 $ 21,073
Interest on taxable investment securities 8,648 7,760 17,654 15,655
Interest on non-taxable investment securities 557 496 1,101 961
Dividends on restricted equity investments 469 480 933 946
Interest on federal funds sold 24 138 125 182
---------- ---------- ---------- ----------
Total interest income 25,653 19,758 50,921 38,817
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 7,991 6,262 15,944 11,860
Interest on short-term borrowed funds 4,122 3,672 8,246 7,675
Interest on guaranteed preferred beneficial
interest in Company's subordinated debt 1,392 719 2,784 1,440
---------- ---------- ---------- ----------
Total interest expense 13,505 10,653 26,974 20,975
---------- ---------- ---------- ----------
Net interest income 12,148 9,105 23,947 17,842
PROVISION FOR LOAN LOSSES 520 527 1,186 1,010
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 11,628 8,578 22,761 16,832
---------- ---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 1,128 898 2,276 1,563
Income from mortgage banking operations 739 1,432
Other service charges 31 17 58 39
Gain on sale of fixed assets 5 10
Gain on sale of loans 31 12 110
Gain on sale of investment securities 29 258 78 589
Other 639 230 1,031 404
---------- ---------- ---------- ----------
Total other income 2,571 1,434 4,897 2,705
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 4,618 3,132 9,218 6,306
Occupancy expense 1,296 802 2,465 1,533
Equipment expense 919 542 1,624 1,058
Professional fees and services 74 100 169 254
Data processing expense 751 560 1,497 1,081
Amortization of excess of cost over fair value of assets acquired 1,483 962 2,952 1,905
Postage and supplies 347 128 714 364
Insurance 102 78 185 147
Other 1,090 867 1,954 1,497
---------- ---------- ---------- ----------
Total other expenses 10,680 7,171 20,778 14,145
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 3,519 2,841 6,880 5,392
INCOME TAXES 1,068 839 2,033 1,585
---------- ---------- ---------- ----------
NET INCOME $ 2,451 $ 2,002 $ 4,847 $ 3,807
========== ========== ========== ==========
Basic earnings per share $ 0.32 $ 0.30 $ 0.64 $ 0.57
========== ========== ========== ==========
Diluted earnings per share $ 0.30 $ 0.26 $ 0.59 $ 0.51
========== ========== ========== ==========
Weighted average shares 7,564,715 6,652,878 7,556,242 6,645,735
- ------------------------------------------------------------------------ ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,847 $ 3,807
Adjustments to reconcile net income to net cash (provided by) used in operating
activities:
Provision for loan losses 1,186 1,010
Provision for losses on real estate owned 23
Depreciation and amortization 1,026 409
Amortization of excess cost over fair value of assets acquired 2,952 1,905
Gain on sale of loans (12) (110)
Gain on sale of investment securities available for sale (78) (589)
Gain on sale of bank properties and equipment (10)
Deferred income taxes (774) (342)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (627) (1,482)
Other assets (609) 540
Other liabilities (8,569) (208)
--------- ---------
Net cash (provided by) used in operating activities (645) 4,940
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (63,956) (119,383)
Purchases of mortgage-backed securities available for sale (36,183) (111,592)
Proceeds from maturities of investment securities available for sale 17,038 22,300
Proceeds from maturities of mortgage-backed securities available for sale 75,143 65,068
Proceeds from sale of investment securities available for sale 10,576 114,461
Proceeds from sale of mortgage-backed securities available for sale 49,209
Proceeds from sale of loans 676 3,303
Net increase in loans (87,012) (62,466)
Increase in loans resulting from branch acquisitions (20) (35)
Purchase of bank properties and equipment (1,632) (1,313)
Increase in bank properties and equipment resulting from branch acquisitions (177) (117)
Proceeds from sale of bank properties and equipment 26
Repurchase of guaranteed preferred beneficial interest in Company's subordinated debt (55)
Excess of cost over fair value of assets acquired (660) (797)
Purchase price adjustment of branch assets acquired 71
Proceeds from sale of real estate owned 62 142
--------- ---------
Net cash used in investing activities (86,103) (41,488)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 14,729 32,971
