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, 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 (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)
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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 11,193,496 August 09, 2002
- ---------------------------- ---------- ---------------
Class Number of shares outstanding Date
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2002 2001
---- ----
(Dollars in thousands)
ASSETS
Cash and due from banks $ 74,332 $ 67,557
Federal funds sold 265 11,525
----------- -----------
Cash and cash equivalents 74,597 79,082
Investment securities available for sale (amortized cost -
$664,808; 2002 and $648,340; 2001) 669,515 647,558
Loans receivable (net of allowance for loan losses -
$14,973; 2002 and $13,782; 2001) 1,194,571 1,089,155
Restricted equity investments 13,475 12,561
Bank properties and equipment, net 28,568 28,180
Real estate owned, net 733 898
Accrued interest receivable 12,619 11,089
Excess of cost over fair value of assets acquired, net 39,813 43,637
Deferred taxes 7,238 8,154
Other assets 6,289 9,111
----------- -----------
TOTAL $ 2,047,418 $ 1,929,425
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,620,801 $ 1,572,338
Federal funds purchased 5,000
Advances from the Federal Home Loan Bank 150,820 74,008
Securities sold under agreements to repurchase 70,047 84,928
Loans payable 6,160 1,160
Other liabilities 8,464 9,704
----------- -----------
Total liabilities 1,861,292 1,742,138
----------- -----------
Guaranteed preferred beneficial interest in Company's subordinated debt 49,287 57,327
SHAREHOLDERS' EQUITY
Preferred stock, none issued
Common stock, $1 par value, 25,000,000 shares authorized,
Issued and outstanding: 11,215,596 in 2002 and 10,553,942 in 2001 11,215 10,554
Surplus 114,558 108,058
Retained earnings 8,274 11,864
Accumulated other comprehensive income (loss) 3,107 (516)
Treasury stock at cost, 25,000 shares in 2002 (315) --
----------- -----------
Total shareholders' equity 136,839 129,960
----------- -----------
TOTAL $ 2,047,418 $ 1,929,425
============ ===========
- --------------------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
2
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
INTEREST INCOME:
Interest and fees on loans $ 20,995 $ 22,150 $ 41,329 $ 44,882
Interest on taxable investment securities 6,863 9,267 13,456 20,245
Interest on non-taxable investment securities 504 494 1,009 985
Interest on restricted equity investments 173 422 306 964
Interest on federal funds sold 80 495 133 720
----------- ------------ ----------- -----------
Total interest income 28,615 32,828 56,233 67,796
----------- ------------ ----------- -----------
INTEREST EXPENSE:
Interest on deposits 8,959 13,405 18,317 27,393
Interest on short-term borrowed funds 2,271 3,704 4,156 8,827
Interest on guaranteed preferred beneficial interest in
Company's subordinated debt 937 1,359 2,297 2,719
----------- ------------ ----------- -----------
Total interest expense 12,167 18,468 24,770 38,939
----------- ------------ ----------- -----------
Net interest income 16,448 14,360 31,463 28,857
PROVISION FOR LOAN LOSSES 1,000 3,684 2,000 4,980
----------- ------------ ----------- -----------
Net interest income after provision for loan losses 15,448 10,676 29,463 23,877
----------- ------------ ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 1,733 1,696 3,399 3,150
Other service charges 114 100 228 192
(Loss) gain on sale of bank properties and equipment (14) 13
Gain on sale of investment securities 616 69 799 119
Other 794 772 1,646 1,397
----------- ------------ ----------- -----------
Total other income 3,257 2,637 6,058 4,871
----------- ------------ ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 6,849 5,922 13,590 11,810
Occupancy expense 1,960 1,658 3,864 3,534
Equipment expense 1,203 1,225 2,289 2,459
Data processing expense 789 816 1,619 1,574
Amortization of excess of cost over fair value of
assets acquired 1,912 1,971 3,824 3,940
Other 3,076 2,859 5,187 4,777
----------- ------------ ----------- -----------
Total other expenses 15,789 14,451 30,373 28,094
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 2,916 (1,138) 5,148 654
INCOME TAXES (BENEFIT) 887 (477) 1,526 33
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 2,029 $ (661) $ 3,622 $ 621
=========== =========== =========== ===========
Less: Trust Preferred issuance costs write-off $ 777 $ - $ 777 $ -
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 1,252 $ (661) $ 2,845 $ 621
=========== =========== =========== ===========
Basic earnings per share $ 0.12 $ (0.06) $ 0.26 $ 0.06
=========== =========== =========== ===========
Diluted earnings per share $ 0.11 $ (0.06) $ 0.25 $ 0.06
=========== =========== =========== ===========
Weighted average shares - basic 10,875,908 10,824,935 10,737,885 10,811,910
=========== =========== =========== ===========
Weighted average shares - diluted 11,371,254 11,157,801 11,170,883 11,063,701
=========== =========== =========== ===========
- --------------------------------------------------------------------
See notes to unaudited condensed consolidated financial statements
3
SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
----------------------
2002 2001
---- ----
(In thousands)
OPERATING ACTIVITIES:
Net income $ 3,622 $ 621
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,000 4,980
Provision for losses on real estate owned 117 310
Depreciation 1,152 1,208
Net amortization (accretion) of investments securities 968 (1,553)
Amortization of excess cost over fair value of assets acquired 3,824 3,940
