UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
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)
(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 10,086,537 November 10, 2000
----------------------------- ---------- ------------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 69,776 $ 69,425
Federal funds sold 3,500 -
----------- -----------
Cash and cash equivalents 73,276 69,425
Investment securities available for sale (amortized cost -
$854,193; 2000 and $876,368; 1999) 829,191 834,677
Loans receivable (net of allowance for loan losses -
$10,293; 2000 and $8,722; 1999) 1,002,459 900,671
Restricted equity investments 30,245 44,796
Bank properties and equipment, net 29,195 31,845
Real estate owned, net 1,532 535
Accrued interest receivable 16,445 14,977
Excess of cost over fair value of assets acquired, net 54,809 60,718
Deferred taxes 13,645 17,768
Other assets 5,362 5,449
----------- -----------
TOTAL $ 2,056,159 $ 1,980,861
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,450,231 $ 1,291,326
Advances from the Federal Home Loan Bank 24,167 119,741
Loan payable 1,160 1,160
Federal funds purchased 5,700
Securities sold under agreements to repurchase 404,347 407,851
Other liabilities 9,826 6,141
---------- ----------
Total liabilities 1,889,731 1,831,919
---------- ----------
Guaranteed preferred beneficial interest in Company's subordinated debt 57,327 57,838
SHAREHOLDERS' EQUITY
Preferred stock, none issued
Common stock, $1 par value, 25,000,000 shares authorized,
issued and outstanding: 10,086,537 in 2000; and 10,080,202 in 1999 10,087 10,080
Surplus 105,841 105,798
Retained earnings 13,644 13,170
Accumulated other comprehensive loss (16,504) (27,516)
Treasury stock at cost, 350,699 shares in 2000; and 947,048 shares in 1999 (3,967) (10,428)
---------- ----------
Total shareholders' equity 109,101 91,104
---------- ----------
TOTAL $ 2,056,159 $ 1,980,861
========== ==========
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements
2
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 22,096 $ 17,620 $ 65,320 $ 48,728
Interest on taxable investment securities 14,319 10,455 41,590 28,109
Interest on non-taxable investment securities 656 648 2,053 1,749
Interest on restricted equity investments 1,219 596 2,756 1,529
Interest on federal funds sold 310 154 370 279
--------- ---------- --------- ---------
Total interest income 38,600 29,473 112,089 80,394
--------- ---------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 14,099 8,459 38,123 24,403
Interest on short-term borrowed funds 7,521 5,844 23,482 14,090
Interest on guaranteed preferred beneficial interest
in Company's subordinated debt 1,359 1,391 4,077 4,175
--------- ---------- --------- ---------
Total interest expense 22,979 15,694 65,682 42,668
--------- ---------- --------- ---------
Net interest income 15,621 13,779 46,407 37,726
PROVISION FOR LOAN LOSSES 525 470 1,895 1,657
--------- ---------- --------- ---------
Net interest income after provision for loan losses 15,096 13,309 44,512 36,069
--------- ---------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts 1,300 1,045 3,834 3,322
Income from mortgage banking operations 160 722 270 2,154
Other service charges 37 28 108 86
Gain on sale of bank properties and equipment 12 127 9 137
Gain on sale of loans 8 2 17 14
Gain (loss) on sale of investment securities 2 (2) 79
Other 729 530 2,135 1,561
--------- ---------- --------- ---------
Total other income 2,246 2,456 6,371 7,353
--------- ---------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 5,764 5,313 17,566 14,531
Occupancy expense 1,678 1,452 5,044 3,917
Equipment expense 1,327 1,111 3,830 2,735
Data processing expense 824 803 2,416 2,300
Amortization of excess of cost over fair value of assets acquired 1,969 1,482 5,909 4,434
Other 2,226 1,998 7,144 5,019
--------- ---------- --------- ---------
Total other expenses 13,788 12,159 41,909 32,936
--------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES 3,554 3,606 8,974 10,486
INCOME TAXES 1,067 1,147 2,600 3,180
--------- ---------- --------- ---------
NET INCOME $ 2,487 $ 2,459 $ 6,374 $ 7,306
========= ========== ========= =========
Basic earnings per share $ 0.26 $ 0.25 $ 0.66 $ 0.85
========= ========== ========= =========
Diluted earnings per share $ 0.25 $ 0.23 $ 0.65 $ 0.79
========= ========== ========= =========
Weighted average shares - basic 9,725,948 9,800,035 9,688,896 8,556,048
========= ========== ========= =========
Weighted average shares - diluted 9,936,925 10,505,519 9,867,605 9,272,234
========= ========== ========= =========
</TABLE>
--------------------------------------------------------------------
See notes to consolidated financial statements
3
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------
2000 1999
---- ----
(In thousands)
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 6,374 $ 7,306
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,895 1,657
Provision for losses on real estate owned 61 23
Depreciation and amortization 1,814 1,515