Increase in deposits resulting from branch acquisitions 15,810 25,149
Net borrowings (payments) under line of credit and repurchase agreements 24,587 (8,814)
Proceeds from exercise of stock options 16
Payments for fractional interests resulting from stock dividend (3) (7)
Treasury stock purchase (365)
Proceeds from issuance of common stock 151 393
--------- ---------
Net cash provided by financing activities 54,909 49,708
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (31,839) 13,160
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 89,516 34,061
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 57,677 $ 47,221
- ----------------------------------------------------------------------------------------- ========= =========
</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 ("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 six months ended June 30, 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) Loans
The components of loans as of June 30, 1999 and December 31, 1998 were
as follows:
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands)
(Unaudited)
Commercial and industrial $628,320 $548,645
Real estate-residential mortgages 82,065 79,188
Installment 72,577 69,162
------- -------
Total gross loans 782,962 696,995
Allowance for loan losses (8,102) (7,143)
------- -------
Net Loans $774,860 $689,852
======== ========
Non-accrual loans $ 1,581 $ 1,608
4
<PAGE>
(3) 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, 1999 December 31, 1998
------------- -----------------
(In thousands)
(Unaudited)
Balance, beginning of period $ 7,143 $ 4,194
Charge-offs (244) (297)
Recoveries 17 33
------ ------
Net charge-offs (227) (264)
Increase due to branch acquisition 1,000
Provision for loan losses 1,186 2,213
------ ------
Balance, end of period $ 8,102 $ 7,143
====== ======
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 follows:
<TABLE>
<CAPTION>
June 30, 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 $ 1,008 $ 1,251
------- -------
Total impaired loans $ 1,008 $ 1,251
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the six
months ended For the year ended
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands)
(Unaudited)
<S> <C> <C>
Average impaired loans $ 1,115 $ 1,115
Interest income recognized on impaired loans $ 16 $ 61
Cash basis interest income recognized on impaired loans $ 16 $ 33
</TABLE>
5
<PAGE>
(4) Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands)
(Unaudited)
<S> <C> <C>
Demand deposits $ 429,342 $ 423,938
Savings deposits 133,492 140,168
Time certificates under $100,000 346,388 317,192
Time certificates $100,000 or more 146,715 144,100
--------- ----------
Total $1,055,937 $ 1,025,398
========= ==========
</TABLE>
Of the total demand deposits, approximately $223,796 (unaudited) and
$211,652 are non-interest bearing at June 30, 1999 and December 31,
1998, respectively.
(5) 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. Other comprehensive (loss) income for the six-month periods
ended June 30, 1999 and 1998 amounted to ($12,757,607) (unaudited) and
$282,502 (unaudited) respectively.
(6) 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.
<TABLE>
<CAPTION>
For the For the
Three Months Six Months For the
Ended Ended Year Ended
June 30, 1999 June 30, 1999 December 31, 1998
------------- ------------- -----------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C>
Net income $ 2,451 $ 4,847 $ 8,784
Average dilutive stock options outstanding 1,267,942 1,264,267 1,480,441
Average exercise price per share $ 6.99 $ 6.95 $ 8.79
Average market price - diluted basis $ 18.74 $ 8.12 $ 23.05
Average common shares outstanding 7,564,715 7,556,242 6,764,668
Increase in shares due to exercise of
options
- diluted basis and tax benefit from assumed
exercise of non-qualified options 711,433 692,537 915,742
======= ======= =======
Adjusted shares outstanding - diluted 8,276,148 8,248,779 7,680,462
========= ========= =========
Net income per share - basic $ 0.32 $ 0.64 $ 1.30
Net income per share - diluted $ 0.30 $ 0.59 $ 1.14
</TABLE>
6
<PAGE>
(7) 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.
(8) Pending Acquisitions
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 July 31, 1999, the branches had
deposits of approximately $244,000,000. 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.