Gain on sale of investment securities available for sale (799) (119)
Loss (gain) on sale of bank properties and equipment 14 (13)
Deferred income taxes (950) (1,959)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (1,530) 3,534
Other assets 2,045 1,304
Other liabilities (1,240) 2,167
--------- ---------
Net cash provided by operating activities 9,223 14,420
--------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (344,447) (185,180)
Purchases of restricted equity securities (914) (79)
Proceeds from maturities, prepayments or calls of investment
securities available for sale 287,688 162,678
Proceeds from sale of investment securities available for sale 40,152 137,745
Net increase in loans (108,080) (35,538)
Purchase of bank properties and equipment (1,554) (749)
Proceeds from the sale of bank properties and equipment 26
Proceeds from sale of real estate owned 712 274
--------- ---------
Net cash (used in) provided by investing activities (126,473) 79,177
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 48,463 74,728
Net advances (repayments) under line of credit and repurchase agreements 66,931 (142,305)
Proceeds from other borrowings 25,000
Repayment of other borrowings (20,000)
Proceeds from exercise of stock options 573 229
Proceeds from issuance of Trust Preferred Securities 20,000
Redemption of Trust Preferred Securities (28,040)
Payments for fractional interests resulting from stock dividend (6) (4)
Treasury stock purchased (315)
Proceeds from issuance of common stock 159 124
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Net cash provided by (used in) financing activities 112,765 (67,228)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,485) 26,369
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 79,082 69,617
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 74,597 $ 95,986
========= =========
- --------------------------------------------------------------------------------
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")
(liquidated in April 2002), 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 and six months ended June 30,
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 paid on May 23, 2002 to shareholders of record
on May 9, 2002.
Recent Accounting Pronouncements - 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 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 were as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Commercial and industrial $ 1,013,567 $ 911,145
Home equity 32,221 23,854
Second mortgages 54,755 49,047
Residential real estate 53,556 55,282
Installment 55,445 63,609
----------- -----------
Total gross loans 1,209,544 1,102,937
Allowance for loan losses (14,973) (13,782)
----------- -----------
Net Loans $ 1,194,571 $ 1,089,155
=========== ===========
Non-accrual loans $ 10,054 $ 9,123
(3) Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
For the six
months ended For the year ended
June 30, 2002 December 31, 2001
------------- -----------------
Balance, beginning of period $ 13,782 $ 10,636
Charge-offs (864) (5,416)
Recoveries 55 467
----------- -----------
Net charge-offs (809) (4,949)
Provision for loan losses 2,000 8,095
----------- -----------
Balance, end of period $ 14,973 $ 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 SFAS Nos. 114
and 118 issued by the FASB. 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:
June 30, 2002 December 31, 2001
------------- -----------------
Impaired loans with related
reserve for loan losses
calculated under SFAS No. 114 $ 1,020 $ 1,643
Impaired loans with no related
reserve for loan losses
calculated under SFAS No. 114 $ 8,497 6,101
----------- ----------
Total impaired loans $ 9,517 $ 7,744
=========== ==========
For the six
months ended For the year ended
June 30, 2002 December 31, 2001
------------- -----------------
Average impaired loans $ 9,217 $ 6,787
Interest income recognized on
impaired loans $ 40 $ 558
Cash basis interest income
recognized on impaired $ 61 $ 651
6
(4) Deposits
Deposits consist of the following major classifications:
June 30, 2002 December 31, 2001
------------- -----------------
Demand deposits - interest bearing $ 572,568 $ 523,737
Demand deposits - non-interest bearing 289,168 280,196
Savings deposits 310,543 275,146
Time certificates under $100,000 319,376 363,199
Time certificates $100,000 or more 129,146 130,060
---------- ----------
Total $1,620,801 $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:
June 30, 2002 December 31, 2001
------------- -----------------
Convertible rate advances $ 53,200 $ 45,000
Term amortizing advances 97,620 29,008
---------- ----------
Total $ 150,820 $ 74,008
========== ==========
Term amortizing advances were as follows:
June 30, 2002 December 31, 2001
------------- -----------------
Original principal $1,800
Interest rate 5.404%
Monthly payment $12
Maturity date October 8, 2008
Balance $1,603 $1,632
Original principal $2,600
Interest rate 5.867%
Monthly payment $18
Maturity date November 26, 2018
Balance 2,334 2,376
Original principal $25,000
Interest rate 3.890%
Monthly payment $459
Maturity date November 15, 2006
Balance 22,713 25,000
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 10, 2007
Balance 23,491 -
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 30, 2007
Balance 23,491 -
Original principal $25,000
Interest rate 4.740%
Monthly payment $350
Maturity date January 30, 2009
Balance 23,988 -
------- -------
Total $97,620 $29,008
======= =======
7
On June 6, 2002, the Company executed an $8.2 million Convertible rate
advance, at a rate of 4.854%, maturing on June 6, 2007. Monthly payments
are interest only during the term of the advance.