Amortization of excess cost over fair value of assets acquired 5,909 4,434
Gain on sale of loans (17) (14)
Loss (gain) on sale of investment securities available for sale 2 (79)
Gain on sale of bank properties and equipment (9) (137)
Write-down of book value of properties and equipment 300
Deferred income taxes (1,554) (1,566)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (1,468) (2,781)
Other assets 87 (4,241)
Other liabilities 3,685 (5,014)
-------- --------
Net cash provided by operating activities 18,004 1,103
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (7,871) (489,885)
Purchases of mortgage-backed securities available for sale (42,210)
Redemption (purchase) of restricted equity securities 14,551 (8,833)
Proceeds from maturities of investment securities available for sale 7,498 165,982
Proceeds from maturities of mortgage-backed securities available for sale 18,531 96,641
Proceeds from sale of investment securities available for sale 3,906 11,130
Proceeds from the sale of loans 925 829
Net increase in loans (104,820) (147,161)
Increase in loans resulting from branch acquisitions (71)
Purchase of bank properties and equipment (1,442) (2,600)
Increase in bank properties and equipment resulting from branch acquisitions (4,962)
Proceeds from the sale of bank properties and equipment 841 478
Repurchases of guaranteed preferred beneficial interest in Company's subordinated debt (511) (55)
Excess of cost over fair value of branch assets acquired (24,401)
Purchase price adjustment of branch assets acquired 71
Proceeds from sale of real estate owned 426 278
-------- --------
Net cash used in investing activities (68,891) (444,769)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 158,905 (32,310)
Increase in deposits resulting from branch acquisitions 246,666
Net (repayments) advances under line of credit and repurchase agreements (104,778) 157,047
Proceeds from the exercise of stock options 1,056 17
Payments for fractional interests resulting from stock dividend (17) (3)
Treasury stock purchased (365)
Reissuance of treasury stock (428)
Proceeds from issuance of common stock - 40,131
-------- --------
Net cash provided by financing activities 54,738 411,183
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,851 (32,483)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,425 89,516
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 73,276 $ 57,033
======== ========
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements
4
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All September 30, 2000 and 1999 dollar and share amounts presented below are
unaudited)
(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"), Sun Mortgage
Company, and Sun's wholly-owned subsidiary Med-Vine, Inc. All
significant intercompany 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, 1999. The results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2000 or any
other period.
(2) Loans
The components of loans as of September 30, 2000 and December 31, 1999
were as follows:
September 30, 2000 December 31, 1999
------------------ -----------------
(In thousands)
Commercial and industrial $ 841,337 $ 750,707
Real estate-residential mortgages 79,142 79,605
Installment 92,273 79,081
----------- -----------
Total gross loans 1,012,752 909,393
Allowance for loan losses (10,293) (8,722)
----------- -----------
Net Loans $ 1,002,459 $ 900,671
=========== ===========
Non-accrual loans $ 3,426 $ 2,580
5
<PAGE>
(3) Allowance For Loan Losses
Changes in the allowance for loan losses were as follows:
For the nine month
period ended For the year ended
September 30, 2000 December 31, 1999
------------------ -----------------
(In thousands)
Balance, beginning of period $ 8,722 $ 7,143
Charge-offs (345) (536)
Recoveries 21 26
-------- --------
Net charge-offs (324) (510)
Provision for loan losses 1,895 2,089
-------- --------
Balance, end of period $ 10,293 $ 8,722
======== ========
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>
September 30, 2000 December 31, 1999
------------------ -----------------
(In thousands)
<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 $ 424 $ 1,251
----- -------
Total impaired loans $ 424 $ 1,251
===== =======
</TABLE>
<TABLE>
<CAPTION>
For the nine month
period ended For the year ended
September 30, 2000 December 31, 1999
------------------ -----------------
(In thousands)
<S> <C> <C>
Average impaired loans $ 488 $ 1,025
Interest income recognized on impaired loans $ 25 $ 32
Cash basis interest income recognized on impaired loans $ 25 $ 32
</TABLE>
6
<PAGE>
(4) Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(In thousands)
<S> <C> <C>
Demand deposits $ 597,993 $ 526,810
Savings deposits 170,479 153,841
Time certificates under $100,000 458,142 421,475
Time certificates $100,000 or more 223,617 189,200
---------- ----------
Total $1,450,231 $1,291,326
========== ==========
</TABLE>
Of the total demand deposits, approximately $250,916,000 and
$231,688,000 are non-interest bearing at September 30, 2000 and
December 31, 1999, respectively.