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, 1999 increased by $38.5 million to $1.554
billion as compared to $1.515 billion at December 31, 1998. The growth was
primarily due to an increase in net loans of $85.0 million offset by a decrease
in federal funds sold of $29.8 million and a decrease in investment securities
available for sale of $22.1 million.
Federal funds sold decreased $29.8 million, from $34.7 million at
December 31, 1998 to $4.9 million at June 30, 1999. Investment securities
available for sale decreased $22.1million, from $621.4 million at December 31,
1998 to $599.3 million at June 30, 1999. The reduction in the Federal funds sold
and the sale of investments were primarily used to fund loan originations.
Net loans at June 30, 1999 amounted to $774.9 million, an increase of
$85.0 million from $689.9 million at December 31, 1998. The increase was
primarily from originations of commercial and industrial loans. The ratio of
allowance for loan losses to total non-performing loans was 301.70% at June 30,
1999 compared to 286.41% at December 31, 1998. The increase in this ratio is the
result of slightly lower amount of both non-accruing loans and accruing loans
contractually past due 90 days or more at June 30, 1999. The ratio of
non-performing assets to total loans and real estate owned at June 30, 1999 was
0.39% compared to 0.40% at December 31, 1998. The ratio of allowance for loan
losses to total loans was 1.03% at June 30, 1999 compared to 1.02% at December
31, 1998.
Excess of cost over fair value of assets acquired decreased $2.4
million, from $43.0 million at December 31, 1998 to $40.6 million at June 30,
1999. The decrease was a result of scheduled amortization of $3.0 million and a
$71,000 purchase price adjustment of the Household branch assets acquisition.
This was partially offset by the addition of a $660,000 premium paid for the
acquisition of two branch offices from Summit Bank, Hackensack, N.J. ("Summit")
during the first quarter.
Deferred taxes at June 30, 1999 amounted to $9.7 million, an increase
of $7.3 million from $2.4 million at December 31, 1998. The increase was
primarily from the income tax effect of the change in net unrealized losses on
available for sale investment securities for the six-month period ended June 30,
1999.
Total liabilities at June 30, 1999 amounted to $1.425 billion compared
to $1.378 billion at December 31, 1998, an increase of $46.6 million. The
increase was the result of approximately $15.8 million in deposits acquired from
Summit, as well as from internal deposit growth of $14.7 million, and an
increase of $15.5 million of Federal funds purchased.
Federal funds purchased amounted to $15.5 million at June 30, 1999.
There were no federal funds purchased at December 31, 1998. These liabilities
were increased, in part, to fund new loans.
Total shareholders' equity decreased by $8.1 million, from $78.3
million at December 31, 1998, to $70.2 million at June 30, 1999. The decrease
was a result of a $12.8 million decrease in accumulated other comprehensive
income, which is comprised entirely of net unrealized losses on securities
available for sale, net of income taxes, the purchase of treasury stock of
approximately $360,000, partially offset by net earnings of $4.8 million for the
six months ended June 30, 1999.
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
9
<PAGE>
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. The Company 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 the 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.
As discussed in Note (8) above, the Company has entered into a purchase
and assumption agreement whereby the Company will assume certain deposit
liabilities of fourteen New Jersey branch offices from First Union.
Consequently, during the third quarter the Company issued additional securities
in a public offering, receiving net proceeds of approximately $39.8 million.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
1998.
General. Net income increased by $450,000 for the three months ended
June 30, 1999 to $2.5 million from $2.0 million for the three months ended June
30, 1997. Net interest income increased $3.0 million for the three months ended
June 30, 1999 compared to the same period in 1998. The provision for loan losses
remained constant at approximately $500,000 for the three months ended June 30,
1999 compared to the same period in 1998. Other income increased by $1.2 million
to $2.6 million for the three months ended June 30, 1999 as compared to $1.4
million for the three months ended June 30, 1998. Other expenses increased by
$3.5 million to $10.7 million for the three months ended June 30, 1999 as
compared to $7.2 million for the three months ended June 30, 1998. The return on
average assets for the three months ended June 30, 1999 and 1998 were 0.65% and
0.73%, respectively. The return on average equity for the three months ended
June 30, 1999 and 1998 were 12.89% and 14.00%, respectively.
