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, 2002
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0 - 20957
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SUN BANCORP, INC.
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(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)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
$ 1.00 Par Value Common Stock 11,175,863 May 10, 2002
- ----------------------------- ---------------------------- -------------
Class Number of shares outstanding Date
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2002 2001
---- ----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 58,456 $ 67,557
Federal funds sold 4,745 11,525
---------- ----------
Cash and cash equivalents 63,201 79,082
Investment securities available for sale (amortized cost -
$679,832; 2002 and $648,340; 2001) 673,874 647,558
Loans receivable (net of allowance for loan losses -
$13,956; 2002 and $13,782; 2001) 1,136,789 1,089,155
Restricted equity investments 12,895 12,561
Bank properties and equipment, net 27,990 28,180
Real estate owned, net 1,393 898
Accrued interest receivable 12,639 11,089
Excess of cost over fair value of assets acquired, net 41,725 43,637
Deferred taxes 10,114 8,154
Other assets 12,907 9,111
---------- ----------
TOTAL $1,993,527 $1,929,425
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,543,076 $1,572,338
Advances from the Federal Home Loan Bank 146,832 74,008
Loans payable 26,160 1,160
Securities sold under agreements to repurchase 77,636 84,928
Other liabilities 14,118 9,704
---------- ----------
Total liabilities 1,807,822 1,742,138
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Guaranteed preferred beneficial interest in Company's subordinated debt 57,327 57,327
SHAREHOLDERS' EQUITY
Preferred stock, none issued - -
Common stock, $1 par value, 25,000,000 shares authorized,
Issued and outstanding: 10,644,358 in 2002 and 10,553,942 in 2001 10,664 10,554
Surplus 108,504 108,058
Retained earnings 13,457 11,864
Accumulated other comprehensive loss (3,932) (516)
Treasury stock at cost, 25,000 shares in 2002 (315) -
---------- ----------
Total shareholders' equity 128,378 129,960
---------- ----------
TOTAL $1,993,527 $1,929,425
========== ==========
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See notes to unaudited condensed consolidated financial statements
2
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months
Ended March 31,
--------------------------------
2002 2001
---- ----
(Dollars in thousands
except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 20,334 $ 22,732
Interest on taxable investment securities 6,593 10,978
Interest on non-taxable investment securities 505 491
Dividends on restricted equity investments 133 542
Interest on federal funds sold 53 225
----------- -----------
Total interest income 27,618 34,968
----------- -----------
INTEREST EXPENSE:
Interest on deposits 9,358 13,988
Interest on short-term borrowed funds 1,885 5,123
Interest on guaranteed preferred beneficial interest in Company's
subordinated debt 1,360 1,360
----------- -----------
Total interest expense 12,603 20,471
----------- -----------
Net interest income 15,015 14,497
PROVISION FOR LOAN LOSSES 1,000 1,296
----------- -----------
Net interest income after provision for loan losses 14,015 13,201
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OTHER INCOME:
Service charges on deposit accounts 1,666 1,454
Other service charges 114 92
(Loss) gain on sale of bank properties and equipment (14) 13
Gain on sale of investment securities available for sale 183 50
Other 852 625
----------- -----------
Total other income 2,801 2,234
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OTHER EXPENSES:
Salaries and employee benefits 6,741 5,888
Occupancy expense 1,904 1,876
Equipment expense 1,086 1,234
Data processing expense 830 758
Amortization of excess of cost over fair value of assets acquired 1,912 1,969
Other 2,111 1,918
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Total other expenses 14,584 13,643
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INCOME BEFORE INCOME TAXES 2,232 1,792
INCOME TAXES 639 510
----------- -----------
NET INCOME $ 1,593 $ 1,282
=========== ===========
Basic earnings per share $ 0.15 $ 0.12
=========== ===========
Diluted earnings per share $ 0.15 $ 0.12
=========== ===========
Weighted average shares, basic 10,599,862 10,284,653
=========== ===========
Weighted average shares, diluted 10,915,456 10,520,288
=========== ===========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
-----------------------
2002 2001
--------- --------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 1,593 $ 1,282
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,000 1,296
Provision for losses on real estate owned 44
Depreciation 569 598
Net amortization (accretion) of investments securities 468 (791)
Amortization of excess cost over fair value of assets acquired 1,912 1,969