(5) Other Comprehensive Income
The Company classifies items of other comprehensive income by their
nature and displays the accumulated balance of other comprehensive
income separately from retained earnings and surplus in the
consolidated statement of financial condition. Amounts categorized as
other comprehensive income represent net unrealized gains or losses on
investment securities available for sale, net of income taxes. Other
comprehensive income (losses) for the three-month periods ended
September 30, 2000 and 1999 amounted to $8,665,000 and ($6,367,000),
respectively. Other comprehensive income (losses) for the nine-month
periods ended September 30, 2000 and 1999 amounted to $11,012,000 and
($19,125,000), 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 net of treasury shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock net of treasury
shares outstanding increased by the number of common shares that are
assumed to have been purchased with the proceeds from the exercise of
the stock options (treasury stock method) along with the assumed tax
benefit from the exercise of non-qualified stock options. These
purchases were assumed to have been made at the average market price of
the common stock, which is based on the daily closing price.
Retroactive recognition has been given to common stock outstanding and
potential common shares for periods prior to the date of the Company's
stock dividends. In May 2000, the Company declared a 5% stock dividend
for which treasury shares were reissued resulting in offsetting
decreases in treasury stock and retained earnings of $5.2 million.
7
<PAGE>
<TABLE>
<CAPTION>
For the For the
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,487 $ 2,459 $ 6,374 $ 7,306
Dilutive stock options outstanding 915,872 1,159,994 915,872 1,189,099
Average exercise price per share $ 4.78 $ 6.02 $ 4.78 $ 6.29
Average market price - diluted basis $ 7.51 $ 17.10 $ 7.18 $ 17.78
Average common shares outstanding 9,725,948 9,800,035 9,688,896 8,556,048
Increase in shares due to exercise of options - diluted basis 210,977 705,484 178,709 716,186
--------- ---------- --------- ---------
Adjusted shares outstanding - diluted 9,936,925 10,505,519 9,867,605 9,272,234
Net income per share - basic $ 0.26 $ 0.25 $ 0.66 $ 0.85
Net income per share - diluted $ 0.25 $ 0.23 $ 0.65 $ 0.79
</TABLE>
(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. At September 30, 2000 and December 31, 1999, the
Company had repurchased 28,400 shares and 17,100 shares, respectively.
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. At September 30, 2000 and December 31, 1999, the
Company had repurchased 61,300 shares and 38,500 shares, respectively.
8
<PAGE>
9
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), 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 ACQUISITIONS NOT BEING FULLY REALIZED OR REALIZED WITHIN EXPECTED
TIME FRAMES; (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
ACQUIRED BUSINESSES 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 DOES
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 IS 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.
9
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at September 30, 2000 increased by $75.3 million to $2.06
billion as compared to $1.98 billion at December 31, 1999. The increase was
primarily due to an increase in net loans of $101.8 million and in cash and cash
equivalents of $3.9 million offset by a decrease in investment securities
available for sale of $5.5 million and restricted equity investments of $14.6
million. Also offsetting the increase was a $5.9 million decrease in excess of
cost over fair value of assets acquired.
