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, 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 (I.R.S. Employer
incorporation 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 9,723,027 August 11, 2000
----------------------------- --------- ---------------
Class Number of shares outstanding Date
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 74,836 $ 69,425
Federal funds sold - -
----------- -----------
Cash and cash equivalents 74,836 69,425
Investment securities available for sale (amortized cost -
$856,549; 2000 and $876,368; 1999) 818,414 834,677
Loans receivable (net of allowance for loan losses -
$9,854; 2000 and $8,722; 1999) 978,435 900,671
Restricted equity investments 30,245 44,796
Bank properties and equipment, net 29,619 31,845
Real estate owned, net 1,552 535
Accrued interest receivable 16,558 14,977
Excess of cost over fair value of assets acquired, net 56,778 60,718
Deferred taxes 17,649 17,768
Other assets 5,048 5,449
----------- -----------
TOTAL $ 2,029,134 $ 1,980,861
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,358,751 $ 1,291,326
Advances from the Federal Home Loan Bank 79,199 119,741
Loan payable 1,160 1,160
Federal funds purchased 4,500 5,700
Securities sold under agreements to repurchase 423,068 407,851
Other liabilities 7,344 6,141
----------- -----------
Total liabilities 1,874,022 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 11,285 13,170
Accumulated other comprehensive loss (25,169) (27,516)
Treasury stock at cost, 373,901 shares in 2000; and 901,951 shares in 1999 (4,259) (10,428)
----------- -----------
Total shareholders' equity 97,785 91,104
----------- -----------
TOTAL $ 2,029,134 $ 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 Six Months
Ended June 30, Ended June 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 $ 22,586 $ 15,955 $ 43,224 $ 31,108
Interest on taxable investment securities 13,431 8,648 27,271 17,654
Interest on non-taxable investment securities 682 557 1,397 1,101
Interest on restricted equity investments 771 469 1,537 933
Interest on federal funds sold 45 24 60 125
----------- ----------- ----------- -----------
Total interest income 37,515 25,653 73,489 50,921
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 12,550 7,991 24,024 15,944
Interest on short-term borrowed funds 8,116 4,122 15,961 8,246
Interest on guaranteed preferred beneficial interest
in Company's subordinated debt 1,359 1,392 2,718 2,784
----------- ----------- ----------- -----------
Total interest expense 22,025 13,505 42,703 26,974
----------- ----------- ----------- -----------
Net interest income 15,490 12,148 30,786 23,947
PROVISION FOR LOAN LOSSES 585 520 1,370 1,186
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 14,905 11,628 29,416 22,761
----------- ----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 1,229 1,128 2,534 2,276
Income from mortgage banking operations 739 110 1,432
Other service charges 38 31 71 58
(Loss) gain on sale of bank properties and equipment (8) 5 (3) 10
Gain on sale of loans 4 9 12
Gain (loss) on sale of investment securities 29 (2) 78
Other 591 639 1,406 1,031
----------- ----------- ----------- -----------
Total other income 1,854 2,571 4,125 4,897
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 6,031 4,619 11,802 9,218
Occupancy expense 1,772 1,296 3,366 2,465
Equipment expense 1,201 919 2,503 1,624
Data processing expense 788 751 1,592 1,497
Amortization of excess of cost over fair value of assets
acquired 1,971 1,483 3,940 2,952
Other 2,857 1,612 4,918 3,022
----------- ----------- ----------- -----------
Total other expenses 14,620 10,680 28,121 20,778
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,139 3,519 5,420 6,880
INCOME TAXES 564 1,068 1,533 2,033
----------- ----------- ----------- -----------
NET INCOME $ 1,575 $ 2,451 $ 3,887 $ 4,847
=========== =========== =========== ===========
Basic earnings per share $ 0.16 $ 0.31 $ 0.40 $ 0.61
=========== =========== =========== ===========
Diluted earnings per share $ 0.16 $ 0.28 $ 0.40 $ 0.56
=========== =========== =========== ===========
Weighted average shares - basic 9,700,470 7,942,513 9,670,370 7,933,836
=========== =========== =========== ===========
Weighted average shares - diluted 9,811,365 8,689,517 9,831,790 8,660,999
=========== =========== =========== ===========
</TABLE>
-------------------------------------------------------------------
See notes to consolidated financial statements
3
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------
2000 1999
-------- --------
(In thousands)
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,887 $ 4,847
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,370 1,186
Provision for losses on real estate owned 56 23
Depreciation and amortization 1,359 1,026
Amortization of excess cost over fair value of assets acquired 3,940 2,952
Gain on sale of loans (9) (12)
Proceeds from sale of loans held for sale 731 676
Loss (gain) on sale of investment securities available for sale 2 (78)
Loss (gain) on sale of bank properties and equipment 3 (10)
Write-down of book value of properties and equipment 300
Deferred income taxes (1,090) (774)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (1,581) (627)