Gain on sale of investment securities available for sale (183) (50)
Loss (gain) on sale of bank properties and equipment 14 (13)
Deferred income taxes (200) (524)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (1,550) 2,295
Other assets (3,796) 7,777
Other liabilities 4,414 1,540
-------- -------
Net cash provided by operating activities 4,241 15,423
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INVESTING ACTIVITIES:
Purchases of investment securities available for sale (182,633) (61,628)
Purchases of restricted equity securities (334)
Proceeds from maturities, prepayments or calls of investment
securities available for sale 145,548 38,000
Proceeds from sale of investment securities available for sale 5,308 90,475
Net increase in loans (49,164) (22,412)
Purchase of bank properties and equipment (393) (974)
Proceeds from the sale of bank properties and equipment 26
Proceeds from sale of real estate owned 35 181
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Net cash (used in) provided by investing activities (81,633) 43,688
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FINANCING ACTIVITIES:
Net (decrease) increase in deposits (29,262) 9,946
Net advances (repayments) under line of credit and repurchase agreements 65,532 (71,273)
Proceeds from other borrowings 25,000
Proceeds from exercise of stock options 453 229
Treasury stock purchased (315)
Proceeds from issuance of common stock 103 -
-------- -------
Net cash provided by (used in) financing activities 61,511 (61,098)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (15,881) (2,007)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 79,082 69,617
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 63,201 $67,610
======== =======
- ----------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
4
SUN BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except per share amounts, are in
thousands.)
(1) Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The unaudited condensed 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 Capital Trust III
("SunTrust III"), Sun National Bank, Delaware ("Sun Delaware"), Sun
National Bank ("Sun") and Sun's wholly-owned subsidiaries Med-Vine,
Inc., 2020 Properties, L.L.C. and Sun Financial Services, L.L.C. All
significant intercompany balances and transactions have been
eliminated. The Company merged Sun Delaware into Sun in the fourth
quarter 2001.
The accompanying unaudited condensed 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 accounting principles generally accepted
in the United States of America. 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, 2001. The results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2002 or any other period.
Stock dividend - On April 25, 2002, the Company's Board of Directors
declared a 5% stock dividend to be paid on May 23, 2002 to shareholders
of record on May 9, 2002.
Recent Accounting Principles - In June 2001, the Financial Accounting
Standards Board ("FASB") issued two new pronouncements: Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. As
adopted, SFAS No. 142 excluded from its scope the unidentifiable
intangible assets recognized in bank and thrift acquisitions in
accordance with SFAS 72, Accounting for Certain Acquisitions of Banking
and Thrift Institutions. The FASB has decided to undertake a
limited-scope project to reconsider part of the guidance in SFAS No.
72, including treatment of identified core deposit intangibles and
unidentifiable intangible assets. In the first quarter 2002, the FASB
has preliminarily decided to amend SFAS No. 72 to remove
stockholder-owned financial institutions from the scope of paragraphs
5-7 and remove stockholder-owned financial institutions from the scope
of FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When
a Savings and Loan Association or a Similar Institution Is Acquired in
a Business Combination Accounted for by the Purchase Method. In
addition, the FASB decided, for the transition provision related to
SFAS No. 72, that if the transaction was a business combination and the
core deposit intangible was separately recognized, then Companies would
cease amortization of all unidentifiable intangible assets. However, if
the transaction was not a business combination or if it is not possible
to determine, after the fact, whether the transaction was a business
combination, then Companies would continue amortization of all
unidentifiable intangible assets. The FASB has also decided that the
final Statement would be effective upon issuance with retroactive
restatement for the nonamortization of the unidentified intangible
asset to the beginning of the fiscal year in which SFAS No. 142 was
applied in its entirety. A final statement is expected to be issued in
the fourth quarter 2002. The adoption of SFAS Nos. 141 and 142 had no
impact on the financial position, results of operations, or cash flows
of the Company.