Investment securities available for sale decreased $5.5 million, from
$834.7 million at December 31, 1999 to $829.2 million at September 30, 2000. The
decrease was primarily the result of principal repayments and maturities offset
by a decrease in unrealized losses of $11.0 million.
Net loans at September 30, 2000 amounted to $1.00 billion, an increase
of $101.8 million from $900.7 million at December 31, 1999. 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 September
30, 2000 was 0.67% compared to 0.54% at December 31, 1999. The increase in this
ratio was the result of three former financial service centers transferred to
real estate owned in June 2000. The ratio of allowance for loan losses to total
non-performing loans was 195.04% at September 30, 2000 compared to 199.05% at
December 31, 1999. The ratio of allowance for loan losses to total loans was
1.02% at September 30, 2000 compared to 0.96% at December 31, 1999.
Restricted equity investments decreased $14.6 million from $44.8
million at December 31, 1999 to $30.2 million at September 30, 2000. The
decrease was the result of the redemption of Federal Home Loan Bank (FHLB) Stock
in accordance with a decrease in the Company's borrowings at the FHLB.
Excess of cost over fair value of assets acquired decreased $5.9
million from $60.7 million at December 31, 1999 to $54.8 million at September
30, 2000. The decrease was a result of scheduled amortization.
Total liabilities at September 30, 2000 amounted to $1.89 billion
compared to $1.83 billion at December 31, 1999, an increase of $57.8 million.
Total deposits amounted to $1.45 billion at September 30, 2000, a
$158.9 million increase over December 31, 1999 deposits of $1.29 billion. The
increase was primarily due to an increase in demand deposits of $71.2 million
from $526.8 million at December 31, 1999 to $598.0 million at September 30, 2000
and an increase of $71.1 million in time deposits from $610.7 million at
December 31, 1999 to $681.8 million at September 30, 2000. Deposit increases are
primarily due to the growth in new offices opened in 1999, the Bank's
promotional marketing programs, and related deposit increases from commercial
loan relationships.
Advances from the Federal Home Loan Bank amounted to $24.2 million at
September 30, 2000 compared to $119.7 million at December 31, 1999, a decrease
of $95.5 million. There were no federal funds purchased at September 30, 2000
compared to $5.7 million at December 31, 1999. Decreases in borrowings were
primarily due to available liquidity from net deposit increases and restricted
equity investment redemptions exceeding net loan growth during this period.
Securities sold under agreements to repurchase amounted to $404.3
million at September 30, 2000 compared to $407.9 million at December 31, 1999,
an decrease of $3.6 million
10
<PAGE>
Total shareholders' equity grew by $18.0 million, from $91.1 million at
December 31, 1999, to $109.1 million at September 30, 2000. The increase was
primarily the result of current year earnings amounting to $6.4 million
augmented by a $11.0 million improvement in accumulated other comprehensive
income. In May 2000, the Company declared a 5% stock dividend for which treasury
stock were reissued resulting in offsetting decreases in treasury stock and
retained earnings of $5.2 million.
Liquidity and Capital Resources
Liquidity management is a daily and long-term business function. The
Company's liquidity, represented in part by cash and cash equivalents, is a
product of its operating, investing and financing activities. Proceeds from
repayment of loans, maturities of investment securities, net income and
increases in deposits and borrowings are the primary sources of liquidity of the
Company.
The Company continues to experience strong loan demand and is closely
monitoring loan growth 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 and sell or participate loans to other institutions.
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. Through its capital
planning, the Company regularly evaluates the growth rate of commercial loans in
light of the internal growth rate of capital.
Under approved lending decisions, the Company had commitments to lend
additional funds totaling approximately $275.2 million at September 30, 2000. In
the normal course of business, the Company also has various commitments and
contingent liabilities, such as customers' letters of credit (including standby
letters of credit of $21.4 million) at September 30, 2000.
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 September 30, 2000
and 1999.
General. Net income increased by $28,000 for the three months ended
September 30, 2000 to $2.49 million from $2.46 million for the three months
ended September 30, 1999. Net interest income increased $1.8 million and the
provision for loan losses increased $55,000 for the three months ended September
30, 2000 compared to the same period in 1999. Other income decreased by $210,000
to $2.25 million for the three months ended September 30, 2000 as compared to
$2.46 million for the three months ended September 30, 1999. Other expenses
increased by $1.6 million to $13.8 million for the three months ended September
30, 2000 as compared to $12.2 million for the three months ended September 30,
1999.