Other assets 401 (609)
Other liabilities 1,203 (8,569)
-------- --------
Net cash provided by operating activities 10,572 31
-------- --------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (63,956)
Purchases of mortgage-backed securities available for sale (36,183)
Proceeds from the redemption of restricted equity securities 14,551
Proceeds from maturities of investment securities available for sale 5,438 17,038
Proceeds from maturities of mortgage-backed securities available for sale 11,026 75,143
Proceeds from sale of investment securities available for sale 3,139 10,576
Net increase in loans (79,994) (87,012)
Increase in loans resulting from branch acquisitions (20)
Purchase of bank properties and equipment (1,319) (1,632)
Increase in bank properties and equipment resulting from branch acquisitions (177)
Proceeds from the sale of bank properties and equipment 841 26
Repurchases of guaranteed preferred beneficial interest in Company's subordinated debt (511) (55)
Excess of cost over fair value of branch assets acquired (660)
Purchase price adjustment of branch assets acquired 71
Proceeds from sale of real estate owned 321 62
-------- --------
Net cash used in investing activities (46,508) (86,779)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 67,425 14,729
Increase in deposits resulting from branch acquisitions 15,810
Net (repayments) advances under line of credit and repurchase agreements (26,525) 24,587
Payments for fractional interests resulting from stock dividend (17) (3)
Treasury stock purchased (365)
Proceeds from issuance of common stock 464 151
-------- --------
Net cash provided by financing activities 41,347 54,909
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,411 (31,839)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,425 89,516
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 74,836 $ 57,677
======== ========
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements
4
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All June 30, 2000 and June 30, 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 six months ended June
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 June 30, 2000 and December 31, 1999 were
as follows:
June 30, 2000 December 31, 1999
------------- -----------------
(In thousands)
Commercial and industrial $823,632 $750,707
Real estate-residential mortgages 77,522 79,605
Installment 87,135 79,081
-------- --------
Total gross loans 988,289 909,393
Allowance for loan losses (9,854) (8,722)
-------- --------
Net Loans $978,435 $900,671
======== ========
Non-accrual loans $ 3,187 $ 2,580
5
<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, 2000 December 31, 1999
------------- ------------------
(In thousands)
Balance, beginning of period $8,722 $7,143
Charge-offs ( 255) (536)
Recoveries 17 26
------ ------
Net charge-offs ( 238) ( 510)
Provision for loan losses 1,370 2,089
------ ------
Balance, end of period $9,854 $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>
June 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 six
months ended June For the year ended
30, 2000 December 31, 1999
-------- -----------------
<S> <C> <C>
Average impaired loans $ 522 $ 1,025
Interest income recognized on impaired loans $ 16 $ 32
Cash basis interest income recognized on impaired loans $ 16 $ 32
</TABLE>
6
<PAGE>
(4) Deposits
Deposits consist of the following major classifications:
June 30, 2000 December 31, 1999
------------- -----------------
(In thousands)
Demand deposits $598,524 $ 526,810
Savings deposits 135,705 153,841
Time certificates under $100,000 442,000 421,475
Time certificates $100,000 or more 182,522 189,200
---------- -----------
Total $1,358,751 $ 1,291,326
========== ===========
Of the total demand deposits, approximately, $257,376,000 and
$231,688,000 are non-interest bearing at June 30, 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 June 30, 2000 and 1999
amounted to ($199,000) and ($8,392,000), respectively. Other
comprehensive income (losses) for the six-month periods ended June 30,
2000 and 1999 amounted to $2,347,000 and ($12,757,000), 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 average price received on
common shares sold. 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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
(Dollars in thousands, except per share amounts) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 1,575 $ 2,451 $ 3,887 $ 4,847
Dilutive stock options outstanding 848,497 1,331,339 914,872 1,327,480
Average exercise price per share $4.65 $6.65 $4.77 $6.62
Average market price - diluted basis $6.57 $17.86 $7.02 $17.26
Average common shares outstanding 9,700,470 7,942,513 9,670,370 7,933,836
Increase in shares due to exercise of options -
diluted basis 110,895 747,004 161,420 727,163
--------- --------- --------- ---------
Adjusted shares outstanding - diluted 9,811,365 8,689,517 9,831,790 8,660,999
Net income per share - basic $0.16 $0.31 $0.40 $0.61
Net income per share - diluted $0.16 $0.28 $0.40 $0.56
</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 June 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 June 30, 2000 and December 31, 1999, the
Company had repurchased 61,300 shares and 38,500 shares, respectively.