5
(2) Loans
The components of loans as of March 31, 2002 and December 31, 2001 were
as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Commercial and industrial $ 964,475 $ 911,145
Home equity 25,759 23,854
Second mortgages 50,689 49,047
Residential real estate 52,719 55,282
Installment 57,103 63,609
---------- ----------
Total gross loans 1,150,745 1,102,937
Allowance for loan losses (13,956) (13,782)
---------- ----------
Net Loans $1,136,789 $1,089,155
========== ==========
Non-accrual loans $ 10,036 $ 9,123
(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, 2002 December 31, 2001
-------------- -----------------
Balance, beginning of period $13,782 $10,636
Charge-offs (864) (5,416)
Recoveries 38 467
------- -------
Net charge-offs (826) (4,949)
Provision for loan losses 1,000 8,095
------- -------
Balance, end of period $13,956 $13,782
======= =======
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:
March 31, 2002 December 31, 2001
-------------- -----------------
Impaired loans with related reserve for loan
losses calculated under SFAS No. 114 $1,538 $1,643
Impaired loans with no related reserve for loan
losses calculated under SFAS No. 114 $7,602 $6,101
--- ------ ------
Total impaired loans $9,140 $7,744
====== ======
For the three
months ended For the year ended
March 31, 2002 December 31, 2001
-------------- -----------------
Average impaired loans $8,416 $6,787
Interest income recognized on impaired loans $13 $558
Cash basis interest income recognized on impaired loans $36 $651
6
(4) Deposits
Deposits consist of the following major classifications:
March 31, 2002 December 31, 2001
-------------- -----------------
Demand deposits - interest bearing $ 506,913 $ 523,737
Demand deposits - non-interest bearing 281,955 280,196
Savings deposits 307,460 275,146
Time certificates under $100,000 329,690 363,199
Time certificates $100,000 or more 117,058 130,060
---------- ----------
Total $1,543,076 $1,572,338
========== ==========
(5) Advances from the Federal Home Loan Bank
Federal Home Loan Bank ("FHLB") advances are collateralized under a
blanket collateral lien agreement. Advances were as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Convertible rate advances $ 45,000 $ 45,000
Term amortizing advances 101,832 29,008
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Total $ 146,832 $ 74,008
========== ==========
Term amortizing advances were as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Original principal $1,800
Interest rate 5.404%
Monthly payment $12
Maturity date October 8, 2008
Balance $1,617 $1,632
Original principal $2,600
Interest rate 5.867%
Monthly payment $18
Maturity date November 26, 2018
Balance 2,355 2,376
Original principal $25,000
Interest rate 3.890%
Monthly payment $459
Maturity date November 15, 2006
Balance 23,862 25,000
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 10, 2007
Balance 24,625 -
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 30, 2007
Balance 24,625 -
Original principal $25,000
Interest rate 4.740%
Monthly payment $350
Maturity date January 30, 2009
Balance 24,748 -
-------- -------
Total $101,832 $29,008
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7
(6) Loans Payable
As more fully described in Note 9, on March 29, 2002, the Company
borrowed a combined $25.0 million as short-term financing in connection
with the call of the Company's outstanding $28.0 million of 9.85% Sun
Trust I Preferred Securities. Of the total, $20.0 million was borrowed
to provide liquidity until the Company completed the issuance of $20.0
million Pooled Floating Rate Capital Securities on April 10, 2002. The
Company borrowed $10.0 million from a company affiliated with the
Chairman of the Board of Directors of the Company, $10.0 million from
an unrelated third-party bank and an additional $5.0 million from the
same unrelated bank. The terms and interest rate (9.85%) were the same
for both $10.0 million loans. The Company paid off both $10.0 million
loans, including accrued interest on April 10, 2002. The $5.0 million
uncollateralized demand borrowing is at an interest rate of 6.00% with
interest only monthly payments.
(7) 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 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. Total
comprehensive (loss) income for the three-month periods ended March 31,
2002 and 2001 was ($1,823,000) and $8,136,000, respectively.
(8) 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 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 daily closing price. 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.