On September 9, 1999, the Company purchased fourteen New Jersey branch
offices from First Union National Bank. The Company acquired approximately $230
million of branch deposits and $2.6 million in branch cash. The Company paid a
premium of approximately $23.7 million, which is being amortized over 12 years.
11
<PAGE>
Net Interest Income. The increase in net interest income (on a
tax-equivalent basis) was due to a $9.1 million increase in interest income (on
a tax-equivalent basis) partially offset by a $7.3 million increase in interest
expense.
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
At or for the three months ended At or for the three months ended
September 30, 2000 September 30, 1999
--------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 993,011 $22,096 8.90 % $ 811,922 $17,620 8.68 %
Investment securities (2) 888,017 16,521 7.44 760,186 12,020 6.32
Federal funds sold 18,801 310 6.60 11,720 154 5.26
---------- ------- ---------- -------
Total interest-earning assets 1,899,829 38,927 8.20 1,583,828 29,794 7.52
Non-interest-earning assets 146,023 120,591
---------- ----------
Total assets $2,045,852 $1,704,419
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts $1,161,241 14,099 4.86 % $ 865,682 8,459 3.91 %
Borrowed money 462,313 7,521 6.51 447,113 5,844 5.23
Guaranteed preferred beneficial interest
in Company's subordinated debt 57,327 1,359 9.48 58,595 1,391 9.50
---------- ------- --------- -------
Total interest-bearing liabilities 1,680,881 22,979 5.47 1,371,390 15,694 4.58
------- -------
Non-interest-bearing liabilities 263,745 237,053
---------- ---------
Total liabilities 1,944,626 1,608,443
Shareholders' equity 101,226 95,976
---------- ---------
Total liabilities and shareholders'
equity $2,045,852 $1,704,419
========== ==========
Net interest income $15,948 $14,100
======= =======
Interest rate spread (3) 2.73 % 2.94 %
==== ====
Net yield on interest earning assets (4) 3.36 % 3.56 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.03 % 115.49 %
====== ======
</TABLE>
(1) Average balances include non-accrual loans
(2) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets
12
<PAGE>
Net interest income (on a tax-equivalent basis) increased $1.8 million
or 13.1% to $15.9 million for the three months ended September 30, 2000 compared
to $14.1 million for the same period in 1999. The increase is due primarily to
the growth of average interest-earning assets from $1.58 billion at September
30, 1999 to $1.90 billion at September 30, 2000 with an increase in yield of 68
basis points. Offsetting the increase in asset yield was an increase in
interest-bearing liabilities cost of funds of 89 basis points which accounted
for a decrease in the interest rate spread from 2.94% for the three months ended
September 30, 1999 to 2.73% for the same period 2000. A change in the mix and
increased cost of interest-bearing liabilities had a slightly negative impact on
the net interest margin, which declined 20 basis points to 3.36% for the
three-month period ended September 30, 2000.
The increase in average interest-earning assets of $316.0 million
reflects an increase of $181.1 million in average loans and $127.8 million in
average investment securities. These assets were funded by an increase of $309.5
million of average interest-bearing liabilities and an increase of $26.7 million
of average non-interest bearing liabilities. The increase in average
interest-bearing and non-interest bearing liabilities reflects in part the
September 1999 acquisition of branches and deposits from First Union, the growth
of deposits at existing financial service centers, the opening of new financial
service centers, and increases in borrowings.
The decrease in interest rate spread for the three months ended
September 30, 2000, compared to the same period in 1999, was primarily due to a
higher cost of funds on interest-bearing deposit accounts and borrowed money.
The cost of funds on interest-bearing deposit accounts increased 98 basis points
from 3.91% for the three months ended September 30, 1999 to 4.86% for the same
period in 2000 as a result of an increase in interest rates on core deposits and
an increase in higher yielding time deposits. The cost of funds on borrowed
money increased 128 basis points from 5.23% for the three months ended September
30, 1999 to 6.51% for the same period in 2000.
