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 September 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
------------------------------------------------------
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 6,618,393
- ------------------------------------ ----------------------------------------
Class Outstanding Shares At September 30, 1998
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheet as of September 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statement of Income for the Three and Nine Months
Ended September 30, 1998 and September 30, 1997 (Unaudited) 5
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and September 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)
September 30, 1998 December 31, 1997
(Unaudited) (Note)
----------- ------
ASSETS
Cash and due from banks $ 9,502 $ 8,173
Interest-bearing deposits in banks 21,107 786
Total cash and cash equivalents 30,609 8,959
-------- --------
Securities available-for-sale 235,865 165,284
Loans, net 318,229 310,300
Bank premises and equipment, net 9,010 8,964
Intangible asset, goodwill, net 10,380 10,946
Accrued interest and other assets 5,549 6,275
-------- --------
Total assets $609,642 $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)
September 30, 1998 December 31, 1997
(Unaudited) (Note)
----------- ------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 33,675 $ 30,563
Interest-bearing 318,116 296,455
--------- ---------
Total deposits 351,791 327,018
Short-term borrowings 23,037 20,259
Other borrowed funds 162,500 93,025
Accrued interest and other liabilities 4,433 4,813
--------- ---------
Total liabilities 541,761 445,115
--------- ---------
Shareholders' Equity:
Common Stock, No par value per share
in 1998 and $.83 per share in 1997;
Authorized 20,000,000 shares;
Issued 6,618,393 shares in 1998 and
4,173,084 shares in 1997 72,652 5,206
Additional paid in capital - 56,155
Retained earnings (deficit) (5,965) 2,485
Accumulated other comprehensive income,
Unrealized gains on available-for-sale
securities, net 2,928 3,176
Less: Treasury stock, At cost
82,263 shares in 1998 and
47,509 shares in 1997 (1,734) (1,409)
--------- ---------
Total shareholders' equity 67,881 65,613
--------- ---------
Total liabilities and
shareholders' equity $609,642 $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 Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 7,156 $7,222 $21,430 $17,032
Income from available-for-sale securities:
Taxable 2,633 1,503 6,986 4,094
Tax Exempt 675 680 2,039 1,989
Dividends 174 183 461 546
Interest on deposits in banks 232 136 526 189
------- ------ ------- -------
Total interest income 10,870 9,724 31,442 23,850
------- ------ ------- -------
Interest Expense:
Interest on deposits 3,584 2,745 10,321 7,018
Interest on short-term borrowings 134 267 376 591
Interest on other borrowed funds 2,115 1,609 5,713 4,256
------- ------ ------- -------
Total interest expense 5,833 4,621 16,410 11,865
------- ------ ------- -------
Net interest income 5,037 5,103 15,032 11,985
Provision for possible loan losses 300 300 900 875
------- ------ ------- -------
Net interest income, after provision
for possible loan losses $ 4,737 $4,803 $14,132 $11,110
------- ------ ------- -------
</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 Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Operating Income:
Service charges on deposit accounts $ 290 $ 304 $ 854 $ 644
Trust income 165 108 450 324
Net security gains 256 433 985 1,301
Income from insurance subsidiary 32 33 114 99
Other income 188 165 400 385
------ ------ ------ ------
Total other operating income 931 1,043 2,803 2,753
Other Operating Expense:
Salaries and employee benefits 1,405 1,413 4,226 3,263
Net occupancy expenses 170 236 546 454
Furniture and equipment expenses 201 200 646 460
Amortization of goodwill 189 189 566 189
Expenses of insurance subsidiary 65 70 171 109
Other expenses 770 1,049 2,291 1,998
------ ------ ------ ------
Total other operating expense 2,800 3,157 8,446 6,473
------ ------ ------ ------
Income before income tax provision 2,868 2,689 8,489 7,390
Income tax provision 744 612 2,183 1,675
------ ------ ------ ------
Net income $2,124 $2,077 $6,306 $5,715
====== ====== ====== ======
PER SHARE DATA
- --------------
Net income per share - Basic $0.33 $0.32 $0.97 $0.97
Weighted average number of shares
outstanding - Basic 6,538,436 6,496,754 6,530,093 5,900,966
Net income per share - Diluted $0.33 $0.32 $0.96 $0.97
Weighted average number of shares
outstanding - Diluted 6,616,520 6,496,754 6,602,408 5,900,966
Dividends paid $0.210 $0.171 $0.605 $0.500
The accompanying notes are an integral part of these financial statements.