For the Three Months
Ended March 31,
---------------
2002 2001
---- ----
Net income $ 1,593 $ 1,282
Dilutive stock options outstanding 1,534,685 1,031,213
Average exercise price per share $ 9.02 $ 5.23
Average market price - diluted basis $ 12.53 $ 8.14
Average common shares outstanding 10,599,862 10,284,653
Increase in shares due to exercise of options - diluted basis 315,594 235,635
---------- -----------
Adjusted shares outstanding - diluted 10,915,456 10,520,288
Net income per share - basic $ 0.15 $ 0.12
Net income per share - diluted $ 0.15 $ 0.12
8
(9) Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
Guaranteed preferred beneficial interest in Company's subordinated
debt consists of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Sun Trust I $28,040 $28,040
Sun Trust II 29,287 29,287
------- -------
$57,327 $57,327
======= =======
During the first quarter 2002, the Company notified the holders of the
outstanding $28.0 million of 9.85% Sun Trust I Preferred Securities of
its intention to call these securities contemporaneously with the
redemption of the Sun Trust I 9.85% Junior Subordinated Debentures on
April 1, 2002. During the second quarter, the Company wrote down the
unamortized debt issuance costs of the called securities in the amount
of $800,000, net of the tax effect of $400,000 (approximately $0.07 per
diluted share). The Company funded this call with short-term borrowings
of $25.0 million and a $3.0 million dividend from Sun. On April 10,
2002, the Company issued $20.0 million Pooled Floating Rate Capital
Securities ("Sun Trust III Capital Securities"). The interest rate
resets every six months to LIBOR plus 3.70%, with an initial rate of
6.02%, and will not exceed 11.00% through five years from its issuance.
The proceeds were used to pay down $20.0 million of short-term
borrowings. The Company will recognize a pretax interest expense saving
from these transactions of $900,000 (approximately $0.05 per diluted
share) for the nine-month period ending December 31, 2002.
The sole asset of Sun Trust II is $29.9 million original principal
amount of 8.875% Junior Subordinated Debentures issued by the Company
that mature on December 31, 2028. At March 31, 2002 and December 31,
2001, the Company had repurchased 61,300 shares. The Company has the
right to optionally redeem Sun trust II Debentures prior to the
maturity date of December 31, 2028, on or after December 31, 2003, at
100% of the stated liquidation amount, plus accrued and unpaid
distributions, if any, to the redemption date.
(10) Stock Repurchase Plan
In February 2002, the Board of Directors of the Company authorized the
initiation of a stock repurchase plan covering up to approximately 3%,
or 320,000 shares of the Company's outstanding common stock. At March
31, 2002, the Company repurchased 25,000 shares for $315,000.
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
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). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN FINANCIAL SERVICES'
LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
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.
10
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 2002 increased by $64.1 million or 3.3% to
$1.99 billion as compared to $1.93 billion at December 31, 2001. The increase
was primarily due to an increase in loans receivable of $47.6 million and in
investment securities of $26.3 million, partially offset by a decrease in cash
and cash equivalents of $15.9 million. The overall increase in total assets
reflects the Company's strategy on growth of its core businesses, with emphasis
on commercial lending and retail banking, while sustaining adequate liquidity,
managing interest rate risk and maintaining strong capital.
Cash and cash equivalents decreased $15.9 million, from $79.1 million
at December 31, 2001 to $63.2 million at March 31, 2002. At December 31, 2001, a
portion of the Company's cash and cash equivalents represented temporary
liquidity from the sales, calls and maturities of investment securities during
the end of the fourth quarter 2001.
Investment securities available for sale increased $26.3 million or
4.1%, from $647.6 million at December 31, 2001 to $673.9 million at March 31,
2002. The increase in investment securities during the first quarter 2002 was
consistent with the Company's asset and liability management goals which are
designed to provide a portfolio of high quality investments which optimizes
interest income within acceptable limits of safety and liquidity. The increase
was primarily the result of $182.6 million of security purchases partially
offset by $145.5 million of proceeds from maturities, prepayments or calls of
investment securities.
Net loans receivable at March 31, 2002 was $1.14 billion, an increase
of $47.6 million from $1.10 billion at December 31, 2001. 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,
2002 was 1.12% compared to 1.02% at December 31, 2001. The ratio of allowance
for loan losses to total non-performing loans was 121.55% at March 31, 2002
compared to 134.84% at December 31, 2001. The increase in these ratios was the
result of an increase in non-performing assets to $11.5 million at March 31,
2002 from $10.2 million at December 31, 2001. The ratio of allowance for loan
losses to total loans was 1.21% at March 31, 2002 compared to 1.25% at December
31, 2001.
Excess of cost over fair value of assets acquired decreased $1.9
million from $43.6 million at December 31, 2001 to $41.7 million at March 31,
2002. The decrease was a result of scheduled amortization.
Total deposits were $1.54 billion at March 31, 2002, reflecting a $29.3
million decrease over December 31, 2001. The Company's core deposits, (demand
and savings deposits) increased $17.3 million while the non-core deposits (time
deposits) declined $46.5 million. The Company's deposit strategy stresses the
importance of building a relationship with each and every customer. To help
facilitate these relationships, the Company has implemented a relationship
pricing strategy that has helped to dramatically increase core deposit growth.