The increase in the average yield on loans for the three months ended
September 30, 2000 compared to the same period in 1999 reflects a increase in
interest on loans resulting from the gradual raising of the prime rate from
8.25% at September 30, 1999 to 9.50% at September 30, 2000. The increase in the
average yield on investment securities was due primarily to increases in LIBOR
and additional securities purchased yielding higher interest rates.
Provision for Loan Losses. For the three months ended September 30,
2000, the provision for loan losses amounted to $525,000, an increase of
$55,000, compared to $470,000 for the same period in 1999. Management regularly
performs an analysis to identify the inherent risk of loss in the Company's loan
portfolio. This analysis includes evaluations of concentrations of credit, past
loss experience, current economic conditions, amount and composition of the loan
portfolio, estimated fair value of underlying collateral, loan commitments
outstanding, delinquencies and other factors.
Other Income. Other income decreased $210,000 for the three-month
period ended September 30, 2000 compared to the three-month period ended
September 30, 1999. In most part, the decrease was a result of the closing of
Sun Mortgage Company in February 2000. There was no income from Sun Mortgage
Company activities for the three month period ended September 30, 2000 compared
to $722,000 for the same period in 1999. This decrease was partially offset by
an increase in service charges on deposit accounts and an increase in fee income
from investment products.
13
<PAGE>
Other Expenses. Other expenses increased approximately $1.6 million, to
$13.8 million for the three months ended September 30, 2000 as compared to $12.2
million for the same period in 1999. Of the increase, $451,000 was in salaries
and employee benefits, $226,000 was in occupancy expense, $487,000 was in
amortization of excess of cost over fair value of assets acquired and $228,000
was in other miscellaneous expenses. The increase in other expenses reflects the
Company's continued commitment to support its expansion. Salaries and benefits
increased due to additional staff positions in financial service centers,
lending, loan review and other support departments. The increase in occupancy
expense was the result of internal growth and the effect of the Company's
acquisitions.
Income Taxes. Applicable income taxes decreased $80,000 for the three
months ended September 30, 2000 as compared to the same period in 1999. The
decrease resulted from lower pre-tax earnings and a decrease in the Company's
effective tax rate. The decrease in the effective tax rate was partially
attributable to an increase in tax exempt municipal bond interest income.
Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
1999.
General. Net income decreased by $932,000 for the nine months ended
September 30, 2000 to $6.4 million from $7.3 million for the nine months ended
September 30, 1999. Net interest income increased $8.7 million and the provision
for loan losses increased $238,000 for the nine months ended September 30, 2000
compared to the same period in 1999. Other income decreased by $982,000 to $6.4
million for the nine months ended September 30, 2000 as compared to $7.4 million
for the nine months ended September 30, 1999. Other expenses increased by $9.0
million to $41.9 million for the nine months ended September 30, 2000 as
compared to $32.9 million for the nine months ended September 30, 1999. The
return on average assets for the nine months ended September 30, 2000 and 1999
were 0.42% and 0.62%, respectively. The return on average equity for the nine
months ended September 30, 2000 and 1999 were 8.96% and 11.69%, respectively.
Net Interest Income. The increase in net interest income (on a
tax-equivalent basis) was due to a $31.8 million increase in interest income (on
a tax-equivalent basis) partially offset by a $23.0 million increase in interest
expense.
