UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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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 9,235,993 May 10, 2000
- ----------------------------- --------- -------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 74,196 $ 69,425
Federal funds sold 700 -
----------- -----------
Cash and cash equivalents 74,896 69,425
Investment securities available for sale (amortized cost -
$871,084; 2000 and $876,368; 1999) 833,250 834,677
Loans receivable (net of allowance for loan losses -
$9,390; 2000 and $8,722; 1999) 962,114 900,671
Restricted equity investments 46,245 44,796
Bank properties and equipment, net 31,952 31,845
Real estate owned, net 671 535
Accrued interest receivable 15,762 14,977
Excess of cost over fair value of assets acquired, net 58,749 60,718
Deferred taxes 16,457 17,768
Other assets 4,918 5,449
----------- -----------
TOTAL $ 2,045,014 $ 1,980,861
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,331,168 $ 1,291,326
Advances from the Federal Home Loan Bank 119,231 119,741
Loan payable 1,160 1,160
Federal funds purchased 5,300 5,700
Securities sold under agreements to repurchase 426,887 407,851
Other liabilities 7,929 6,141
----------- -----------
Total liabilities 1,891,675 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: 10,086,635 in 2000; and 10,080,202 in 1999 10,087 10,080
Surplus 105,841 105,798
Retained earnings 15,482 13,170
Accumulated other comprehensive loss (24,970) (27,516)
Treasury stock at cost, 903,201 shares (10,428) (10,428)
----------- -----------
Total shareholders' equity 96,012 91,104
----------- -----------
TOTAL $ 2,045,014 $ 1,980,861
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
1
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
2000 1999
----------- -----------
(Dollars in thousands, except per share amounts)
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 20,638 $ 15,152
Interest on taxable investment securities 13,840 9,007
Interest on non-taxable investment securities 715 544
Dividends on restricted equity investments 766 464
Interest on federal funds sold 15 101
----------- -----------
Total interest income 35,974 25,268
----------- -----------
INTEREST EXPENSE:
Interest on deposits 11,474 7,954
Interest on short-term borrowed funds 7,845 4,124
Interest on guaranteed preferred beneficial interest in
Company's subordinated debt 1,359 1,391
----------- -----------
Total interest expense 20,678 13,469
----------- -----------
Net interest income 15,296 11,799
PROVISION FOR LOAN LOSSES 785 667
----------- -----------
Net interest income after provision for loan losses 14,511 11,132
----------- -----------
OTHER INCOME:
Service charges on deposit accounts 1,305 1,149
Other service charges 33 26
Gain on sale of bank properties and equipment 5 5
Gain on sale of loans 5 12
(Loss) gain on sale of investment securities (2) 49
Other 925 1,085
----------- -----------
Total other income 2,271 2,326
----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 5,771 4,599
Occupancy expense 1,594 1,169
Equipment expense 1,302 705
Professional fees and services 221 96
Data processing expense 804 746
Amortization of excess of cost over fair value of assets acquired 1,969 1,468
Postage and supplies 313 367
Insurance 151 83
Other 1,376 864
----------- -----------
Total other expenses 13,501 10,097
----------- -----------
INCOME BEFORE INCOME TAXES 3,281 3,361
INCOME TAXES 969 965
----------- -----------
NET INCOME $ 2,312 $ 2,396
=========== ===========
Basic earnings per share $ 0.25 $ 0.32
=========== ===========
Diluted earnings per share $ 0.25 $ 0.29
=========== ===========
Weighted average shares, basic 9,181,211 7,547,514
=========== ===========
Weighted average shares, diluted 9,401,335 8,234,100
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
2
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
2000 1999
-------- --------
(In thousands)
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,312 $ 2,396
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 785 667
Provision for losses on real estate owned 3
Depreciation and amortization 498 454
Amortization of excess cost over fair value of assets acquired 1,969 1,468
Gain on sale of loans (5) (12)
Proceeds from sale of loans held for sale 414 676
Loss (gain) on sale of investment securities available for sale 2 (49)
Gain on sale of bank properties and equipment (5) (5)