This relationship strategy has enabled the Company to favorably increase the
deposit mix with a higher concentration of core deposits.
Advances from the Federal Home Loan Bank increased $72.8 million to
$146.8 million at March 31, 2002 from $74.0 million at December 31, 2001. These
advances are in line with the Company's ALCO interest rate sensitivity policies,
by matching longer-term assets with longer-term liabilities.
Other borrowings at March 31, 2002 were $26.2 million, an increase of
$25.0 million from $1.2 million at December 31, 2001. The increase was in
short-term borrowing of $25.0 million, which the Company used to fund, in part,
the call of its Sun Trust I Preferred Securities on April 1, 2002. On April 10,
2002, the Company paid off $20.0 million of its short-term borrowings with the
issuance of $20.0 million Pooled Floating Rate Capital Securities. The Company
will recognize a pretax interest expense saving from these transactions of
$900,000 (approximately $0.05 per diluted share) for the nine-months period
ending December 31, 2002.
11
Securities sold under agreement to repurchase decreased $7.3 million
from $84.9 million at December 31, 2001 to $77.6 million at March 31, 2002,
reflecting the seasonality of these borrowings.
Total shareholders' equity decreased by $1.6 million, from $130.0
million at December 31, 2001, to $128.4 million at March 31, 2002. The decrease
was primarily the result of a $3.4 million decrease in accumulated other
comprehensive loss, partially offset by first quarter earnings amounting to $1.6
million.
In February 2002, the Board of Directors of the Company authorized the
initiation of a stock repurchase plan covering up to approximately 3%, or
320,000 shares of the Company's outstanding common stock. At March 31, 2002, the
Company repurchased 25,000 shares for $315,000.
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 and maturities of loans, sales and maturities of investment
securities, net income and increases in deposits and borrowings are the primary
sources of liquidity of the Company.
The Company anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for the Company's future operating, investing and financing needs. In
addition to cash and cash equivalents of $63.2 million at March 31, 2002, the
Company has additional secured borrowing capacity with the FHLB and other
sources. Management will continue to monitor the Company's liquidity in order to
maintain it at a level that is adequate but not excessive.
Net cash used in investing activities for the quarter ended March 31,
2002, was $81.6 million compared to net cash provided by investing activities
for the quarter ended March 31, 2001 of $43.7 million, a difference of $125.3
million. Net cash provided by financing activities for the quarter ended March
31, 2002, was $61.5 million compared to net cash used in financing activities
for the quarter ended March 31, 2001 of $61.1 million, a difference of $122.6
million. The activity during the first quarter 2001 reflects the Company's
continued focus on overall balance sheet and capital management. Continuing its
strategy implemented during the later part of 2000, the Company concentrated on
growth of its core businesses, with emphasis on commercial lending and retail
banking, while also deleveraging the balance sheet through a reduction in
investments of $66.8 million and borrowings of $71.2 million. By year-end 2001,
the Company had substantially executed its de-leveraging strategy. During the
first quarter 2002, consistent with the Company's overall balance sheet and
funding management, the Company increased FHLB advances by $65.5 million in
order to match longer-term assets with longer-term liabilities. These advances
are in line with the Company's ALCO interest rate sensitivity and liquidity
policies. On March 29, 2002, the Company borrowed $25.0 million primarily to
provide liquidity from April 1, 2002, when the Company called its outstanding
$28.0 million of 9.85% Sun Trust I Preferred Securities ("Sun Trust I
Securities") until April 10, 2002 when Company issued $20.0 million Pooled
Floating Rate Capital Securities ("Sun Trust III Capital Securities").
Management has developed a capital plan for the Company and the Bank
that should allow the Company and the Bank to grow capital internally at levels
sufficient for achieving its growth projections and operating and financial
risks. It is the Company's intention to maintain "well-capitalized" risk-based
capital levels. The Company has also considered a plan for contingency capital
needs, and when appropriate, the Company's Board of Directors may consider
various capital raising alternatives.