14
<PAGE>
The following table sets forth a summary of average balances with
corresponding interest income (on a tax-equivalent basis) and interest expense
as well as average yield and cost information for the periods presented. Average
balances are derived from daily balances. Dollar amounts are in thousands
<TABLE>
<CAPTION>
At or for the nine months ended At or for the nine months ended
September 30, 2000 September 30, 1999
------------------------------------ ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 976,352 $ 65,320 8.92 % $ 758,952 $48,728 8.56 %
Investment securities (2) 904,700 47,423 6.99 690,110 32,254 6.23
Federal funds sold 7,645 370 6.45 7,903 279 4.71
--------- -------- --------- --------
Total interest-earning assets 1,888,697 113,113 7.99 1,456,965 81,261 7.44
Non-interest-earning assets 142,666 119,861
---------- ----------
Total assets $2,031,363 $1,576,826
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts $1,117,473 38,123 4.55 $ 836,799 24,403 3.89
Borrowed money 508,846 23,482 6.15 377,211 14,090 4.98
Guaranteed preferred beneficial interest
In Company's subordinated debt 57,350 4,077 9.48 58,601 4,175 9.50
---------- -------- --------- --------
Total interest-bearing liabilities 1,683,669 65,682 5.20 1,272,611 42,668 4.47
-------- --------
Non-interest-bearing liabilities 252,864 220,869
---------- ----------
Total liabilities 1,936,533 1,493,480
Shareholders' equity 94,830 83,346
---------- ----------
Total liabilities and shareholders'
equity $2,031,363 $1,576,826
========== ==========
Net interest income $ 47,431 $ 38,593
======== ========
Interest rate spread (3) 2.79 % 2.97 %
==== ====
Net yield on interest earning assets (4) 3.35 % 3.53 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.18 % 114.49 %
====== ======
</TABLE>
(1) Average balances include non-accrual loans
(2) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets
15
<PAGE>
Net interest income (on a tax-equivalent basis) increased $8.8 million
or 22.8% to $47.4 million for the nine months ended September 30, 2000 compared
to $38.6 million for the same period in 1999. The increase is due primarily to
the growth of average interest-earning assets from $1.46 billion at September
30, 1999 to $1.89 billion at September 30, 2000, with an increase in yield of 55
basis points. Offsetting the increase in asset yield was an increase in interest
bearing-liabilities cost of funds of 73 basis points which accounted for a
decrease in the interest rate spread from 2.97% for the nine months ended
September 30, 1999 to 2.79% for the same period in 2000. A change in the mix and
increased cost of interest-bearing liabilities had a slightly negative impact on
the net interest margin, which declined 18 basis points to 3.35% for the nine
months ended September 30, 2000.
The increase in average interest-earning assets of $431.7 million
reflects an increase of $217.4 million in average loans and $214.6 million in
average investment securities. These assets were funded by an increase of $411.1
million of average interest-bearing liabilities and an increase of $32.0 million
of average non-interest bearing liabilities. The increase in average
interest-bearing liabilities reflects in part the September 1999 acquisition of
branches and deposits from First Union, the growth of deposits at existing
financial service centers, the opening of new financial service centers, and
increases in borrowings.
The decrease in interest rate spread for the nine months ended
September 30, 2000, compared to the same period in 1999, was primarily due to a
higher cost of funds on interest-bearing deposit accounts and borrowed money.
The cost of funds on interest-bearing deposit accounts increased 66 basis points
from 3.89% for the nine months ended September 30, 1999 to 4.55% for the same
period in 2000 as a result of an increase in interest rates on core deposits and
an increase in higher yielding time deposits. The cost of funds on borrowed
money increased 117 basis points from 4.98% for the nine months ended September
30, 1999 to 6.15% for the same period in 2000.
The increase in the average yield on loans for the nine months ended
September 30, 2000 compared to the same period 1999 reflects a increase in
interest on loans resulting from the gradual raising of the prime rate from
8.25% at September 30, 1999 to 9.50% at September 30, 2000. The increase in the
average yield on investment securities was due primarily to increases in LIBOR
and additional securities purchased yielding higher interest rates.
Provision for Loan Losses. For the nine months ended September 30,
2000, the provision for loan losses amounted to $1.9 million, an increase of
$238,000, compared to $1.7 million for the same period in 1999. The increase in
the provision for loan losses was due to higher levels of loans outstanding.
Management regularly performs an analysis to identify the inherent risk of loss
in the Company's loan portfolio. This analysis includes evaluations of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio, estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies and other factors.
Other Income. Other income decreased $982,000 for the
nine-month period ended September 30, 2000 compared to the same period in 1999.
In most part, the decrease was a result of the closing of Sun Mortgage Company
in February 2000. There was income of $111,000 from Sun Mortgage Company
activities for the nine-month period ended September 30, 2000 compared to income
of $2.2 million for the same period in 1999. This decrease was partially offset
by an increase in service charges on deposit accounts and an increase in fee
income from investment products.