Deferred income taxes (417)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (785) (1,097)
Other assets 531 (674)
Other liabilities 1,788 (6,477)
-------- --------
Net cash provided by (used in) operating activities 7,507 (3,070)
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (4,026) (47,508)
Purchases of mortgage-backed securities available for sale (22,036)
Purchases of restricted equity securities (1,449)
Proceeds from maturities of investment securities available for sale 4,084 7,000
Proceeds from maturities of mortgage-backed securities available for sale 5,024 38,883
Proceeds from sale of investment securities available for sale 234 9,112
Net increase in loans (62,775) (41,724)
Increase in loans resulting from branch acquisitions (20)
Purchase of bank properties and equipment (640) (970)
Increase in bank properties and equipment resulting from branch acquisitions (177)
Proceeds from the sale of bank properties and equipment 5 8
Repurchases of Company's trust preferred securities (511) (55)
Excess of cost over fair value of branch assets acquired (660)
Proceeds from sale of real estate owned - (80)
-------- --------
Net cash used in investing activities (60,054) (58,227)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 39,842 (34,305)
Increase in deposits resulting from branch acquisitions 15,810
Net advances under line of credit and repurchase agreements 18,126 32,202
Treasury stock purchased (198)
Proceeds from issuance of common stock 50 99
-------- --------
Net cash provided by financing activities 58,018 13,608
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,471 (47,689)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,425 89,516
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 74,896 $ 41,827
======== ========
</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 subsidiary Med-Vine, Inc. All significant inter-company
balances and transactions have been eliminated.
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all
normal recurring adjustments that, in the opinion of management, are
necessary for a fair presentation of the financial statements, have
been included. These financial statements should be read in conjunction
with the audited financial statements and the accompanying notes
thereto included in the Company's Annual Report for the period ended
December 31, 1999. The results for the three months ended March 31,
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 March 31, 2000 and December 31, 1999
were as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
(In thousands)
(Unaudited)
Commercial and industrial $811,494 $750,707
Real estate-residential mortgages 77,991 79,605
Installment 82,019 79,081
-------- --------
Total gross loans 971,504 909,393
Allowance for loan losses (9,390) (8,722)
-------- --------
Net Loans $962,114 $900,671
======== ========
Non-accrual loans $ 1,291 $ 2,580
4
<PAGE>
(3) Allowance For Loan Losses
Changes in the allowance for loan losses were as follows:
For the three month
period ended For the year ended
March 31, 2000 December 31, 1999
-------------- -----------------
(In thousands)
(Unaudited)
Balance, beginning of period $8,722 $7,143
Charge-offs ( 124) (536)
Recoveries 7 26
------ ------
Net charge-offs ( 117) ( 510)
Provision for loan losses 785 2,089
------ ------
Balance, end of period $9,390 $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>
March 31, 2000 December 31, 1999
-------------- -----------------
(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 $427 $ 1,251
---- -------
Total impaired loans $427 $ 1,251
==== =======
</TABLE>
<TABLE>
<CAPTION>
For the three
months ended For the year ended
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
Average impaired loans $ 620 $ 1,025
Interest income recognized on impaired loans $ 47 $ 32
Cash basis interest income recognized on impaired loans $ 54 $ 32
</TABLE>
5
<PAGE>
(4) Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(In thousands)
(Unaudited)
<S> <C> <C>
Demand deposits $ 551,836 $ 526,810
Savings deposits 142,968 153,841
Time certificates under $100,000 423,362 421,475
Time certificates $100,000 or more 213,002 189,200
--------- ---------
Total $1,331,168 $ 1,291,326
========== ===========
</TABLE>
Of the total demand deposits, approximately, $237,957,000 (unaudited)
and $231,688,000 are non-interest bearing at March 31, 2000 and
December 31, 1999, respectively.