(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, at an
interest rate of 6.00% with interest only monthly payments, and was paid
off on July 11, 2002.
(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 income for the
three-months ended June 30, 2002 and 2001 amounted to $9,068,000 and
$1,070,000, respectively. Total comprehensive income for the six-months
ended June 30, 2002 and 2001 amounted to $7,245,000 and $9,206,000,
respectively.
(8) Earnings Per Share
Basic earnings per share is computed by dividing income available to common
shareholders (net income less Trust Preferred issuance costs write-off), 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 available to common shareholders 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 For the
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 2,029 $ (661) $ 3,622 $ 621
Less: Trust Preferred issuance costs write-off $ 777 $ - $ 777 $ -
------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ 1,252 $ (661) $ 2,845 $ 621
============ ============ ============ ============
Dilutive stock options outstanding 2,218,862 1,404,968 2,142,605 1,369,383
Average exercise price per share $ 9.51 $ 5.45 $ 9.34 $ 5.51
Average market price $ 13.67 $ 8.64 $ 12.84 $ 8.19
Average common shares outstanding 10,875,908 10,824,935 10,737,885 10,811,910
Increase in shares due to exercise of options - diluted basis 495,346 332,866 432,998 251,791
------------ ------------ ------------ ------------
Adjusted shares outstanding - diluted 11,371,254 11,157,801 11,170,883 11,063,701
Net earnings per share - basic $ 0.12 $ (0.06) $ 0.26 $ 0.06
Net earnings per share - diluted $ 0.11 $ (0.06) $ 0.25 $ 0.06
8
(9) Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
Guaranteed preferred beneficial interest in Company's subordinated debt
consists of the following:
June 30, 2002 December 31, 2001
------------- -----------------
Sun Trust I $28,040
Sun Trust II $29,287 29,287
Sun Trust III 20,000 -
------- -------
$49,287 $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 $777,000, net of
income tax, through a charge to equity. 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 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 June 30, 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.
On July 11, 2002, the Company issued $10.0 million Pooled Floating Rate
Capital Securities ("Sun Trust IV Capital Securities"). The interest rate
resets every three months to LIBOR plus 3.65%, with an initial rate of
5.51%, and will not exceed 11.95% through five years from its issuance. The
proceeds were used to pay down $5.0 million of short-term borrowings and
for general corporate purposes.
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 June 30, 2002 increased by $118.0 million, or 6.1% to $2.05
billion as compared to $1.93 billion at December 31, 2001. The increase was
primarily due to an increase in net loans receivable of $105.4 million and in
investment securities of $22.0 million, partially offset by a decrease in cash
and cash equivalents of $4.5 million and a decrease in excess of cost over fair
value of assets acquired of $3.8 million. The overall increase in total assets
reflects the Company's continued strategy on growth of its core businesses, with
emphasis on commercial and small business lending and community banking, while
sustaining adequate liquidity, managing interest rate risk and maintaining
strong capital.
Cash and cash equivalents decreased $4.5 million, from $79.1 million at
December 31, 2001 to $74.6 million at June 30, 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 $22.0 million, or 3.4%,
from $647.6 million at December 31, 2001 to $669.5 million at June 30, 2002. The
increase in investment securities during the six months ended June 30, 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 $344.4 million of security purchases partially
offset by $287.7 million of proceeds from maturities, prepayments or calls of
investment securities.
Net loans receivable at June 30, 2002 was $1.19 billion, an increase of
$105.4 million, or 9.7% from $1.10 billion at December 31, 2001. Of this
increase, $102.4 million was due primarily to originations of commercial and
industrial loans. Credit quality at June 30, 2002 remained consistent with
December 31, 2001. The ratio of non-performing assets to total loans and real
estate owned at June 30, 2002 was 0.98% compared to 1.02% at December 31, 2001.
The ratio of allowance for loan losses to total non-performing loans was 135.27%
at June 30, 2002 compared to 134.84% at December 31, 2001. The ratio of
allowance for loan losses to total loans was 1.24% at June 30, 2002 compared to
1.25% at December 31, 2001.
Excess of cost over fair value of assets acquired decreased $3.8 million
from $43.6 million at December 31, 2001 to $39.8 million at June 30, 2002. The
decrease was a result of scheduled amortization.
Total deposits were $1.62 billion at June 30, 2002, reflecting a $48.5
million, or 3.1% increase over December 31, 2001. The Company's core deposits,
(demand and savings deposits) increased $93.2 million, or 8.6%, while the
non-core deposits (time deposits) declined $44.7 million, or 9.1%. The Company
maintains a deposit relationship pricing strategy that has enabled the Company
to favorably increase the deposit mix with a higher concentration of core
deposits. Core deposits as a percentage of total deposits were 72.3 at June 30,
2001 and 68.6% at December 31, 2001.