8
<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), 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.
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at June 30, 2000 increased by $48.3 million to $2.03
billion as compared to $1.98 billion at December 31, 1999. The increase was
primarily due to an increase in net loans of $77.8 million and in cash and due
from banks of $5.4 million offset by a decrease in investment securities
available for sale of $16.3 million and restricted equity investments of $14.6
million. Also offsetting the increase was a $3.9 million decrease in excess of
cost over fair value of assets acquired.
Investment securities available for sale decreased $16.3 million, from
$834.7 million at December 31, 1999 to $818.4 million at June 30, 2000. The
decrease was primarily the result of principal repayments and maturities offset
by a decrease in unrealized losses of $2,347,000.
Net loans at June 30, 2000 amounted to $978.4 million, an increase of
$77.7 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 June 30,
2000 was 0.60% compared to 0.54% at December 31, 1999. The increase in this
ratio was the result of three financial
9
<PAGE>
service centers transferred to real estate owned in June 2000. The ratio of
allowance for loan losses to total non-performing loans was 226.74% at June 30,
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-performing loans at June 30, 2000. The ratio of allowance for loan losses to
total loans was 1.00% at June 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 June 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 $3.9
million from $60.7 million at December 31, 1999 to $56.8 million at June 30,
2000. The decrease was a result of scheduled amortization.
Total liabilities at June 30, 2000 amounted to $1.87 billion compared
to $1.83 billion at December 31, 1999, an increase of $42.1 million.
Total deposits amounted to $1.36 billion at June 30, 2000, a $67.4
million increase over December 31, 1999 deposits of $1.29 billion. The increase
was primarily due to an increase in demand deposits of $71.7 million from $526.8
million at December 31, 1999 to $598.5 million at June 30, 2000 and an increase
of $13.8 million in time deposits from $610.7 million at December 31, 1999 to
$624.5 million at June 30, 2000. The increase was offset by a decrease in
savings deposits of $18.1 million from $153.8 million at December 31, 1999 to
$135.7 million at June 30, 2000.
Advances from the Federal Home Loan Bank amounted to $79.2 million at
June 30, 2000 compared to $119.7 million at December 31, 1999, a decrease of
$40.5 million. Federal funds purchased at June 30, 2000 amounted to $4.5 million
compared to $5.7 million at December 31, 1999. Decreases in borrowings were
primarily due to improved liquidity management.
Securities sold under agreements to repurchase amounted to $423.1
million at June 30, 2000 compared to $407.9 million at December 31, 1999, an
increase of $15.2 million. The increase represented increased customer
repurchase agreements resulting from the continued growth from the Company's
cash management program.
Total shareholders' equity grew by $6.7 million, from $91.1 million at
December 31, 1999, to $97.8 million at June 30, 2000. The increase was primarily
the result of current year earnings amounting to $3.9 million augmented by a
$2.3 million improvement in accumulated other comprehensive income. 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.
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 a 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.
10
<PAGE>
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 $253,796,000 at June 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 $21,809,000) at June 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 June 30, 2000 and
1999.