As part of its capital plan, the Company issued trust preferred
securities that qualify as Tier 1 or core capital of the Company, subject to a
25% capital limitation under risk-based capital guidelines developed by the
Federal Reserve. The portion that exceeds the 25% capital limitation qualifies
as Tier 2, or supplementary capital of the Company. During the first quarter
2002, the Company notified the holders of the outstanding $28.0 million of 9.85%
Sun Trust I Securities of its intention to call these securities
contemporaneously with the redemption of the Sun Trust I 9.85% Junior
Subordinated Debentures on April 1, 2002. The Company funded this call with
short-term borrowings of $25.0 million and a $3.0 million dividend from Sun. On
April 10, 2002, the Company issued $20.0 million Sun Trust III Capital
Securities. The proceeds were used to pay down $20.0 million of short-term
borrowings.
12
Comparison of Operating Results for the Three Months Ended March 31, 2002 and
2001
Net income increased by $311,000, or 24.3% for the three months ended
March 31, 2002 to $1.6 million from $1.3 million for the three months ended
March 31, 2001. As more fully described below, the increase in net income was
due to an increase of $518,000 in net interest income, a decrease of $296,000 in
the provision for loan losses and an increase of $567,000 in non-interest
income, partially offset by an increase in non-interest expenses of $941,000.
Net Interest Income. The increase in net interest income (on a
tax-equivalent basis) from March 31, 2002 compared to March 31, 2001 was due to
a $7.9 million decrease in interest expense partially offset by a $7.4 million
decrease in interest income (on a tax-equivalent basis).
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.
At or for the three months ended At or for the three months ended
March 31, 2002 March 31, 2001
---------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2) $1,123,734 $20,334 7.24% $ 1,054,631 $22,732 8.62%
Investment securities (3) 682,788 7,482 4.38 743,118 12,260 6.60
Federal funds sold 12,534 53 1.68 16,473 225 5.46
---------- ------ --------- -------
1,819,056 27,869 6.13 1,814,222 35,217 7.76
Non-interest-earning assets 146,111 145,237
---------- ----------
$1,965,167 $1,959,459
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts
Deposits:
Core deposits 822,637 4,295 2.09% 535,426 4,384 3.27%
Time deposits 463,114 5,063 4.37 633,131 9,605 6.07
---------- ------- ---------- -------
Total interest-bearing deposits 1,285,751 9,358 2.91 1,168,556 13,988 4.79
Borrowings:
Repurchase agreements with 4.81
customers 78,905 184 0.94 73,934 890 4.81
Repurchase agreements with FHLB 0 0 0.00 234,179 3,384 5.78
FHLB term advances 133,461 1,674 5.02 49,121 809 6.59
Other borrowed money 2,704 27 4.00 3,271 40 4.94
---------- ------- ---------- -------
Total borrowed money 215,070 1,885 3.51 360,505
5,123 5.68
Guaranteed preferred beneficial
interest 57,327 1,360 9.49 57,327 1,360 9.49
---------- ------- ---------- -------
Total Interest-bearing
liabilities: 1,558,148 12,603 3.24 1,586,388 20,471 5.16
------- -------
Non-interest-bearing liabilities 275,227 252,218
---------- ----------
1,833,375 1,838,606
Shareholders' equity 131,792 120,853
---------- ----------
$1,965,167 $1,959,459
========== ==========
Net interest income $15,266 $14,746
======= =======
Interest rate spread (4) 2.89% 2.60%
====== ======
Net yield on interest earning assets (5) 3.36% 3.25%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.74% 114.36%
====== ======
Footnotes described on following page
13
(1) Average balances include non-accrual loans
(2) Loan fees are included in interest income and the amount is not material
for this analysis
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities
(5) Net yield on interest earning assets represents net interest income as a
percentage of average interest-earning assets
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Quarter Ended March 31,
2002 vs. 2001
------------------------------
Increase (Decrease)
Due to
------------------------------
Volume Rate Net
------ ---- ---
Interest income:
Loans receivable $ 1,417 $(3,815) $(2,398)
Investment securities (930) (3,848) (4,778)
Federal funds sold (44) (128) (172)
-------- ------- -------
Total interest-earning assets $ 443 $(7,791) $(7,348)
-------- ------- -------
Interest expense:
Deposit accounts:
Core deposits $ 2,348 $(2,436) $ (89)
Time deposits (2,223) (2,319) (4,542)
-------- ------- -------
Total interest-bearing deposits 125 (4,755) (4,630)
Borrowings:
Repurchase agreements with customers 56 (761) (705)
Repurchase agreements with FHLB (3,384) - (3,384)
FHLB advances 1,098 (233) 865
Other borrowed money (7) (7) (14)
Total borrowed money (2,237) (1,001) (3,238)
-------- ------- -------
Guaranteed preferred beneficial
interest in Company's subordinated debt - - -
-------- ------- -------
Total interest-bearing liabilities $ (2,112) $(5,756) $(7,868)
-------- ------- -------
Net change in interest income $ 2,555 $(2,035) $ 520
======== ======= =======
14
Net interest income (on a tax-equivalent basis) increased $520,000 or
3.5% to $15.3 million for the quarter ended March 31, 2002 compared to $14.7
million for the same period in 2001. This increase is primarily due to the
change in the volume of interest-earning assets and interest-bearing
liabilities, as well as the number of market rate decreases between periods.
