FORM 10-Q-QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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, 1998
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-14745
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SUN BANCORP, INC. (SUN)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2233584
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PO Box 57, Selinsgrove, Pennsylvania 17870
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(717) 374-1131
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(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. X Yes No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes 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.
Common Stock, No Par Value 6,538,975
- ---------------------------------------- -----------------------------------
Class Outstanding Shares At June 30, 1998
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
CONTENTS Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Financial Statements:
Consolidated Balance Sheet as of June 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statement of Income for the Three and Six Months Ended
June 30, 1998 and June 30, 1997 (Unaudited) 5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1998 and June 30, 1997 (Unaudited) 7
Notes to the Consolidated Financial Statements (Unaudited) 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
- ---------------------------
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 30, 1998 December 31, 1997
(Unaudited) (Note)
----------- ------
ASSETS
Cash and due from banks $ 12,712 $ 8,173
Interest-bearing deposits in banks 8,627 786
-------- --------
Total cash and cash equivalents 21,339 8,959
Securities available-for-sale 225,897 165,284
Loans, net 309,866 310,300
Bank premises and equipment, net 8,832 8,964
Intangible asset, goodwill, net 10,569 10,946
Accrued interest and other assets 6,380 6,275
-------- --------
Total assets $582,883 $510,728
======== ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(Continued)
(In Thousands)
June 30, 1998 December 31, 1997
(Unaudited) (Note)
----------- ------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 35,936 $ 30,563
Interest-bearing 315,062 296,455
--------- ---------
Total deposits 350,998 327,018
Short-term borrowings 20,718 20,259
Other borrowed funds 140,525 93,025
Accrued interest and other liabilities 4,091 4,813
--------- ---------
Total liabilities 516,332 445,115
--------- ---------
Shareholders' Equity:
Common Stock, No par value per share
in 1998 and $.83 per share in 1997;
Authorized 20,000,000 shares;
Issued 6,616,238 shares in 1998 and
6,271,944 shares in 1997 72,623 5,206
Additional paid in capital - 56,155
Retained earnings (deficit) (6,716) 2,485
Accumulated other comprehensive income,
Unrealized gains on available-for-sale
securities, net 2,233 3,176
Less: Treasury stock, At cost
77,263 shares in 1997 and
47,509 shares in 1996 (1,589) (1,409)
--------- ---------
Total shareholders' equity 66,551 65,613
--------- ---------
Total liabilities and
shareholders' equity $582,883 $510,728
--------- ---------
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In Thousands)
<TABLE>
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 7,105 $ 4,939 $14,274 $ 9,810
Income from available-for-sale securities:
Taxable 2,447 1,258 4,353 2,591
Tax Exempt 707 670 1,364 1,309
Dividends 154 181 287 363
Interest on deposits in banks 200 40 294 53
------- ------- ------- -------
Total interest income 10,613 7,088 20,572 14,126
------- ------- ------- -------
Interest Expense:
Interest on deposits 3,454 2,121 6,737 4,273
Interest on short-term borrowings 113 51 242 324
Interest on other borrowed funds 2,049 1,444 3,598 2,647
------- ------- ------- -------
Total interest expense 5,616 3,616 10,577 7,244
------- ------- ------- -------
Net interest income 4,997 3,472 9,995 6,882
Provision for possible loan losses 300 425 600 575
------- ------- ------- -------
Net interest income, after provision
for possible loan losses $ 4,697 $ 3,047 $ 9,395 $6,307
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
-----------
(Continued)
<TABLE>
(In Thousands) For the Three Months For the Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Operating Income:
Service charges on deposit accounts $ 284 $ 232 $ 564 $ 340
Trust income 165 75 285 216
Net security gains 419 659 729 868
Income from insurance subsidiary 42 23 82 66
Other income 83 141 212 220
------ ------ ------ ------
Total other operating income 993 1,130 1,872 1,710
------ ------ ------ ------
Other Operating Expense:
Salaries and employee benefits 1,361 942 2,821 1,850
Net occupancy expenses 195 111 376 218
Furniture and equipment expenses 226 126 445 260
Amortization of goodwill 188 - 377 -
Expenses of insurance subsidiary 30 32 106 39
Other expenses 801 546 1,521 949
------ ------ ------ ------
Total other operating expense 2,801 1,757 5,646 3,316
Income before income tax provision 2,889 2,420 5,621 4,701
------ ------ ------ ------
Income tax provision 750 585 1,439 1,063
------ ------ ------ ------
Net income $2,139 $1,835 $4,182 $3,638
====== ====== ====== ======
PER SHARE DATA
- --------------
Net income per share - Basic $0.33 $0.33 $0.64 $0.65
Weighted average number of shares