General. Net income decreased by $876,000 for the three months ended
June 30, 2000 to $1.6 million from $2.4 million for the three months ended June
30, 1999. Included in the net income for the three months ended June 30, 2000 is
an after tax charge of approximately $900,000 for a write-down of non-credit
related assets. Net interest income increased $3.3 million and the provision for
loan losses increased $65,000 for the three months ended June 30, 2000 compared
to the same period in 1999. Other income decreased by $717,000 to $1.85 million
for the three months ended June 30, 2000 as compared to $2.57 million for the
three months ended June 30, 1999. Other expenses increased by $3.9 million to
$14.6 million for the three months ended June 30, 2000 as compared to $10.7
million for the three months ended June 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.
Net Interest Income. The increase in net interest income (on a
tax-equivalent basis) was due to a $11.9 million increase in interest income (on
a tax-equivalent basis) partially offset by a $8.5 million increase in interest
expense.
11
<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 three months ended At or for the three months ended
June 30, 2000 June 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) $ 996,606 $ 22,586 9.07 % $ 752,243 $ 15,955 8.48 %
Investment securities (2) 907,377 15,219 6.71 640,791 9,954 6.21
Federal funds sold 2,921 45 6.16 2,007 24 4.78
---------- -------- ---------- --------
Total interest-earning assets 1,906,904 37,850 7.94 1,395,041 25,933 7.44
Non-interest-earning assets 140,384 124,835
---------- ---------
Total assets $2,047,288 $1,519,876
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts $1,118,287 12,550 4.49 % $ 824,040 7,991 3.88 %
Borrowed money 525,380 8,116 6.18 344,588 4,122 4.78
Guaranteed preferred beneficial interest
in Company's subordinated debt 57,327 1,359 9.48 58,595 1,392 9.51
---------- -------- ---------- ---------
Total interest-bearing liabilities 1,700,994 22,025 5.18 1,227,223 13,505 4.40
Non-interest-bearing liabilities 252,876 216,572
---------- ----------
Total liabilities 1,953,870 1,443,795
Shareholders' equity 93,418 76,081
---------- ---------
Total liabilities and stockholders $2,047,288 $1,519,876
========== ==========
Net interest income $ 15,825 $12,428
======== =======
Interest rate spread (3) 2.76 % 3.04 %
==== ====
Net yield on interest earning assets (4) 3.32 % 3.56 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.11 % 113.67 %
====== ======
</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 net interest income as a
percentage of average interest-earning assets
12
<PAGE>
Net interest income (on a tax-equivalent basis) increased $3.4 million
or 27.3% to $15.8 million for the three months ended June 30, 2000 compared to
$12.4 million for the same period 1999. The increase is due primarily to the
growth of average interest-earning assets from $1.4 billion at June 30, 1999 to
$1.9 billion at June 30, 2000 with an increase in yield of 50 basis points.
Offsetting the increase in asset yield was an increase in interest bearing
liabilities cost of funds of 78 basis points which accounted for a decrease in
the interest rate spread from 3.04% for the three months ended June 30, 1999 to
2.76% for the same period 2000. A change in the mix of interest-earning assets
and interest-bearing liabilities had a slightly negative impact on the net
interest margin, which declined 24 basis points to 3.32% for the June 30, 2000.
The increase in average interest-earning assets of $511.9 million
reflects an increase of $244.4 million in average loans and $266.6 million in
average investment securities. These assets were funded by an increase of $473.8
million of average interest-bearing liabilities and an increase of $36.3 million
of average non-interest bearing liabilities. The increase in interest-bearing
and non-interest bearing liabilities reflects 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 June
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 61 basis points from
3.88% for the three months ended June 30, 1999 to 4.49% 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 140 basis points from 4.78% for the three months ended June 30, 1999
to 6.18% for the same period in 2000.
The increase in the average yield on loans for the three months ended
June 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 8.0%
at June 30, 1999 to 9.5% at June 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 June 30, 2000,
the provision for loan losses amounted to $585,000, an increase of $ 65,000,
compared to $520,000 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 $717,000 for the three-month
period ended June 30, 2000 compared to the three-month period ended June 30,
1999. In most part, the decrease was a result of the closing of Sun Mortgage
Company in February 2000. There was no other income from mortgage banking
activities for the three month period ended June 30, 2000 compared to $738,000
for the same period in 1999. This decease was offset by an increase in service
charges on deposit accounts.