Net Interest Income. The increase in net interest income was due to a
$5.9 million increase in interest income partially offset by a $2.9 million
increase in interest expense.
Interest Income. Interest income for the three months ended June 30,
1999 increased approximately $5.9 million, or 29.8%, from $19.8 million for the
same period in 1998 to $25.7 million in 1999. The increase was primarily the
result of an increase of $5.1 million in interest and fees on loans and $900,000
in interest on investment securities resulting primarily from internal growth.
Interest Expense. Interest expense for the three months ended June 30,
1999 increased approximately $2.9 million, from $10.6 million for the same
period in 1998 to $13.5 million in 1998. This increase was primarily due to a
$1.7 million increase in interest on deposit accounts resulting from a higher
deposit balances due to acquisitions and internal growth; a $450,000 increase in
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 June 30, 1999,
the provision for loan losses amounted to $519,000, a decrease of $8,000,
compared to $527,000 for the same period in 1998. 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 Banks' primary regulator.
10
<PAGE>
Other Income. Other income increased $1.2 million for the three-month
period ended June 30, 1999 compared to the three-month period ended June 30,
1998. Of this amount, $739,000 was income from mortgage banking operations for
the three-month period ended June 30, 1999 compared to no income for the same
period in 1998. Most of the remaining increase was a result of service charges
on deposit accounts generated by a larger customer base due to deposit
acquisitions and internal growth amounting to $230,000, and an increase of
$409,000 in other income. This was partially offset by a decrease of $31,000 in
gains from the sale of loans and a decrease of $229,000 in gains on the sale of
investment securities.
Other Expenses. Other expenses increased approximately $3.5 million, to
$10.7 million for the three months ended June 30, 1999 as compared to $7.2
million for the same period in 1998. Of the increase, $1.5 million was in
salaries and employee benefits, $494,000 was in occupancy expense, $377,000 was
in equipment expense, $191,000 was in data processing expense, $521,000 was in
amortization of excess of cost over fair value of assets acquired, $219,000 was
in postage and supplies and $223,000 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, data processing and postage
and supplies expenses were the result of internal growth, branch expansion and
the effect of the Company's acquisitions.
Income Taxes. Applicable income taxes increased $229,000 for the
three months ended June 30, 1999 as compared to the same period in 1998. The
increase resulted from higher pre-tax earnings.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998.
General. Net income increased by $1.0 million for the six months ended
June 30, 1999 to $4.8 million from $3.8 million for the six months ended June
30, 1998. Net interest income increased $6.1 million and the provision for loan
losses increased $176,000 for the six months ended June 30, 1999 compared to the
same period in 1998. Other income increased by $2.2 million to $4.9 million for
the six months ended June 30, 1999 as compared to $2.7 million for the six
months ended June 30, 1998. Other expenses increased by $6.7 million to $20.8
million for the six months ended June 30, 1999 as compared to $14.1 million for
the six months ended June 30, 1998. The return on average assets for the six
months ended June 30, 1999 and 1998 were 0.64% and 0.70%, respectively. The
return on average equity for the six months ended June 30, 1999 and 1998 were
12.60% and 13.49%, respectively.
Net Interest Income. The increase in net interest income was due to a
$12.1 million increase in interest income partially offset by a $6.0 million
increase in interest expense.
Interest Income. Interest income for the six months ended June 30, 1999
increased approximately $12.1 million, or 31.2%, from $38.8 million for the same
period in 1998 to $50.9 million in 1999. The increase was primarily the result
of an increase of $10.0 million in interest and fees on loans resulting from
acquisitions and internal growth and $2.1 million in interest on investment
securities and federal funds sold resulting from the deployment of cash received
from branch acquisitions and deposit growth.