outstanding - Basic 6,535,380 5,548,596 6,525,922 5,593,469
Net income per share - Diluted $0.32 $0.33 $0.63 $0.65
Weighted average number of shares
outstanding - Diluted 6,619,826 5,610,654 6,610,368 5,640,310
Dividends paid $0.205 $0.171 $0.395 $0.329
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
-----------
(In Thousands)
<TABLE>
For the Six Months
Ended June 30
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,182 $ 3,638
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 600 575
Provision for depreciation 384 233
Amortization of goodwill 377 -
Amortization and accretion of securities, net 167 119
Net security gains (729) (868)
Gain on sale of bank premises - (83)
(Increase) decrease in accrued interest and
other assets 670 (2,766)
Increase (decrease) in accrued interest and
other liabilities (722) 705
--------- ----------
Net cash provided by operating activities 4,929 1,553
--------- ----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 13,681 1,835
Proceeds from maturities of available-for-sale securities 20,478 5,419
Purchases of available-for-sale securities (95,638) (3,471)
Net (increase) decrease in loans (456) 2,506
Capital expenditures (252) (830)
Proceeds from sale of bank premises - 266
--------- ----------
Net cash provided by (used in) investing activities (62,187) 5,725
--------- ----------
Cash flows from financing activities:
Net increase in deposits 23,980 5,310
Net increase (decrease) in short-term borrowings 459 (17,503)
Proceeds from other borrowed funds 65,000 20,000
Repayments of other borrowed funds (17,500) (2,000)
Cash dividends paid (2,592) (1,848)
Proceeds from sale of stock for employee benefits program 471 388
Purchase of treasury stock (180) -
Cash and cash equivalents received from issuance of stock
related to acquisition of Bucktail Bank & Trust Company - 6,093
Offering costs paid - (150)
--------- ----------
Net cash provided by financing activities 69,638 10,290
--------- ----------
Net increase in cash and cash equivalents 12,380 17,568
Cash and cash equivalents at beginning of period 8,959 7,499
--------- ----------
Cash and cash equivalents at end of period $21,339 $25,067
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Continued)
(In Thousands)
<TABLE>
For the Six Months
Ended June 30
-------------
1998 1997
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
Interest $10,109 $6,895
Income taxes 1,085 1,275
</TABLE>
Supplemental schedule of noncash investing and financing
activities:
On June 30, 1997, SUN acquired all of the capital stock of
Bucktail Bank & Trust Company in exchange for shares of
SUN's common stock valued at $20,213,000. In conjunction
with the acquisition, liabilities were assumed as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents acquired $ 6,093
Fair value of other assets acquired 130,030
---------
136,123
Value of stock issued by SUN, net of offering costs (20,063)
---------
Liabilities assumed $116,060
=========
</TABLE>
During the six-month period ended June 30, 1998,
loans with an estimated value of $290,000 were reclassified
to other real estate owned.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-----------
Note 1 -- Basis of Presentation
---------------------
The consolidated financial statements include the accounts of SUN BANCORP,
INC. (SUN), the parent company, and its wholly-owned subsidiaries of Sun Bank
(Bank), doing business as Snyder County Trust Company, Watsontown Bank, Central
Pennsylvania Bank, Bucktail Bank and Trust Company, and the Pennsylvania SUN
Life Insurance Company. All significant intercompany balances and transactions
have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements for the interim
periods do not include all of the information and footnotes required by
generally accepted accounting principles. However, in the opinion of
management, all adjustments necessary for a fair presentation of the results of
the interim period have been included. Operating results for the three and six
months ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998.
The accounting policies followed in the presentation of interim financial
results are the same as those followed on an annual basis. These policies are
presented on pages 10 and 11 of the 1997 Annual Report to Shareholders.
9
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
Note 2 - Consolidated Statement of Comprehensive Income
----------------------------------------------
The purpose of reporting comprehensive income is to report a measure of all
changes in SUN's equity that result from economic events other than transactions
with shareholders in their capacity as shareholders. For SUN, "comprehensive
income" includes traditional income statement amounts as well as unrealized
gains and losses on certain investments in debt and equity securities (i.e.
available-for-sale securities). Because unrealized gains and losses are part of
comprehensive income, comprehensive income may vary substantially between
reporting periods due to fluctuations in the market prices of securities held.
This is evidenced by the fact that SUN's net income increased for the three and
six months ended June 30, 1998 compared to the corresponding periods in 1997,
but comprehensive income over the same periods has declined.