Advances from the Federal Home Loan Bank increased $76.8 million to $150.8
million at June 30, 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 June 30, 2002 were $11.2 million, an increase of $10.0
million from $1.2 million at December 31, 2001. Of this increase, a net $5.0
million increase was in short-term borrowings, which the Company used to fund,
in part, the call of its Sun Trust I Preferred Securities on April 1, 2002. This
$5.0 million borrowing was paid off on July 11, 2002. The remaining $5.0 million
increase was federal funds purchased.
Securities sold under agreement to repurchase decreased $14.9 million from
$84.9 million at December 31, 2001 to $70.0 million at June 30, 2002, reflecting
the seasonality of these borrowings.
Total shareholders' equity increased by $6.9 million, from $130.0 million
at December 31, 2001, to $136.9 million at June 30, 2002. The increase was
primarily the result of the Company's six months net earnings of $3.6 million
and a $3.6 million increase in accumulated other comprehensive income, due to
the improvement in the market value of the investment portfolio.
11
On April 1, 2002, the Company called the outstanding $28.0 million of 9.85%
Sun Trust I Preferred Securities contemporaneously with the redemption of the
Sun Trust I 9.85% Junior Subordinated Debentures on April 1, 2002. The Company
wrote down the unamortized debt issuance costs of the called securities in the
amount of $777,000, net of income tax, through a charge to equity. 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
proceeds were used to pay down $20.0 million of short-term borrowings.
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 June 30, 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 $74.6 million at June 30, 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 June 30, 2002,
was $126.5 million compared to net cash provided by investing activities for the
six months ended June 30, 2001 of $79.2 million, a difference of $205.7 million.
By contrast, net cash provided by financing activities for the quarter ended
June 30, 2002, was $112.8 million compared to net cash used in financing
activities for the quarter ended June 30, 2001 of $67.2 million, a difference of
$180.0 million. The activity during the first half 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 and small business
lending and community banking, while also deleveraging the balance sheet through
a reduction in investments of $100.6 million and borrowings of $142.3 million.
By year-end 2001, the Company had substantially executed its de-leveraging
strategy. During the first half 2002, consistent with the Company's overall
balance sheet and funding management, the Company increased FHLB advances by
$76.8 million in order to match longer-term assets with longer-term liabilities.
On July 11, 2002, the Company issued $10.0 million Pooled Floating Rate
Capital Securities ("Sun Trust IV Capital Securities"). The interest rate resets
every three months to LIBOR plus 3.65%, with an initial rate of 5.51%, and will
not exceed 11.95% through five years from its issuance. The proceeds were used
to pay down $5.0 million of short-term borrowings and for general corporate
purposes.
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.
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
Net income increased by $2.7 million, for the three months ended June 30,
2002 to $2.0 million from a net loss of $661,000 for the three months ended June
30, 2001. As more fully described below, the increase in net income was due to
an increase of $2.1 million in net interest income and a decrease of $2.7
million in the provision for loan losses, partially offset by an increase in
non-interest expenses of $1.3 million.
12
Net Interest Income. Net interest income is the most significant component
of the Company's income from operations. Net interest income is the difference
between interest received on interest-earning assets (primarily loans and
investment securities) and interest paid on interest-bearing liabilities
(primarily deposits and borrowed funds). Net interest income depends on the
volume and interest rate earned on interest-earning assets and the volume and
interest rate paid on interest-bearing liabilities.
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
June 30, 2002 June 30, 2001
------------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $ 996,498 $ 17,553 7.05% $ 883,372 $ 18,406 8.33%
Home equity 29,293 377 5.15 24,030 502 8.36
Second mortgage 54,277 1,010 7.44 37,119 845 9.11
Residential real estate 53,111 843 6.35 55,313 1,075 7.78
Installment 56,173 1,212 8.63 63,796 1,322 8.29
---------- -------- ---------- --------
Total loans receivable 1,189,352 20,995 7.06 1,063,630 22,150 8.33
Investment securities (3) 676,721 7,778 4.60 704,753 10,382 5.89
Federal funds sold 5,442 18 1.29 6,211 51 3.31
Interest-bearing deposit with banks 18,966 81 1.70 46,580 495 4.25
---------- -------- ---------- --------
Total interest-earning assets 1,890,481 28,872 6.11 1,821,174 33,078 7.27
Cash and due from banks 59,053 61,886
Bank properties and equipment 28,314 28,969
Excess of cost over fair value of assets acquired 41,011 50,136
Other assets 10,475 15,330
---------- ----------
Non-interest-earning assets 138,853 156,321
---------- ----------
Total Assets $2,029,334 $1,977,495
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 553,541 2,684 1.94% $ 388,097 2,884 2.97%
Savings deposits 308,714 1,764 2.29 187,811 1,231 2.62
Time deposits 458,475 4,511 3.94 630,021 9,290 5.90
---------- -------- ---------- --------
Total interest-bearing deposits accounts 1,320,730 8,959 2.71 1,205,929 13,405 4.45
---------- -------- ---------- --------
Borrowed money:
Repurchase agreements with customers 73,194 197 1.07 79,534 698 3.51
Repurchase agreements with FHLB 191,781 2,178 4.54
FHLB advances 163,135 1,933 4.74 49,087 817 6.66
Federal funds purchased 2,033 11 2.15
Other borrowed money 8,138 130 6.38 1,160 11 3.69
---------- -------- ---------- --------
Total borrowed money 246,500 2,271 3.68 321,562 3,704 4.61
Guaranteed preferred beneficial interest in
Company's subordinated debt 47,286 938 7.93 57,327 1,359 9.49
---------- -------- ---------- --------
Total Interest-bearing liabilities 1,614,516 12,168 3.01 1,584,818 18,468 4.66
---------- -------- ---------- --------
Non-interest-bearing demand deposits 275,284 257,956
Other liabilities 8,993 10,735
---------- ----------
Non-interest-bearing liabilities 284,277 268,691
---------- ----------
Total liabilities 1,898,793 1,853,509
Shareholders' equity 130,541 123,986
---------- ----------
Total liabilities and shareholders' equity $2,029,334 $1,977,495
========== ==========
Net interest income $ 16,704 $ 14,610
======== ========
Interest rate spread (4) 3.10% 2.61%
==== ====
Net yield on interest earning assets (5) 3.53% 3.21%
==== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities 117.09% 114.91%
====== ======
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.