Interest Expense. Interest expense for the six months ended June 30,
1999 increased approximately $6.0 million, from $21.0 million for the same
period in 1998 to $27.0 million in 1999. This increase was primarily due to a
$4.1 million increase in interest on deposit accounts resulting from
significantly higher deposit balances due to acquisitions and internal growth
and a $1.3 million increase in interest on guaranteed preferred beneficial
interest in subordinated debt.
Provision for Loan Losses. For the six months ended June 30, 1999, the
provision for loan losses amounted to $1.2 million, an increase of $176,000,
compared to $1.0 million for the same period in 1998. 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 Banks' primary regulator.
11
<PAGE>
Other Income. Other income increased $2.2 million for the six-month
period ended June 30, 1999 compared to the six-month period ended June 30, 1998.
Of this amount, $1.4 million was income from mortgage banking operations for the
six-month period ended June 30, 1999 compared to no income for the same period
in 1998. Service charges on deposit accounts increased approximately $713,000 as
a result of a larger customer base due to deposit acquisitions and internal
growth, and an increase of $627,000 in other income. This was partially offset
by a decrease of $98,000 in gains from the sale of loans and a decrease of
$511,000 in gains on the sale of investment securities.
Other Expenses. Other expenses increased approximately $6.7 million, to
$20.8 million for the six months ended June 30, 1999 as compared to $14.1
million for the same period in 1998. Of the increase, $2.9 million was in
salaries and employee benefits, $932,000 was in occupancy expense, $566,000 was
in equipment expense, $416,000 was in data processing expense, $350,000 was in
postage and supplies, $1.1 million was in amortization of excess of cost over
fair value of assets acquired and $457,000 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, and data processing expenses were the result
of internal growth and the effect of the Company's acquisitions. The increase in
amortization of excess of cost over fair value of assets acquired is the result
of additional acquisitions by the Company through June 30, 1999. As noted in
Note 8 above, the Company has entered into a purchase and assumption agreement
which, when completed, will result in the acquisition of a total of fourteen
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 $448,000 for the
six months ended June 30, 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 June 30, 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 $140,000 had been spent at June 30, 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.
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
12
<PAGE>
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 monthly basis,
Management monitors the Company's 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 Company 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 Company's results of
operations. Should the Company experience a positive or negative mismatch in
excess of the approved range, there are a number of remedial options. The
Company 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, 1999, the Company had a negative position with respect to its
exposure to interest rate risk: total interest-earning liabilities maturing or
repricing within one year exceeded total interest-bearing assets maturing or
repricing during the same time period by $177.5 million, representing a negative
cumulative one-year gap ratio of 11.04%. As a result, the yield on
interest-earning assets of the Company should adjust to changes in interest
rates at a slightly slower rate than the cost of interest-bearing liabilities.
13
<PAGE>
The following table summarizes the maturity and repricing characteristics of the
Company 's interest-earning assets and interest-bearing liabilities at June 30,
1999. All amounts are categorized by their actual maturity or repricing date
with the exception of interest-bearing demand deposits and savings deposits. As
a result of prior experience during periods of rate volatility resulting in
insignificant changes to levels of core deposits and management's estimate of
future rate sensitivities, the Company allocates the interest-bearing demand
deposits and the savings deposits into categories noted below. Management's
allocation is based on the estimated effective duration.