6
</TABLE>
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
-----------
(In Thousands)
For the Nine Months
Ended September 30
------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 6,306 $ 5,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 900 1,055
Provision for depreciation 575 493
Amortization of goodwill 566 189
Amortization and accretion of securities, net 267 328
Net security gains (985) (1,301)
Gain on sale of bank premises - (83)
(Increase) decrease in accrued interest and
other assets 1,174 (391)
Increase (decrease) in accrued interest and
other liabilities (380) (646)
-------- --------
Net cash provided by operating activities 8,423 5,359
-------- --------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 30,134 12,858
Proceeds from maturities of available-for-sale securities 34,459 13,347
Purchases of available-for-sale securities (134,833) (23,937)
Net (increase) decrease in loans (9,148) 1,646
Capital expenditures (621) (1,096)
Proceeds from sale of bank premises - 266
--------- --------
Net cash provided by (used in) investing activities (80,009) 3,084
--------- --------
Cash flows from financing activities:
Net increase in deposits 24,773 8,546
Net increase (decrease) in short-term borrowings 2,778 (17,417)
Proceeds from other borrowed funds 95,000 20,000
Repayments of other borrowed funds (25,525) (12,003)
Cash dividends paid (3,964) (3,003)
Proceeds from sale of stock for employee benefits program 499 451
Purchase of treasury stock (325) -
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 93,236 2,517
-------- --------
Net increase in cash and cash equivalents 21,650 10,960
Cash and cash equivalents at beginning of period 8,959 7,499
-------- --------
Cash and cash equivalents at end of period $30,609 $18,459
======== ========
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 Nine Months
Ended September 30
------------------
1998 1997
---- ----
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
<S> <C> <C>
Interest $15,711 $11,286
Income taxes 1,760 1,600
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):
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 nine-month period ended September 30, 1998,
loans with an estimated value of $320,000 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, Central Pennsylvania
Bank, Bucktail Bank and Trust Company, Watsontown Bank, 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 nine
months ended September 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
nine months ended September 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 Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $2,124 $2,077 $6,306 $5,715
------- ------- ------- -------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities:
Gains (losses) arising during the period 1,309 2,227 609 3,597
Reclassification adjustment - realized
gains included in net income (256) (433) (985) (1,301)
------- ------- ------- -------
Other comprehensive income (loss)
before income tax provision 1,053 1,794 (376) 2,296
Income tax expense/benefit related to
other comprehensive income (loss) (358) (610) 128 (782)
------- ------- ------- -------
Other comprehensive income (loss) 695 1,184 (248) 1,514
------- ------- ------- -------
Comprehensive income $2,819 $3,261 $6,058 $7,229
======= ======= ======= =======
</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 future, and
may not be indicative of future results.
SUN's net income for the nine months ended September 30, 1998 amounted to
$6,306,000, an increase of 10.3% over the same period of 1997. Basic and
diluted earnings per share were $.97 and $.96, respectively, for the nine months
ended September 30, 1998 compared to $.97 basic and diluted for the same period
in 1997. SUN achieved a 1.49% return on average assets and a 12.63% return on
average equity for the nine months ended September 30, 1998, compared to ratios
of 1.82% and 16.07% 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 accounting principles to reflect the effect of goodwill on
the balance sheet and income statement. This expense has an effect on earnings.
Without the effect of goodwill, our return on average assets would be 1.66% and
return on average equity would be 16.39% for the nine months ended September 30,
1998, compared to ratios of 1.90% and 18.05% for the previous comparable period.
For the three months ended September 30, 1998, SUN's earnings amounted to
$2,124,000, an increase of 2.3% over the same period of 1997. Basic and diluted
earnings per share were $.33 for the three months ended September 1998, compared
to $.32 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 September 30, 1998 and 1997
- ----------------------------------------------------------------------
Interest income increased $1,146,000 or 11.8% from $9,724,000 for the three
months ended September 30, 1997. However, interest expense also increased
$1,212,000 or 26.2% from the three month ended September 30, 1997. This
increase in interest expense off set increases in interest income which kept net
interest income at a static level for the three months ended September 30, 1998
and 1997.
Total other operating income increased $65,000, excluding net security gains,
or 10.7%, for the three months ended September 30, 1998 compared to the same
period of 1997. Net security gains, primarily from the sales of equity
securities, were $256,000 for the three months ended September 30, 1998 compared
to gains of $433,000 for the same period in 1997. Service charges on deposit
accounts decreased $14,000 to $290,000 from $304,000 for the three months
11
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ended September 30, 1997. Additionally, trust income increased 52.8% to
$165,000 primarily due to the addition of Bucktail trust accounts. Other income
increased 13.9% to $188,000 from $165,000 for the three months ended
September 30, 1997. The increase is the result of safe deposit box rent and
income from the increased debit and credit card interchange fees.