From the volume component, net interest income (on a tax-equivalent basis)
increased $2.5 million and was partially offset by the rate component that
decreased net interest income by $2.0 million. The change in the average
balances of the interest-earning assets and the interest-bearing liabilities
reflects the Company's continued focus on overall balance sheet management by
concentrating on the growth of its core businesses.
Interest income (on a tax-equivalent basis) decreased $7.3 million, or
20.9% to $27.9 million for the three months ended March 31, 2002 compared to
$35.2 million for the same period in 2001. The decrease in interest income was
due to the continued drop in interest rates, which lowered the yield on average
interest-earning assets by 163 basis points. Interest income (on a
tax-equivalent basis) on investment securities decreased $4.8 million caused by
a decrease in yield of 222 basis points with a reduction in the average balance
from $743.1 million at March 31, 2001 to $682.8 million at March 31, 2002. In
addition, interest income on loans receivable decreased due to a decrease in
yield of 138 basis points offset by an increase in average balance of loans
receivable from $1.05 billion at March 31, 2001 to $1.12 billion at March 31,
2002.
Interest expense decreased $7.9 million or 38.4% to $12.6 million for
the three months ended March 31, 2002 compared to $20.5 million for the same
period in 2001. The decrease in interest expense was due primarily to the
overall decrease in interest rates, the change in the mix of deposits between
core and time deposits, and the decrease in volume of borrowed money. The change
in interest rates decreased overall cost of funds by 192 basis points, or $5.8
million. The change in the mix of deposits is the result of the Company
implementing a relationship pricing strategy that has enabled the Bank to
favorably increase the deposit mix with a higher concentration of lower costing
core deposits. The increase in the average balance of core deposits from $535.4
million at March 31, 2001 to $822.6 million at March 31, 2002, resulted in the
increase in the volume component of interest expense of $2.3 million. The core
deposit increase was partially offset with a decrease in the average balance of
time deposits from $633.1 million at March 31, 2001 to $463.1 million at March
31, 2002, which resulted in the decrease in the volume component of interest
expense of $2.2 million. An additional $2.2 million decrease in the volume
component of interest expense was the result of the decrease in the aggregate
volume of borrowed money. The volume component of interest expense decreased
$3.4 million as the Company fully paid off repurchase agreements with the FHLB,
which was partially offset by an increase in the volume component of interest
expense of $1.1 million with increased FHLB advances. These advances are in line
with the Company's ALCO interest rate sensitivity and liquidity management, by
matching longer-term assets with longer-term liabilities.
The increase in net yield on interest-earning assets for the three
months ended March 31, 2002, compared to the same period in 2001, was primarily
due to the average cost of funds reduction being greater than the reduction in
the Company's interest-earning assets.
Provision for Loan Losses. For the three months ended March 31, 2002,
the provision for loan losses was $1.0 million, a decrease of $296,000, compared
to $1.3 million for the same period in 2001. Commencing in the second quarter
2001, the Company focused on reinforcing its ongoing loan portfolio management,
enhancing the credit review process to effectively address the current risk
profile of the portfolio and a more aggressive approach to troubled credits. The
result was that non-performing loans have been reduced from a high of $14.6
million during 2001 to $11.5 million at March 31, 2002. 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. The allowance for loan losses at
March 31, 2002 was $14.0 million or 1.21% of loans. This compares to the
allowance for loan losses of $13.8 million at March 31, 2001, or 1.25% of loans.