Three Months Ended June 30,
2002 vs. 2001
----------------------------------------
Increase (Decrease)
Due to
----------------------------------------
Volume Rate Net
------ ---- ---
Interest income
Loans receivable:
Commercial and industrial $ 2,182 $(3,035) $ (853)
Home equity 95 (220) (125)
Second mortgage 340 (175) 165
Residential real estate (42) (190) (232)
Installment (163) 53 (110)
------- ------- -------
Total loans receivable 2,412 (3,567) (1,155)
Investment securities (400) (2,204) (2,604)
Interest-bearing deposits accounts (5) (28) (33)
Federal funds sold (207) (208) (415)
------- ------- -------
Total interest-earning assets $ 1,800 $(6,007) $(4,207)
------- ------- -------
Interest expense
Interest-bearing deposit
accounts:
Interest-bearing demand deposit $ 991 $(1,191) $ (200)
Savings deposits 705 (172) 533
Time deposits (2,153) (2,626) (4,779)
------- ------- -------
Total interest-bearing deposit accounts (457) (3,989) (4,446)
Borrowed money:
Repurchase agreements with customers (51) (455) (501)
Repurchase agreements with FHLB (2,178) (2,178)
FHLB advances 1,413 (297) 1,116
Federal funds purchased 11 11
Other borrowed money 106 13 119
------- ------- -------
Total borrowed money (699) (734) (1,433)
Guaranteed preferred beneficial interest in
Company's subordinated debt
(217) (205) (422)
------- ------- -------
Total interest-bearing liabilities $(1,373) $(4,928) $(6,301)
------- ------- -------
Net change in interest income $ 3,173 $(1,079) $ 2,094
======= ======= =======
14
The increase in net interest income (on a tax-equivalent basis) of $2.1
million from the quarter June 30, 2002 compared to the quarter June 30, 2001 was
due to a $6.3 million decrease in interest expense partially offset by a $4.2
million decrease in interest income (on a tax-equivalent basis).
The increase in interest rate spread and margin for the three months ended
June 30, 2002, compared to the same period 2001, was primarily due to the
volatility of interest rates and difference in maturities and repricing
characteristics of the interest-bearing liabilities and interest-earning assets.
The cost of funds on interest-bearing liabilities decreased 165 basis points
from 4.66% for the six months ended June 30, 2001 to 3.01% for the same period
in 2002, while the yield on the average interest-earning assets declined 116
basis points during the same time period.
Net interest income (on a tax-equivalent basis) increased $2.1 million, or
14.3% to $16.7 million for the quarter ended June 30, 2002 compared to $14.6
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 $3.2 million and was partially offset by the rate component that
decreased net interest income by $1.1 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,
concentration on the growth of its core businesses, and continued focus on
liquidity management.
Interest income (on a tax-equivalent basis) decreased $4.2 million, or
12.7% to $28.9 million for the three months ended June 30, 2002 compared to
$33.1 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 116 basis points. Interest income (on a
tax-equivalent basis) on investment securities decreased $2.6 million caused by
a decrease in yield of 129 basis points with a reduction in the average balance
from $704.8 million at June 30, 2001 to $676.7 million at June 30, 2002. In
addition, interest income on loans receivable decreased due to a decrease in
yield of 127 basis points partially offset by an increase in average balance of
loans receivable from $1.06 billion at June 30, 2001 to $1.19 billion at June
30, 2002.