<TABLE>
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $2,139 $1,835 $4,182 $3,638
------- ------- ------- -------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities:
Gains (losses) arising during the period 216 3,243 (700) 1,369
Reclassification adjustment - realized
gains included in net income (419) (659) (729) (868)
------- ------- ------- -------
Other comprehensive income (loss)
before income tax provision (203) 2,584 (1,429) 501
Income tax expense/benefit related to
other comprehensive income (loss) 69 (879) 486 (171)
------- ------- ------- -------
Other comprehensive income (loss) (134) 1,705 (943) 330
------- ------- ------- -------
Comprehensive income $2,005 $3,540 $3,239 $3,968
======= ======= ======= =======
</TABLE>
10
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity presented
in its accompanying consolidated financial statements for SUN BANCORP, INC., a
bank holding company, and its wholly-owned subsidiary, Sun Bank. SUN also owns
a captive insurance company, the Pennsylvania SUN Life Insurance Company, that
provides credit life and disability insurance to Sun Bank's credit customers.
SUN's consolidated financial condition and results of operations consist almost
entirely of the bank's financial condition and results of operations. This
discussion should be read in conjunction with the 1997 Annual Report. Current
performance does not guarantee or assure similar performance in the futrue, and
may not be indicative of future results.
SUN's net income for the six months ended June 30, 1998 amounted to
$4,182,000, an increase of 15.0% over the same period of 1997. Basic and
diluted earnings per share were $.64 and $.63, respectively, for the six months
ended June 30, 1998 compared to $.65 basic and diluted for the same period in
1997. Diluted earnings per share is less than basic earnings per share because
of the assumed increase in the average number of common shares outstanding
resulting from the assumed exercise of outstanding options in periods in which
the average market price of SUN's common stock exceeds the related option
exercise prices. SUN achieved a 1.52% return on average assets and a 12.60%
return on average equity for the six months ended June 30, 1998, compared to
ratios of 1.96% and 18.35% for the previous comparable period. Since the
acquisition of Bucktail Bank and Trust Company (Bucktail) on June 30, 1997, we
are required by generally accepted accouting principles to relfect the effect of
goodwill on the balance sheet and income statement. This expense has an effect
on earnings. Whithout the effet of goodwill, our return on average assets would
be 1.69% abd return on average equity would be 16.35% for the six months ended
June 30, 1998. For the three months ended June 30, 1998, SUN's earnings
amounted to $2,139,00, an increase of 16.6% over the same period of 1997. Basic
and diluted earnings per share were $.33 and $.32, respectively, for the three
months ended June 30, 1998 compared to $.33 basic and diluted for the same
period in 1997. Earnings per share data has been adjusted to reflect a three-
for-two stock split on December 12, 1997 and 5% stock dividend on June 5, 1998.
Results of Operations - Three Months Ended June 30, 1998 and 1997
- -----------------------------------------------------------------
SUN's income statement for the three months ended June 30, 1998, compared to
the same period in 1997, was significantly affected by the acquisition of
Bucktail on June 30, 1997. The effects of the Bucktail purchase were to
substantially increase the average balances of earning assets and interest-
bearing liabilities. Corresponding increases in total interest income and total
interest expense resulted in an overall increase in net interest income of
$1,525,000 to $4,997,000, a 43.9% increase over the same period in 1997.
11
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Total other operating income decreased $137,000, or 12.1%, in the three months
ended June 30, 1998 compared to the same period of 1997. Net security gains,
primarily from the sales of equity securities, were $419,000 in the three months
ended June 30, 1998 compared to gains of $659,000 for the same period in 1997.
Service charges on deposit accounts increased $52,000 due in part to the
addition of Bucktail accounts and to an increase in automatic teller machine
fees. Additionally, trust income increased 120.0% to $165,000 primarily due to
the addition of Bucktail trust accounts for the three months ended
June 30, 1998. Excluding a gain or $83,000 from the sale of the old Shamokin
Dam office in 1997, other income increased $25,000 for the three months ended
June 30, 1998. The increase is the result of safe deposit box rent, debit card,
and credit card income from the Bucktail accounts.
Other operating expenses increased to $2,801,000 for the three months ended
June 30, 1998, compared to $1,757,000 in the same period of 1997. Increases in
salaries and employee benefits, net occupancy expense, furniture and equipment
expense, and other expenses were reflective of increased operating costs
associated with the addition of seven former Bucktail locations. Also,
amortization of $188,000 was recorded in the three months ended June 30, 1998,
resulting from goodwill related to the Bucktail acquisition.