(5) Other Comprehensive Income
The Company classifies items of other comprehensive income by their
nature in a financial statement and displays the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. 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 March 31, 2000 and 1999
amounted to $2,546,000 (unaudited) and ($3,870,000) (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) along with the
assumed tax benefit from the exercise of non-qualified options. 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.
6
<PAGE>
<TABLE>
<CAPTION>
For the For the
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
------------------- ------------------
(Dollars in thousands, except per share amounts)
(Unaudited)
<S> <C> <C>
Net income $ 2,312 $ $ 9,714
Dilutive stock options outstanding 905,555 1,159,174
Average exercise price per share $ 5.01 $ 6.02
Average market price - diluted basis $ 7.84 $ 16.30
Average common shares outstanding 9,181,211 8,538,809
Increase in shares due to exercise of options - diluted basis 220,124 647,416
--------- ---------
Adjusted shares outstanding - diluted 9,401,335 9,186,225
Net income per share - basic $ 0.25 $ 1.14
Net income per share - diluted $ 0.25 $ 1.06
</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 March 31, 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 March 31, 2000 and December 31, 1999 the
Company had repurchased 61,300 shares and 38,500 shares, respectively.
7
<PAGE>
THE COMPANY MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING
STATEMENTS," INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS QUARTERLY REPORT ON FORM 10-Q
AND THE EXHIBITS THERETO), IN ITS REPORTS TO SHAREHOLDERS AND IN OTHER
COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). FACTORS THAT MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST
SAVINGS FROM THE ACQUISITIONS NOT BEING FULLY REALIZED OR REALIZED WITHIN THE
EXPECTED TIME FRAME; (2) REVENUES FOLLOWING THE ACQUISITIONS BEING LOWER THAN
EXPECTED; (3) A SIGNIFICANT INCREASE IN COMPETITIVE PRESSURES AMONG DEPOSITORY
AND OTHER FINANCIAL INSTITUTIONS; (4) COSTS OR DIFFICULTIES RELATED TO THE
INTEGRATION OF THE ACQUIRED BUSINESS BEING GREATER THAN EXPECTED; (5) CHANGES IN
THE INTEREST RATE ENVIRONMENT RESULTING IN REDUCED MARGINS; (6) GENERAL ECONOMIC
OR BUSINESS CONDITIONS, EITHER NATIONALLY OR IN THE STATES IN WHICH THE COMPANY
WILL BE DOING BUSINESS, BEING LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG
OTHER THINGS, A DETERIORATION IN CREDIT QUALITY OR A REDUCED DEMAND FOR CREDIT;
(7) LEGISLATIVE OR REGULATORY CHANGES ADVERSELY AFFECTING THE BUSINESSES IN
WHICH THE COMPANY WILL BE ENGAGED; (8) CHANGES IN THE SECURITIES MARKETS; AND
(9) CHANGES IN THE BANKING INDUSTRY INCLUDING THE EFFECTS OF CONSOLIDATION
RESULTING FROM POSSIBLE MERGERS OF FINANCIAL INSTITUTIONS.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
8
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 2000 increased by $64.2 million to $2.05
billion as compared to $1.98 billion at December 31, 1999. The increase was
primarily due to an increase in net loans of $61.4 million and an increase in
cash and due from banks of $4.8 million.
Cash and cash equivalents increased $5.5 million, from $69.4 million at
December 31, 1999 to $74.9 million at March 31, 2000.
Investment securities available for sale decreased $1.4 million, from
$834.7 million at December 31, 1999 to $833.3 million at March 31, 2000. The
decrease was primarily the result of principal repayments and maturities.