Interest expense decreased $6.3 million, or 34.1% to $12.2 million for the
three months ended June 30, 2002 compared to $18.5 million for the same period
in 2001. The decrease in interest expense was due primarily to the overall
decrease in market 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 165 basis points, or $4.9
million. The change in the mix of deposits is the result of the Company's
relationship pricing strategy that has favorably increased the deposit mix to a
higher concentration of lower costing core deposits. The decrease in the average
balance of time deposits from $630.0 million at June 30, 2001 to $458.5 million
at June 30, 2002, resulted in the decrease in the volume component of interest
expense of $2.2 million. The time deposit decrease was partially offset with an
increase in the average balance of core deposits from $575.9 million at June 30,
2001 to $862.3 million at June 30, 2002, resulted in the increase in the volume
component of interest expense of $1.7 million. An additional $699,000 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 $2.2 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 $1.4 million with increased FHLB advances.
Provision for Loan Losses. For the three months ended June 30, 2002, the
provision for loan losses was $1.0 million, a decrease of $2.7 million, compared
to $3.7 million for the same period in 2001. The second quarter 2001 provision
was a result of loan portfolio growth, portfolio maturation, deterioration of
several loans and the impact on the Company of the overall slowing trends of the
national and regional economy. 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 $11.1 million at June 30, 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
June 30, 2002 was $15.0 million, or 1.24% of loans. This compares to the
allowance for loan losses of $13.8 million at June 30, 2001, or 1.25% of loans.
15
Other Income. Other income increased $620,000 for the three-month period
ended June 30, 2002 compared to the three-month period ended June 30, 2001. The
increase was primarily the result of the gain on the sale of investment
securities of $616,000 for the three months ended June 30, 2002 compared to a
gain of $69,000 in the same period of 2001.
Other Expenses. Other expenses increased $1.3 million, or 9.3% to $15.8
million for the three months ended June 30, 2002 as compared to $14.5 million
for the same period in 2001. Of the increase, $927,000 was in salaries and
employee benefits and $302,000 was in occupancy. These costs continued to
reflect the ongoing investment for the Company's initiatives announced in 2001.
Income Taxes (Benefit). Applicable income taxes (benefit) increased $1.4
million for the three months ended June 30, 2002 as compared to the same period
in 2001. The income tax benefit of ($477,000) for the period ended June 30, 2001
was due to a net loss before taxes, as compared to an income tax of $887,000
resulting from pre-tax earnings for the three months ended June 30, 2002. In
addition, the Company's effective tax rate changed due primarily to the
proportion of tax-free municipal income to income (loss) before taxes.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001.
General. Net income increased by $3.0 million for the six months ended June
30, 2002 to $3.6 million from $621,000 for the six months ended June 30, 2001.
Net interest income increased $2.6 million and the provision for loan losses
decreased $3.0 million for the six months ended June 30, 2002 compared to the
same period in 2001. Other income increased by $1.2 million to $6.1 million for
the six months ended June 30, 2002 as compared to $4.9 million for the six
months ended June 30, 2001. Other expenses increased by $2.3 million to $30.4
million for the six months ended June 30, 2002 as compared to $28.1 million for
the six months ended June 30, 2001.
Net Interest Income. 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.
16
At or for the six months ended At or for the six months ended
June 30, 2002 June 30, 2001
------------------------------------ ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial $ 967,503 $34,433 7.12% $ 877,633 $37,331 8.51%
Home equity 26,907 723 5.37 24,310 1,090 8.97
Second mortgage 51,876 1,948 7.51 36,382 1,660 9.12
Residential real estate 53,847 1,793 6.66 54,852 2,167 7.90
Installment 56,591 2,432 8.59 61,494 2,635 8.57
---------- ------- ---------- -------
Total loans receivable 1,156,724 41,329 7.15 1,054,671 44,883 8.51
Investment securities (3) 675,095 15,239 4.51 720,840 22,555 6.26
Federal funds sold 7,379 46 1.25 7,265 137 3.78
Interest-bearing deposit with banks 15,768 133 1.69 31,548 720 4.56
---------- ------- ---------- -------
Total interest-earning assets 1,854,966 56,747 6.12 1,814,324 68,295 7.53
Cash and due from banks 60,428 59,537
Bank properties and equipment 28,224 29,112
Excess of cost over fair value of assets acquired 41,971 51,123
Other assets 11,839 14,520
---------- ----------
Non-interest-earning assets 142,462 154,292
---------- ----------
Total Assets $1,997,428 $1,968,616
========== ==========
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 541,007 5,259 1.94% $ 373,026 6,031 3.23%
Savings deposits 301,548 3,484 2.31 182,752 2,468 2.70
Time deposits 460,782 9,574 4.16 631,482 18,894 5.98
---------- ------- ---------- -------
Total interest-bearing deposits accounts 1,303,337 18,317 2.81 1,187,260 27,393 4.61
---------- ------- ---------- -------
Borrowed money:
Repurchase agreements with customers 76,033 381 1.00 76,749 1,587 4.14
Repurchase agreements with FHLB 212,864 5,562 5.23
FHLB advances 148,380 3,607 4.86 49,104 1,626 6.62
Federal funds purchased 1,376 15 2.12 1,058 30 5.59
Other borrowed money 5,083 153 6.03 1,160 22 3.74
---------- ------- ---------- -------
Total borrowed money 230,872 4,156 3.60 340,935 8,827 5.18
Guaranteed preferred beneficial interest in
Company's subordinated debt 42,279 2,297 8.79 57,327 2,719 9.49
---------- ------- ---------- -------
Total Interest-bearing liabilities 1,586,488 24,770 3.12 1,585,522 38,939 4.91
---------- ------- ---------- -------
Non-interest-bearing demand deposits 270,802 250,302
Other liabilities 8,975 10,386
---------- ----------
Non-interest-bearing liabilities 279,777 260,670
---------- ----------
Total liabilities 1,866,265 1,846,192
Shareholders' equity 131,163 122,424
---------- ----------
Total liabilities and shareholders' equity $1,997,428 $1,968,616
========== ==========
Net interest income $31,977 $29,356
======= =======
Interest rate spread (4) 3.00% 2.62%
==== ====
Net yield on interest earning assets (5) 3.45% 3.24%
==== ====
Ratio of average interest-earning assets to
average interest-bearing iabilities 116.92% 114.43%
====== ======
Footnotes described on following page
17
(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), (ii) changes in rate
(changes in rate multiplied by old average volume) and (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume).