Results of Operations - Six Months Ended June 30, 1998 and 1997
- ---------------------------------------------------------------
The increase in SUN's net earnings for the six months ended June 30, 1998
compared to the same period in 1997 was attributable primarily to increases in
net interest income. Increases in other operating expenses limited the growth
of net earnings for the six months ended June 30, 1998. Net interest income for
the six months ended June 30, 1998 increased $3,113,000, or 45.2%, over the same
period in 1997, principally due to increased volumes in the first and second
quarters of 1998 resulting from the Bucktail acquistion. Other operating income
increased $162,000, or 9.5%, over the same period of 1997, as net security
gains, primarily form the sale of equity securities, decreased $139,000.
Service charge on deposit accounts and trust income increased $293,000 due in
part to reasons described above. Other operating expenses increased $2,330,000,
or 70.3%, for the six months ended June 30, 1998 over the same period in 1997
due in part to the reasons described above in the three month month ended
June 30, 1998 analysis. The increase includes goodwill amortization of $377,000
for the six months ended June 30, 1998. Other expenses increased $572,000 with
the Pennsylvania shares tax increasing $80,000 as a direct result of the
Bucktail axquisition. The remaining increase in other expense was attributable
to increased in general operating expenses such as marketing, insurance,
supplies, and postage due to the addition of offices from the Bucktail
acquisition.
12
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Balance Sheet - June 30, 1998 and December 31, 1997
- ---------------------------------------------------
Total assets were $582,883,000 at June 30, 1998, an increase of 14.1% from
$510,728,000 at December 31, 1997. Securities available-for-sale increased by
$60,613,000. The investment portfolio is mainly comprised of mortgage-backed
securities and state and municipal bonds. The intangible asset, goodwill, was
reduced to $10,569,000 at June 30, 1998. Goodwill resulted from the acquisition
of Bucktail on June 30, 1997. Also, total liabilities increased $71,217,000, or
16.0% to $516,332,000 at June 30, at June 30, 1998 compared to
December 31, 1997. Deposits increased by $23,980,000 due to growth in
certificates of deposit and NOW accounts. A new certificate of deposit product,
which allows additional deposits within ninety days, provided $14,275,000 of the
total deposit increase. The majority of the remaining increase is due to the
introduction of a government funds account, which has provided additional
deposits of $7,630,000. Total borrowed funds increased $47,959,000, or 42.3% to
$161,243,000 in 1998 with FHLB term borrowings representing $47,500,000 of the
inrease. Average term FHLB borrowings increased for the first six months by
$28,734,000. These additional borrowings were made to take advantage of special
rates offered by the FHLB of Pittsburgh. Management reinvested the additional
borrowed funds in additional mortgage backed securities, which aided in
increasing the net interest margin.
Allowance for Possible Loan Losses
- ----------------------------------
Losses on loans are charged against the allowance in the period in which they
have been determined to be uncollectible. Recoveries of loans previously
charged off are credited to the allowance as they are received. A monthly
review of the allowance for possible loan losses is done to determine the
collectibility of certain loans based on internal analysis and management's
assumptions as to the ability of the borrower to service the loan. As of
June 30, 1998, the allowance for possible loan losses was $3,333,000. This
allowance amount represents 1.06% of total loans. Management deems the
allowance to be adequate; however, future additions may be necessary based on
econmic, market, or other unforeseeable conditions. Although management makes
its best estimate as to the additions to the allowance, there can be no
assurance that future material additions may not be needed.
Changes in Shareholders' Equity Accounts
- ----------------------------------------
SUN and other corporate entities are subject to accounting standards that
dictate how we report our financial performance. These rules are written to
apply to all corporations. In the second quarter of 1998, SUN experienced two
events which caused a change within its shareholders' equity accounts.
At the Spring 1998 shareholders' meeting, shareholders approved the
elimination of the stated par on SUN's common stock. This act caused the
additional paid-in capital account to be reduced to zero, with the balance of
$56,369,000 being reclassified to the common stock account.
13
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SUN's shareholders' equity accounts also experienced one additional
significant change. On June 5, 1998, a 5% stock dividend was distributed. When
stock dividends of less than 20% are declared, the difference between the par
value and the market value of the stock dividend must be recorded as a reduction
in the retained earnings account with a corresponding increase in common stock.
Accordingly, in the second quarter of 1998, an accounting entry of $10,791,000
was recorded to reduce retained earning and increase common stock (no effect on
SUN's total shareholders' equity) for the market value of the 5% stock dividend.
Additionally, retained earnings was reduced for cash dividends paid on
June 5, 1998, while second quarter income was credited to retained earnings.