Maturity/Repricing Time Periods
At June 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Loans Receivable $ 310,005 $ 108,709 $ 329,980 $ 34,268 $ 782,962
Investment Securities 291,583 16,541 64,711 274,946 647,781
Federal funds sold 4,900 -- -- -- 4,900
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 606,488 125,250 394,691 309,214 1,435,643
---------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 76,388 11,937 66,496 50,725 205,546
Savings deposits 3,046 9,221 51,397 69,828 133,492
Time certificates under $100,000 120,847 196,121 25,696 3,724 346,388
Time certificates $100,000 or more 79,245 62,467 5,003 -- 146,715
Federal Home Loan Bank advances 31 95 750 3,449 4,325
Federal funds purchased 15,500 -- -- -- 15,500
Loan payable -- -- 1,160 -- 1,160
Securities sold under agreements
to repurchase 341,266 -- -- -- 341,266
---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities 636,323 279,841 150,502 127,726 1,194,392
---------- ---------- ---------- ---------- ----------
Periodic Gap $ (29,835) $ (154,591) $ 244,189 $ 181,488 $ 241,251
========== ========== ========== ========== ==========
Cumulative Gap $ (29,835) $ (184,426) $ 59,763 $ 241,251
=========== =========== ========== ==========
Cumulative Gap Ratio (1.92%) (11.87%) 3.85% 15.53%
=========== =========== ========== ==========
</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, 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
Between July 27 and July 30, 1999, the Company issued 2,472,500 shares
of its common stock, par value $1.00 per share, in a public offering
for a purchase price of $17.25 per share. The Company intends to use
substantially all of the net proceeds from this offering to provide
sufficient capital to Sun to consummate the First Union acquisition.
Any remaining proceeds will be used for the Company's general corporate
purposes.
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on May
20, 1999 and the following matters were voted on:
Proposal 1. Election of directors.
FOR WITHHELD
--- --------
Bernard A. Brown 6,573,948 43,325
Ike Brown 6,573,948 43,325
Jeffrey S. Brown 6,573,948 43,325
Sidney R. Brown 6,573,948 43,325
Adolph F. Calovi 6,573,948 43,325
Peter Galetto, Jr. 6,573,948 43,325
Philip W. Koebig, III 6,573,948 43,325
Anne E. Koons 6,573,948 43,325
Proposal 2. Ratification of the amendment to the Sun Bancorp, Inc. 1997 Stock
Option Plan.
FOR: 4,722,066
AGAINST: 172,976
ABSTAIN: 19,088
Item 5 Other Information
Not applicable
15
<PAGE>
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 June 30, 1999:
On May 17, 1999 the Company filed a Form 8-K to report that
the Bank had entered into a Purchase and Assumption Agreement
to acquire fourteen branch offices, certain loans and $250
million of deposits from First Union National Bank, Charlotte,
North Carolina.
On May 21, 1999 the Company filed a Form 8-K to report that
the Board of Directors had declared a 5% stock dividend to all
stockholders of record on June 7, 1999, payable on June 21,
1999.
16
<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.
SUN BANCORP, INC.
Date August 16, 1999 By: /s/ Philip W. Koebig, III
--------------- -------------------------------
Philip W. Koebig, III
President and
Chief Executive Officer
Date August 16, 1999 By: /s/ Robert F. Mack
--------------- -------------------------------
Robert F. Mack
Executive Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 52,777
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 627,687
<INVESTMENTS-CARRYING> 627,687
<INVESTMENTS-MARKET> 627,687
<LOANS> 782,762
<ALLOWANCE> 8,102
<TOTAL-ASSETS> 1,553,778
<DEPOSITS> 1,055,937
<SHORT-TERM> 356,892
<LIABILITIES-OTHER> 6,789
<LONG-TERM> 5,359
58,595
0
<COMMON> 7,595
<OTHER-SE> 62,611
<TOTAL-LIABILITIES-AND-EQUITY> 1,553,778
<INTEREST-LOAN> 31,108
<INTEREST-INVEST> 19,688
<INTEREST-OTHER> 125
<INTEREST-TOTAL> 50,921
<INTEREST-DEPOSIT> 15,944
<INTEREST-EXPENSE> 26,974
<INTEREST-INCOME-NET> 23,947
<LOAN-LOSSES> 1,186
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 20,778
<INCOME-PRETAX> 6,880
<INCOME-PRE-EXTRAORDINARY> 6,880
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,847
<EPS-BASIC> .64
<EPS-DILUTED> .59
<YIELD-ACTUAL> 3.53
<LOANS-NON> 1,581
<LOANS-PAST> 1,104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,143
<CHARGE-OFFS> 244
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 8,102
<ALLOWANCE-DOMESTIC> 8,102
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 145
</TABLE>