Six Months Ended June 30,
2002 vs. 2001
----------------------------------
Increase (Decrease)
Due to
----------------------------------
Volume Rate Net
------ ---- ---
Interest income
Loans receivable:
Commercial and industrial $ 3,584 $ (6,482) $ (2,898)
Home equity 106 (473) (367)
Second mortgage 618 (330) 288
Residential real estate (39) (335) (374)
Installment (210) 7 (203)
-------- -------- --------
Total loans receivable 4,059 (7,613) (3,554)
Investment securities (1,354) (5,962) (7,316)
Interest-bearing deposits accounts 2 (93) (91)
Federal funds sold (260) (327) (587)
-------- -------- --------
Total interest-earning assets $ 2,447 $(13,995) $(11,548)
-------- -------- --------
Interest expense
Interest-bearing deposit
accounts:
Interest-bearing demand deposit $ 2,142 $ (2,914) $ (772)
Savings deposits 1,414 (398) 1,016
Time deposits (4,384) (4,936) (9,320)
-------- -------- --------
Total interest-bearing deposit accounts (828) (8,248) (9,076)
Borrowed money:
Repurchase agreements with customers (15) (1,191) (1,206)
Repurchase agreements with FHLB (5,562) (5,562)
FHLB advances 2,514 (533) 1,981
Federal funds purchased 7 (22) (15)
Other borrowed money 111 20 131
-------- -------- --------
Total borrowed money (2,945) (1,726) (4,671)
Guaranteed preferred beneficial interest in Company's
subordinated debt
(230) (192) (422)
-------- -------- --------
Total interest-bearing liabilities $ (4,003) $(10,166) $(14,169)
-------- -------- --------
Net change in interest income $ 6,450 $ (3,829) $ 2,621
======== ======== ========
18
The decrease in net interest income (on a tax-equivalent basis) of $2.6
million for the six months ended June 30, 2002 compared to the six months ended
June 30, 2001 was due to a $14.2 million decrease in interest expense partially
offset by a $11.6 million decrease in interest income (on a tax-equivalent
basis).
The increase in interest rate spread and margin for the six months ended
June 30, 2002, compared to the same period 2001, was primarily due to the
volatility of interest rates and difference in maturities and repricing
characteristics of the interest-bearing liabilities and interest-earning assets.
The cost of funds on interest-bearing liabilities decreased 179 basis points
from 4.91% for the six months ended June 30, 2001 to 3.12% for the same period
in 2002, while the yield on the average interest-earning assets declined 141
basis points during the same time period.
For the six-month period ended June 30, 2002, the average Prime rate was
4.750%, as compared to 7.965% for the same period in 2001. This difference in
average Prime rate was primarily responsible for a $14.0 million decrease in the
rate component of interest income and a $10.2 million decrease in the rate
component of interest expense.
The increase in the average balance of loans of $102.1 million, or 9.7%
reflects the Company's continued strategy on growth of its core businesses, with
emphasis on commercial and small business lending and community banking, and is
represented by the increase in the volume component of interest expense for
loans of $4.1 million. This increase was partially offset by the decrease in the
average balance of investments of $45.7 million and the related decrease in the
volume component of interest expense for investments of $1.6 million.
Comparing the first half of 2002 to 2001, the Company's liquidity and asset
management strategies focused on changing the mix of interest-bearing and
non-interest-bearing liabilities. By focusing on relationship accounts and
competitive interest rates for core deposits, the Company attempted to attract
the maturing funds of the higher costing time deposits, along with new funds, to
lower costing core deposits. During this period, the average balance for time
deposits decreased $170.7 million while the average balance for core deposits
increased $286.8 million. The volume component of interest expense for time
deposits decreased $4.4 million, partially offset by the volume component of
interest expense for core deposits, which increased by $3.6 million. By matching
longer-term liabilities with longer-term assets, the Company fully paid off the
repurchase agreements with the FHLB and executed longer-term advances with the
FHLB.