Net loans at March 31, 2000 amounted to $962.1 million, an increase of
$61.4 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 March 31,
2000 was 0.36% compared to 0.54% at December 31, 1999. The decrease was the
result of a lower amount of non-accrual loans and a higher level of loans at
March 31, 2000. The ratio of allowance for loan losses to total non-performing
loans was 337.28% at March 31, 2000 compared to 199.05% at December 31, 1999.
The increase in this ratio was the result of a higher level of allowance for
loan losses and a lower amount of non-accrual loans at March 31, 2000. The ratio
of allowance for loan losses to total loans was 0.97% at March 31, 2000 compared
to 0.96% at December 31, 1999.
Excess of cost over fair value of assets acquired decreased $2 million
from $60.7 million at December 31, 1999 to $58.7 million at March 31, 2000. The
decrease was a result of scheduled amortization.
Total liabilities at March 31, 2000 amounted to $1.89 billion compared
to $1.83 billion at December 31, 1999, an increase of $59.8 million.
Total deposits amounted to $1.33 billion at March 31, 2000 a $39.8
million increase over December 31, 1999 deposits of $1.29 billion.
Advances from the Federal Home Loan Bank amounted to $119.2 million at
March 31, 2000 compared to $119.7 million at December 31, 1999, a decrease of
$510,000. Federal funds purchased at March 31, 2000 amounted to $5.3 million
compared to $5.7 million at December 31, 1999.
Securities sold under agreements to repurchase amounted to $426.9
million at March 31, 2000 compared to $407.9 million at December 31, 1999, an
increase of $19.0 million. The increase represented increased customer
repurchase agreements.
Total shareholders' equity grew by $4.9 million, from $91.1 million at
December 31, 1999, to $96.0 million at March 31, 2000. The increase was
primarily the result of first quarter earnings amounting to $2.3 million
augmented by a $2.5 million improvement in accumulated other comprehensive
income.
9
<PAGE>
Liquidity and Capital Resources
Liquidity management is a daily and long-term business function. The
Company's liquidity, represented in part by cash and cash equivalents, is a
product of its operating, investing and financing activities. Proceeds from
repayment of loans, maturities of investment securities, net income and
increases in deposits and borrowings are the primary sources of liquidity of the
Company.
The Company has experienced a significant increase in commercial loan
demand and expects such demand to continue for the remainder of the current
fiscal year. Historically, management has demonstrated the ability to meet this
increased need for funds by attracting higher levels of deposits, engaging in
repurchase agreements, raising capital and utilizing its lines of credit with
other financial institutions. It also has the ability to liquidate portions of
its investment portfolio.
The increase of commercial loans has the effect of increasing the level
of risk-based assets and thus lowering the Company's risk-based capital ratios.
In general, commercial loans are categorized as having a 100% risk weighting
using the calculations required by the Company's regulators. Until its issuance
of Trust Preferred Securities and additional issuance of common shares, the rate
at which commercial loans have grown has outpaced the internal growth rate of
the Company's capital.
It is the Company's intent to maintain adequate levels of risk-based
capital. Management monitors the Company's capital levels, and when appropriate,
will recommend additional capital raising efforts to the Company's board of
directors.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999.
General. Net income decreased by $84,000 for the three months ended
March 31, 2000 to $2.3 million from $2.4 million for the three months ended
March 31, 1999 primarily due to an increase in other expenses. Net interest
income increased $3.5 million and the provision for loan losses increased
$118,000 for the three months ended March 31, 2000 compared to the same period
in 1999. Other income decreased by $55,000 to $2.27 million for the three months
ended March 31, 2000 as compared to $2.33 million for the three months ended
March 31, 1999. Other expenses increased by $3.4 million to $13.5 million for
the three months ended March 31, 2000 as compared to $10.1 million for the three
months ended March 31, 1999.
Net Interest Income. The increase in net interest income was due to a
$10.7 million increase in interest income partially offset by a $7.2 million
increase in interest expense.