Other Expenses. Other expenses increased approximately $3.9 million, to
$14.6 million for the three months ended June 30, 2000 as compared to $10.7
million for the same period in 1999. Of the increase, $1.4 million was in
salaries and employee benefits, $476,000 was in occupancy expense, $487,000 was
in amortization of excess of cost over fair value of assets acquired and $1.2
million was in other 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 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.
13
<PAGE>
Income Taxes. Applicable income taxes decreased $504,000 for the
three months ended June 30, 2000 as compared to the same period in 1999.
Comparison of Operating Results for the Six Months Ended June 30, 2000 and 1999.
General. Net income decreased by $1.0 million for the six months ended
June 30, 2000 to $3.9 million from $4.9 million for the six months ended June
30, 1999. Net interest income increased $6.9 million and the provision for loan
losses increased $184,000 for the six months ended June 30, 2000 compared to the
same period in 1999. Other income decreased by $772,000 to $4.1 million for the
six months ended June 30, 2000 as compared to $4.9 million for the six months
ended June 30, 1999. Other expenses increased by $7.3 million to $28.1 million
for the six months ended June 30, 2000 as compared to $20.8 million for the six
months ended June 30, 1999. The return on average assets for the six months
ended June 30, 2000 and 1999 were 0.38% and 0.64%, respectively. The return on
average equity for the six months ended June 30, 2000 and 1999 were 8.49% and
12.60%, respectively.
Net Interest Income. The increase in net interest income (on a
tax-equivalent basis) was due to a $22.7 million increase in interest income (on
a tax-equivalent basis) partially offset by a $15.7 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 six months ended At or for the six months ended
June 30, 2000 June 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) $ 967,931 $ 43,224 8.93 % $ 732,029 $ 31,108 8.50 %
Investment securities (2) 913,133 30,925 6.77 649,012 20,243 6.24
Federal funds sold 2,005 60 5.98 5,962 125 4.19
---------- -------- --------- --------
Total interest-earning assets 1,883,069 74,209 7.88 1,387,003 51,476 7.42
Non-interest-earning assets 140,969 124,970
---------- ----------
Total assets $2,024,038 $1,511,973
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts $1,095,349 24,024 4.39 % $ 822,119 15,944 3.88 %
Borrowed money 532,369 15,961 6.00 341,681 8,246 4.83
Guaranteed preferred beneficial interest
in Company's subordinated debt 57,362 2,718 9.48 58,604 2,784 9.50
---------- -------- ---------- --------
Total interest-bearing liabilities 1,685,080 42,703 5.07 1,222,404 26,974 4.41
Non-interest-bearing liabilities 247,363 212,642
---------- ----------
Total liabilities 1,932,442 1,435,046
Shareholders' equity 91,595 76,927
---------- ----------
Total liabilities and stockholders
equity $2,024,038 $1,511,973
========== ==========
Net interest income $ 31,506 $ 24,502
======== ========
Interest rate spread (3) 2.81 % 3.01 %
==== ====
Net yield on interest earning assets (4) 3.35 % 3.53 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.75 % 113.47 %
====== ======
</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 net interest income as a
percentage of average interest-earning assets
15
<PAGE>
Net interest income (on a tax-equivalent basis) increased $7.0 million
or 28.6% to $31.5 million for the six months ended June 30, 2000 compared to
$24.5 million for the same period in 1999. The increase is due primarily to the
growth of average interest-earning assets from $1.4 billion at June 30, 1999 to
$1.9 billion at June 30, 2000, with an increase in yield of 46 basis points.
Offsetting the increase in asset yield was an increase in interest bearing
liabilities cost of funds of 66 basis points which accounted for a decrease in
the interest rate spread from 3.01% for the three months ended June 30, 1999 to
2.81% for the same period in 2000. A change in the mix of interest-earning
assets and interest-bearing liabilities had a slightly negative impact on the
net interest margin, which declined 18 basis points to 3.35% for the six months
ended June 30, 2000.