Provision for Loan Losses. For the six months ended June 30, 2002, the
provision for loan losses amounted to $2.0 million, a decrease of $3.0 million,
compared to $5.0 million for the same period in 2001. The larger 2001 provision
was a result of loan portfolio growth, portfolio maturation, deterioration of
several loans and the impact on the Company of the overall slowing trends of the
national and regional economy. 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.
Non-Interest Income. Other income increased $1.2 million, or 24.4% for the
six-months ended June 30, 2002 compared to the same period in 2001. The increase
was a primarily the result gain on the sale of investment securities amounted to
$799,000 for the six months ended June 30, 2002 compared to a gain of $119,000
for the same period of 2001. The increase was also attributed to the increase in
the volume of service charges of $285,000 for the six-months ended June 30, 2002
compared to the same period in 2001.
Other Expenses. Other expenses increased $2.3 million, or 8.1% to $30.4
million for the three months ended June 30, 2002 as compared to $28.1 million
for the same period in 2001. Of the increase, $1.8 million was in salaries and
employee benefits and $332,000 was in occupancy. These costs continued to
reflect the ongoing investment for the Company's initiatives announced in 2001.
Income Taxes. Applicable income taxes increased $1.5 million for the six
months ended June 30, 2002 as compared to the same period in 2001. The increase
resulted from higher pre-tax earnings. In addition, the Company's effective tax
rate changed due to the proportion of tax-free municipal income to net income
before taxes.
19
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. 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 interest rate changes of up to 300 basis points
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 variance 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 its exposure to interest rate risk.
At June 30, 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 $24.0 million, representing a
positive cumulative one-year gap ratio of 1.17%. 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.
The following table summarizes the maturity and repricing characteristics
of the Company's interest-earning assets and interest-bearing liabilities at
June 30, 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 $ 2,280 $ 2,280
Loans receivable 349,842 $ 169,009 $ 582,292 $ 108,401 1,209,544
Investment securities 119,424 139,667 317,592 99,320 676,003
Federal funds sold 265 - - - 265
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 471,811 308,676 899,884 207,721 1,888,092
---------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 209,140 50,300 286,212 26,916 572,568
Savings deposits 13,809 41,419 234,420 20,895 310,543
Time certificates 132,724 172,044 142,368 1,386 448,522
Federal Home Loan Bank Advances 2,880 32,953 79,826 35,161 150,820
Federal funds purchased 5,000 5,000
Loan payable 6,160 6,160
Securities sold under agreements
to repurchase 70,047 70,047
Guaranteed interest in Company's subordinated debt - 20,000 29,287 - 49,287
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 439,760 316,716 772,113 84,358 1,612,947
---------- ---------- ---------- ---------- ----------
Periodic Gap $ 32,051 $ (8,040) $ 127,771 $ 123,363 $ 275,145
========== ========== ========== ========== ==========
Cumulative Gap $ 32,051 $ 24,011 $ 151,782 $ 275,145
========== ========== ========== ==========
Cumulative Gap Ratio 1.57% 1.17% 7.41% 13.44%
========== ========== ========== ==========
20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at June 30, 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
The annual meeting of the shareholders of the Company was held on May
16, 2002 and the following matters were voted on:
1) Election of directors
FOR WITHHELD
--- --------
Thomas A. Bracken 9,153,492 104,679
Bernard A. Brown 9,096,575 161,596
Ike Brown 9,190,331 67,840
Jeffrey S. Brown 9,190,875 67,296
Sidney R. Brown 9,192,035 66,136
Peter Galetto, Jr 9,253,985 4,186
Linwood C. Gerber 9,254,639 3,532
Douglas J. Heun 9,254,639 3,532
Anne E. Koons 9,250,928 7,243
Vito J. Marseglia 9,254,639 3,532
Alfonse M. Mattia 9,153,472 104,699
George A. Pruitt 9,254,139 4,032
Anthony Russo, III 9,254,095 4,076
Edward H. Salmon 9,254,639 3,532
John D. Wallace 9,254,139 4,032
Timothy J. Wilmott 9,254,139 4,032
2) Ratification of the Sun Bancorp, Inc. 2002 Stock Option Plan:
Number
------
FOR 5,817,358
AGAINST 325,038
ABSTAIN 38,256
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
Exhibit 99.1 Certification Pursuant to 18 U.S.C. ss. 1350.
The Company filed a Current Report on Form 8-K on April 26, 2002 under
Item 5.
21
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 13, 2002 Sun Bancorp, Inc.
----------------------- -----------------------------------------
(Registrant)
/s/ Thomas A. Bracken
----------------------------------------
Thomas A. Bracken
President and Chief Executive Officer
Date August 13, 2002 /s/ Dan. A. Chila
----------------------- -----------------------------------------
Dan A. Chila
Executive Vice President and
Chief Financial Officer