16
<PAGE>
Other Expenses. Other expenses increased approximately $9.0 million, to
$41.9 million for the nine months ended September 30, 2000 as compared to $32.9
million for the same period in 1999. Of the increase, $3.0 million was in
salaries and employee benefits, $1.1 million was in occupancy expense, $1.5
million was in amortization of excess of cost over fair value of assets acquired
and $2.1 million was in miscellaneous expenses. Of these miscellaneous expenses,
$350,000 is attributable to a provision for other real estate and approximately
$250,000 represented the net charge-offs of various non-credit assets during the
second quarter ended June 30, 2000. The remaining increase in other expenses
reflects the Company's commitment to support its expansion. Salaries and
benefits increased due to additional staff positions in financial service
centers, lending, loan review, compliance and other support 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 decreased $580,000 for the nine
months ended September 30, 2000 as compared to the same period in 1999. The
decrease resulted from lower pre-tax earnings and a decrease in the Company's
effective tax rate. The decrease in the effective tax rate was partially
attributable to an increase in tax exempt municipal bond interest income.
17
<PAGE>
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 or repricing characteristics on interest-bearing
liabilities and interest-earning assets and the volatility of interest rates.
Because the Company's assets have a longer maturity or repricing dates 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 and is also directing its retail
deposit marketing for longer term deposits of 2 - 3 years.
Gap Analysis
Banks have become increasingly concerned with the extent to which they
are able to match the maturities or repricing characteristics 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 same time period. On a monthly 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 25% of
total assets. The Company attempts to maintain its ratio of rate-sensitive
assets to rate-sensitive liabilities between 75% to 125%.
The Asset/Liability Committee of the Banks' Board of Directors monitors
the gap position and 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. 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, the Company 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. Management of the Company may also consider employing
hedging and/or derivative instruments within defined limits to manage its
interest rate risk.
At September 30, 2000, the Company 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 period by $78.3 million. This represents a
negative cumulative one-year gap ratio of 3.81%. 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.
Thus, in a rising interest rate environment, the Company's earnings may decrease
as liabilities reprice faster than assets.
18
<PAGE>
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at September 30, 2000. 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 savings deposits into categories noted
below. Management's allocation is based on the estimated effective duration.
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
(Amounts in Thousands)
0 - 3 Months 4 - 12 Months 1 - 5 Years Over 5 Years Total
----------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Loans receivable 346,652 96,123 497,925 72,052 1,012,752
Investment securities 417,477 130,616 65,497 270,848 884,438
Federal funds sold 3,500 3,500
----------------- ----------------- ------------------ ----------------- -----------------
Total interest-earning assets 767,629 226,739 563,422 342,900 1,900,690
----------------- ----------------- ------------------ ----------------- -----------------
Interest-bearing demand deposits 119,210 24,593 140,995 62,279 347,077
Savings deposits 3,889 11,776 65,638 89,176 170,479
Time certificates 278,893 228,694 170,885 3,287 681,759
Federal Home Loan Bank advances 34 102 20,625 3,406 24,167
Federal funds purchased
Loan payable 1,160 1,160
Securities sold under agreements
to repurchase 404,347 404,347
----------------- ----------------- ------------------ ----------------- -----------------
Total interest-bearing liabilities 807,533 265,165 398,143 158,148 1,628,989
----------------- ----------------- ------------------ ----------------- -----------------
Periodic Gap (39,904) (38,426) 165,279 184,752 271,701
================= ================= ================== ================= =================
Cumulative Gap (39,904) (78,330) 86,949 271,701
================= ================= ================== =================
Cumulative Gap Ratio (1.94%) (3.81%) 4.23% 13.21%
================= ================= ================== =================
</TABLE>
19
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at September 30, 2000. 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 report on Form 8-K was filed during the
quarter ended September 30, 2000:
The Company filed a Current Report on Form 8-K (Items
5 and 7) on July 18, 2000.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 14, 2000 Sun Bancorp, Inc.
-------------------------- --------------------------------------------
(Registrant)
/s/ Philip W. Koebig, III
--------------------------------------------
Philip W. Koebig, III
President and Chief Executive Officer
Date November 14, 2000 /s/ Dan A. Chila
-------------------------- --------------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
21