Other Income. Other income increased $567,000, or 25.4% for the
three-month period ended March 31, 2002 compared to the three-month period ended
March 31, 2001. The increase was primarily the result of an increase in the
volume of service charges on deposit accounts. In addition, gain on the sale of
investment securities was $183,000 for the three months ended March 31, 2002
compared to a gain of $50,000 in the same period of 2001.
15
Other Expenses. Other expenses increased $941,000, or 6.9% to $14.6
million for the three months ended March 31, 2002 as compared to $13.6 million
for the same period in 2001. Of the increase, $853,000 was in salaries and
employee benefits needed to support the Company's initiatives announced in 2001.
Income Taxes. Applicable income taxes increased $129,000 for the three
months ended March 31, 2002 as compared to the same period in 2001. The increase
resulted from higher pre-tax earnings.
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 and repricing characteristics of the interest-earning
assets and interest-bearing liabilities and the volatility of interest rates. If
the Company's assets have shorter maturity or repricing terms than its
liabilities, the Company's earnings will tend to be negatively affected during
periods of declining interest rates. Conversely, this mismatch would benefit the
Company during periods of increasing interest rates. Management monitors the
relationship between the interest rate sensitivity of the Company's assets and
liabilities.
Gap Analysis
Banks have become increasingly concerned with the extent to which they
are able to match 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 time period. On a monthly basis, the Bank 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. Management
and the Board of Directors monitor the Company's gap position quarterly.
The Asset/Liability Committee of the Bank's Board of Directors discuss,
among other things, interest rate risk. The Bank also uses simulation models to
measure the impact of potential changes of up to 300 basis points in interest
rates on net interest income. Sudden changes to interest rates should not have a
material impact to results of operations. Should the Bank experience a positive
or negative mismatch in excess of the approved range, it has a number of
remedial options. The Bank 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. The Bank can also price deposit products to attract deposits with
maturity characteristics that can lower their exposure to interest rate risk.
At March 31, 2002, the Company had a positive position with respect to
its exposure to interest rate risk. Total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing during the same time period by $41.6 million, representing a
positive cumulative one-year gap ratio of 2.09%. As a result, the cost of
interest-bearing liabilities of the Company should adjust to changes in interest
rates at a slower rate than yield on interest-earning assets of the Company.
16
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities at March 31, 2002. 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 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
duration of those deposits.
Maturity/Repricing Time Periods
0-3 Months 4-12 Months 1-5 Years Over 5 Yrs. Total
---------- ----------- --------- ----------- -----
FHLB interest-bearing deposit $ 2,626 $ 2,626
Loans receivable 363,493 $151,287 $567,860 $ 68,105 1,150,745
Investment securities 182,386 77,415 329,212 103,714 692,727
Federal funds sold 4,745 - - 4,745
-------- -------- -------- -------- ----------
Total interest-earning assets 553,250 228,702 897,072 171,819 1,850,843
-------- -------- -------- -------- ----------
Interest-bearing demand deposits 165,344 47,161 268,518 25,890 506,913
Savings deposits 13,674 41,021 232,330 20,435 307,460
Time certificates 130,027 194,174 120,787 1,760 446,748
Federal Home Loan Bank Advances 4,259 12,863 93,876 35,834 146,832
Loan payable 26,160 26,160
Securities sold under agreements
to repurchase 77,636 77,636
Guaranteed interest in Company's
subordinated debt 28,040 - - 29,287 57,327
-------- -------- -------- -------- ----------
Total interest-bearing liabilities 445,140 295,219 715,511 113,206 1,569,076
-------- -------- -------- -------- ----------
Periodic Gap $108,110 $(66,517) $181,561 $ 58,613 $ 281,767
======== ======== ======== ======== ==========
Cumulative Gap $108,110 $ 41,593 $223,154 $281,767
======== ======== ======== ========
Cumulative Gap Ratio 5.42% 2.09% 11.19% 14.13%
======== ======== ======== ========
17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at March 31, 2002. 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
The following current reports on Form 8-K were filed during the
quarter ended March 31, 2002:
The Company filed a Current Report on Form 8-K on February 26, 2002
The Company filed a Current Report on Form 8-K on January 25, 2002
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sun Bancorp, Inc.
-----------------
(Registrant)
Date May 10, 2002 /s/ Thomas A. Bracken
------------ ---------------------
Thomas A. Bracken
President and Chief Executive Officer
Date May 10, 2002 /s/ Dan. A. Chila
------------ -----------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer
19