This results in a deficit retained earnings balance of $6,716,000 as of
June 30, 1998. Although this account is negative due to accounting standard
requirements, SUN's total shareholders' equity of $66,551,000 as of
June 30, 1998 is indicative of a very strong financial condition.
Capital Adequacy
- ----------------
SUN's strong capital position is evidenced by the following capital ratios
which are well above the regulatory minimum levels.
(In Thousands) For Capital
Actual Adequacy Purposes
------ -----------------
Amount Ratio Ratio
------- ----- -----
As of June 30, 1998:
Total Capital $57,082 17.8% 8.0%
(to Risk Weighted Assets)
Tier I Capital 53,749 16.5% 4.0%
(to Risk Weighted Assets)
Tier I Capital 53,749 9.6% 4.0%
(to Average Assets)
As of December 31, 1997:
Total Capital $54,621 17.8% 8.0%
(to Risk Weighted Assets)
Tier I Capital 51,491 16.8% 4.0%
(to Risk Weighted Assets)
Tier I Capital 51,491 10.3% 4.0%
(to Average Assets)
14
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Regulatory and Industry Merger Activity
- ---------------------------------------
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of SUN and Sun Bank. It cannot be predicted whether such legislation
will be adopted or, if adopted, how such legislation would affect the business
of SUN and Sun Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, SUN's and Sun Bank's business is
particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business. Except as
specifically described above, management believes that the effect of the
provisions on the liquidity, capital resources, and results of operations of
SUN will be immaterial. Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation, which if
they were implemented, would have a material adverse effect upon the liquidity,
capital resources, or results of operations, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have, and in the future may have, a negative impact on SUN's results of
operations.
Further, the business of SUN is also affected by the state of the financial
services industry in general. As a result of legal and industry changes,
management predicts that the industry will continue to experience an increase in
consolidations and mergers as the financial services industry strives for
greater cost efficiencies and market share. Management also expects increased
diversification of financial products and services offered by Sun Bank and its
competitors. Management believes that such consolidations and mergers, and
diversification of products and services may enhance its competitive position as
a community bank.
Year 2000 Readiness
- -------------------
The corporation's Year 2000 Compliance Committee has been working on the
Year 2000 issue for the past year. The Y2K issue is being addressed as an
enterprise-wide concern, considering both information technology (IT) and non-IT
systems and components. The bank has identified and evaluated all known third
party companies and vendors that have a material relationship with the bank.
The significant vendors which have a material relationship with the bank have
indicated they are either Year 2000 compliant or have plans in place to be
tested prior to year-end 1998.
Management is reviewing the status of Year 2000 readiness for significant bank
customer relationships. A questionnaire and personal evaluation with those
customers is being conducted to assess any potential impact on the bank. We are
also notifying the customer to research what possible impact their vendors and
suppliers may have on their operation.
The corporation has established a test strategy to validate mission critical
systems, both IT and non-IT. This validation phase is underway with most
mission critical systems planned to be tested by year-end 1998. To date, there
are no known significant problems with any mission critical systems.
15
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Year 2000 project is considered one of the corporation's highest
priorities. Other IT projects that are strategic to the bank's long range plans
have not been significantly impacted, although some may be delayed slightly.
The hard costs associated with repairing or validating Year 2000 thus far are
minimal and are not expected to have any material financial impact. To date,
costs to repair systems and equipment are less than $20,000. (Note: The
corporation's systems and products are primarily purchased software and hardware
and are being renovated by the third party companies.) Management does not
expect any significant future expenditures associated with Year 2000.
Management is currently establishing a contingency strategy plan to address
worst-case scenarios. The bank does have a tested disaster recovery hot-site to
back up the bank's core main processing operations. Plans are to have detailed
contingency plans in place for mission critical systems by year-end 1998.
16
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART II
Items 1, 2, 3, and 4 -- Omitted pursuant to instructions to Part II
Item 5 -- Other information
In August 1998, the Board of Directors approved an increased quarterly
dividend payment from $.205 per share to $.21 per share for shareholders of
record August 28, 1998, payable September 11, 1998.
Item 6 -- Exhibits and Reports on Form 8-K
a. No reports on Form 8-K were filed for the quarter ending
June 30, 1998.
17
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART II
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.
Date 8/12/98 /s/ Fred W. Kelly, Jr.
--------------------- ---------------------------
Fred W. Kelly, Jr.
Chief Executive Officer
(Principal Executive Officer)
/s/ Jeffrey E. Hoyt
---------------------------
Jeffrey E. Hoyt
Executive Vice President,
Chief Operating Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
SUN BANCORP, INC.
PO Box 57
Selinsgrove, PA 17870
(717) 374-1131
18
<PAGE>
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