The increase in average interest-earning assets of $496.0 million
reflects an increase of $235.9 million in average loans and $264.1 million in
average investment securities. These assets were funded by an increase of $462.7
million of average interest-bearing and non-interest bearing liabilities and an
increase of $34.7 million of average non-interest bearing liabilities. The
increase in interest-bearing liabilities reflects 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 six months ended June 30,
2000, compared to the same period 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 51 basis points from 3.88% for
the six months ended June 30, 1999 to 4.39% 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 4.83% for the six months ended June 30, 1999 to 6.00% for the
same period in 2000.
The increase in the average yield on loans for the six months ended
June 30, 2000 compared to the same period 1999 reflects a increase in interest
on loans resulting from the raising of the gradual prime rate from 8.0% at June
30, 1999 to 9.5% at June 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 six months ended June 30, 2000, the
provision for loan losses amounted to $1.4 million, an increase of $184,000,
compared to $1.2 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 $772,000 for the six-month period
ended June 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 $110,000 from mortgage banking activities for the six month
period ended June 30, 2000 compared to income of $1.4 million for the same
period in 1999. This decrease was offset by an increase in service charges on
deposit accounts.
16
<PAGE>
Other Expenses. Other expenses increased approximately $7.3 million, to
$28.1 million for the six months ended June 30, 2000 as compared to $20.8
million for the same period 1999. Of the increase, $2.6 million was in salaries
and employee benefits, $900,000 was in occupancy expense, $1.0 million was in
amortization of excess of cost over fair value of assets acquired and $1.7
million was in miscellaneous expenses. Of these miscellaneous expenses $350,000
was 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 $500,000 for the six
months ended June 30, 2000 as compared to the same period in 1999. The decrease
resulted from lower pre-tax earnings.
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 June 30, 2000, 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 period by $242.2 million. This represents a negative
cumulative one-year gap ratio of 11.94%. 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.
18
<PAGE>
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at June 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 344,798 86,516 $ 397,204 $ 159,771 $ 988,289
Investment securities 397,455 42,300 65,956 381,083 886,794
Federal funds sold
----------------- ----------------- ------------------ ----------------- -----------------
Total interest-earning assets 742,253 128,816 463,160 540,854 1,875,083
----------------- ----------------- ------------------ ----------------- -----------------
Interest-bearing demand deposits 106,868 25,094 144,866 64,320 341,148
Savings deposits 3,095 9,374 52,250 70,986 135,705
Time certificates 207,043 277,913 135,946 3,620 624,522
Federal Home Loan Bank advances 55,032 101 20,617 3,449 79,199
Federal funds purchased 4,500 4,500
Loan payable 1,160 1,160
Securities sold under agreements
to repurchase 423,068 423,068
----------------- ----------------- ------------------ ----------------- -----------------
Total interest-bearing liabilities 800,766 312,482 353,679 142,375 1,609,302
----------------- ----------------- ------------------ ----------------- -----------------
Periodic Gap $ (58,513) $ (183,666) $ 109,481 $ 398,479 $ 265,781
================= ================= ================== ================= =================
Cumulative Gap $ (58,513) $ (242,179) $ (132,698) $ 265,781
================= ================= ================== =================
Cumulative Gap Ratio -2.88% -11.94% -6.54% 13.10%
================= ================= ================== =================
</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 June 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
The annual meeting of the shareholders of the Company was held on May
18, 2000 and the following matters were voted on:
Proposal 1. Election of directors
FOR WITHHELD
--- --------
Bernard A. Brown 8,300,342 223,269
Ike Brown 8,300,342 223,269
Jeffrey S. Brown 8,300,342 223,269
Sidney R. Brown 8,300,342 223,269
Peter Galetto, Jr. 8,300,342 223,269
Philip W. Koebig, III 8,300,342 223,269
Anne E. Koons 8,300,342 223,269
Proposal 2. Ratification of the amendment to the Sun Bancorp, Inc. 1997 Stock
Option Plan
FOR: 8,447,354
AGAINST: 413,448
ABSTAIN: 74,536
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 June 30, 2000:
None
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 August 11, 2000 Sun Bancorp, Inc.
-------------------------------------
(Registrant)
/s/ Philip W. Koebig, III
-------------------------------------
Philip W. Koebig, III
President and Chief Executive Officer
Date August 11, 2000 /s/ Dan. A. Chila
-------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