Interest Income. Interest income for the three months ended March 31,
2000 increased approximately $10.7 million, or 42.4%, from $25.3 million for the
same period in 1999 to $36.0 million in 2000. The increase was primarily the
result of an increase of $5.5 million in interest and fees on loans resulting
from internal growth and $4.8 million in interest on investment securities
resulting from the deployment of cash received from branch acquisitions into the
Company's investment portfolio.
Interest Expense. Interest expense for the three months ended March 31,
2000 increased approximately $7.2 million, from $13.5 million for the same
period in 1999 to $20.7 million in 2000. This increase was primarily due to a
$3.5 million increase in interest on deposit accounts resulting from
significantly higher deposit balances due to acquisitions and internal growth
and a $3.7 increase on borrowed funds resulting from higher levels of securities
sold under agreements to repurchase.
Provision for Loan Losses. For the three months ended March 31, 2000,
the provision for loan losses amounted to $785,000, an increase of $118,000,
compared to $667,000 for the same period in 1999.
10
<PAGE>
Management continually reviews the adequacy of the loan loss reserve using
guidelines promulgated by the Bank's primary regulator.
Other Income. Other income decreased $55,000 for the three-month period
ended March 31, 2000 compared to the three-month period ended March 31, 1999. In
most part, the decrease was a result of lower fees being generated by mortgage
banking operations, offset by an increase in service charges on deposit
accounts. In addition, losses on the sale of investment securities amounted to
$2,000 for the three months ended March 31, 2000 compared to a gain of $49,000
in the same period of 1999.
Other Expenses. Other expenses increased approximately $3.4 million, to
$13.5 million for the three months ended March 31, 2000 as compared to $10.1
million for the same period in 1999. Of the increase, $1.2 million was in
salaries and employee benefits, $425,000 was in occupancy expense, $597,000 was
in equipment expense, $501,000 was in amortization of excess of cost over fair
value of assets acquired, $125,000 was in professional fees and services and
$512,000 was in other miscellaneous expenses. The increase in other expenses
reflects the Company's continued strategy 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, equipment, data processing expenses and postage and supplies were the
result of internal growth and the effect of the Company's acquisitions.
Income Taxes. Applicable income taxes increased $4,000 for the
three months ended March 31, 2000 as compared to the same period in 1999.
11
<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 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,
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, it
has a number of remedial options. It has the ability to reposition its
investment portfolio to include securities with more advantageous repricing
and/or maturity characteristics. It can attract variable- or fixed-rate loan
products as appropriate. It can also price deposit products to attract deposits
with maturity characteristics that can lower its exposure to interest rate risk.
Management of the Company may also consider employing hedging and/or derivative
instruments within defined limits to manage its interest rate risk.
At March 31, 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 $361.6 million. This represents a negative
cumulative one-year gap ratio of 17.68%. 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.
12
<PAGE>
The following table summarizes the maturity and repricing characteristics of the
Company's interest-earning assets and interest-bearing liabilities at March 31,
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
At March 31, 2000
(Dollars in thousands)
0-3 Months 4-12 Months 1-5 Years Over 5 Yrs. Total
--------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Loans receivable $ 352,555 $ 68,971 $ 397,435 $ 152,543 $ 971,504
Investment securities 424,506 33,428 75,106 384,289 917,329
Federal funds sold 700 - - - 700
--------- --------- --------- ---------- ---------
Total interest-earning assets 777,761 102,399 472,541 536,832 1,889,533
--------- --------- --------- ---------- ---------
Interest-bearing demand deposits 91,969 23,114 132,660 66,136 313,879
Savings deposits 3,266 9,889 55,081 74,732 142,968
Time certificates under $100,000 90,538 271,068 58,342 3,414 423,362
Time certificates $100,000 or more 113,148 91,414 8,225 215 213,002
Federal Home Loan Bank Advances 115,033 99 608 3,491 119,231
Federal funds purchased 5,300 5,300
Loan payable 1,160 1,160
Securities sold under agreements
to repurchase 426,887 - - - 426,887
---------- ---------- --------- --------- ---------
Total interest-bearing liabilities 846,141 395,584 256,076 147,988 1,645,789
---------- ---------- --------- --------- ---------
Periodic Gap $ (68,380) $ (293,185) $ 216,465 $ 388,844 $ 243,744
========== ========== ========= ========= =========
Cumulative Gap $ (68,380) $ (361,565) $(145,100) $ 243,744
========== ========== ========= =========
Cumulative Gap Ratio - 3.34% - 17.68% - 7.10% 11.92%
========== ========== ========= =========
</TABLE>
13
<PAGE>
The following table sets forth a summary of average balances with corresponding
interest income and interest expense as well as average yield and cost
information for the period presented. Average balances are derived from daily
balances. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
For the three months ended March 31, 2000
-----------------------------------------
(Dollars in thousands) Average Average
Balance Interest Yield/Cost
------- -------- ----------
<S> <C> <C> <C>
Interest earning assets:
Loans receivable (1) $ 939,256 $ 20,638 8.79 %
Investment securities (2) 874,499 15,677 7.17
Federal funds sold 1,090 15 5.51
----------- --------
Total interest-earning assets 1,814,845 36,330 8.01
Non-interest-earning assets 185,944
-----------
Total assets $ 2,000,789
===========
Interest-bearing liabilities:
Interest-bearing deposit accounts $ 1,072,410 11,474 4.28 %
Borrowed money 539,358 7,845 5.82
Guaranteed preferred beneficial interest
in Company's subordinated debt 57,396 1,359 9.47
----------- --------
Total interest-bearing liabilities 1,669,164 20,678 4.96
Non-interest-bearing liabilities 241,853 --------
-----------
Total liabilities 1,911,017
Shareholders' equity 89,772
Total liabilities and shareholders' equity $ 2,000,789
===========
Net interest income $15,652
=======
Interest rate spread (3) 3.05 %
Net yield on interest earning assets (4) 3.45 %
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.73 %
</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 yield on interest-earning assets represents the net interest income as
a percentage of average interest-earning assets.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at March 31, 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 reports on Form 8-K were filed during
the quarter ended March 31, 2000:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date May 11, 2000 Sun Bancorp, Inc.
--------------------------- -----------------------------------------
(Registrant)
/s/ Philip W. Koebig, III
----------------------------------------
Philip W. Koebig, III
President and Chief Executive Officer
Date May 11, 2000 /s/ Dan. A. Chila
--------------------------- -----------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
16
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 74,196
<INT-BEARING-DEPOSITS> 1,093,211
<FED-FUNDS-SOLD> 700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 879,495
<INVESTMENTS-CARRYING> 879,495
<INVESTMENTS-MARKET> 879,495
<LOANS> 971,504
<ALLOWANCE> 9,390
<TOTAL-ASSETS> 2,045,014
<DEPOSITS> 1,331,168
<SHORT-TERM> 547,319
<LIABILITIES-OTHER> 7,929
<LONG-TERM> 5,259
57,327
0
<COMMON> 10,087
<OTHER-SE> 85,925
<TOTAL-LIABILITIES-AND-EQUITY> 2,045,014
<INTEREST-LOAN> 20,638
<INTEREST-INVEST> 15,321
<INTEREST-OTHER> 15
<INTEREST-TOTAL> 35,974
<INTEREST-DEPOSIT> 11,474
<INTEREST-EXPENSE> 20,678
<INTEREST-INCOME-NET> 15,296
<LOAN-LOSSES> 785
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 13,501
<INCOME-PRETAX> 3,281
<INCOME-PRE-EXTRAORDINARY> 3,281
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,312
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 3.45
<LOANS-NON> 1,291
<LOANS-PAST> 1,493
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,722
<CHARGE-OFFS> 124
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 9,390
<ALLOWANCE-DOMESTIC> 9,390
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