Other operating expenses decreased to $2,800,000 for the three months ended
September 30, 1998, compared to $3,157,000 in the same period in 1997. Other
expense decreased $279,000 or 26.6% to $770,000 from $1,049,000 for the three
months ended September 30, 1997. The decrease is due primarily to a write down
of other real estate owned of $180,000 for the three months ended September 30,
1997. In addition, the three months ended September 30, 1997 included $55,000
in expenses associated with the merger with Bucktail Bank and Trust. The
remaining decrease of $44,000 is the result of economies of scale being
realized.
Results of Operations - Nine Months Ended September 30, 1998 and 1997
- ---------------------------------------------------------------------
The increase in SUN's net earnings for the nine months ended September 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 nine months ended September 30, 1998. Net
interest income for the nine months ended September 30, 1998 increased
$3,047,000, or 25.4%, over the same period in 1997, principally due to increased
volumes in the first and second quarters of 1998 resulting from the Bucktail
acquisition. Other operating income increased $50,000, or 1.8%, over the same
period of 1997, as net security gains, primarily from the sale of equity
securities, decreased $316,000. Service charges on deposit accounts and trust
income increased $336,000 due in part to reasons described above.
Other operating expenses increased $1,973,000, or 30.5%, for the nine months
ended September 30, 1998 over the same period in 1997 due in part to the
$1,241,000 increase in salary and employee benefits, occupancy expense, and
furniture and equipment expense due mainly to the acquisition of Bucktail. The
increase includes goodwill amortization of $566,000 for the nine months ended
September 30, 1998 compared to $189,000 for the nine months ended September 30,
1997. Other expenses increased $293,000 with the Pennsylvania shares tax
increasing $104,000 as a direct result of the Bucktail acquisition. The
remaining increase in other expense was attributable to increases 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 - September 30, 1998 and December 31, 1997
- --------------------------------------------------------
Total assets were $609,642,000 at September 30, 1998, an increase of 19.4%
from $510,728,000 at December 31, 1997. Securities available-for-sale increased
by $70,518,000. The investment portfolio is mainly comprised of mortgage-backed
securities and state and municipal bonds. The intangible asset, goodwill, was
reduced to $10,380,000 at September 30, 1998. Goodwill resulted from the
acquisition of Bucktail on June 30, 1997. Also, total liabilities increased
$96,646,000, or 21.7% to $541,761,000 at September 30, 1998 compared to
December 31, 1997. Deposits increased by $24,773,000 due to growth in
certificates of deposit and NOW accounts. The introduction of a government
funds account has provided additional deposits of $10,806,000 with a majority of
the remaining increase due to certificate of deposit growth. Total borrowed
funds increased $69,253,000, or 61.1% to $182,537,000 in 1998 with FHLB term
borrowings representing $69,475,000 of the increase. Average term FHLB
borrowings increased for the first nine months by $36,240,000. 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.
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
September 30, 1998, the allowance for possible loan losses was $3,498,000.
This allowance amount represents 1.09% of total loans. Management deems the
allowance to be adequate; however, future additions may be necessary based on
economic, 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 earnings and increase common stock (no net
effect on SUN's total shareholders' equity) for the market value of the 5% stock
dividend. This results in a deficit retained earnings balance of $5,965,000 as
of September 30, 1998. Although this account is negative due to accounting
standard requirements, SUN's total shareholders' equity was $67,881,000 as of
September 30, 1998 is indicative of a very strong financial condition.
Capital Adequacy
- ----------------
Management believes capital is being maintained at adequate levels. SUN paid
a cash dividend of $.210 per share to its shareholders on September 11, 1998.
SUN's stock is traded publicly on the NASDAQ national market system under the
symbol SUBI. 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 September 30, 1998:
Total Capital $58,071 17.2% 8.0%
(to Risk Weighted Assets)
Tier I Capital 54,573 16.1% 4.0%
(to Risk Weighted Assets)
Tier I Capital 54,573 9.4% 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 of legislation 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
- -------------------
SUN's Year 2000 Project Team consists of members from every business unit in
the company. Continuous progress is being made to assure the company's
readiness for Year 2000 compliance. The Year 2000 project has top management's
fullest support and is considered one of the corporation's highest priorities.
Although SUN performs its core application processing in-house, it relies
heavily on external vendors for all Mission Critical Systems. None of these
systems are developed or designed in-house. To date, the Inventory and
Assessment Phases have been completed, with all known systems and vendors being
evaluated or contacted. The vendors of the Mission Critical Systems have
indicated they are in compliance or have plans in place to be compliant by the
first quarter of 1999. In addition to the system certification by the Mission
Critical vendors, SUN is also performing its own in-house testing of these
systems and identified system interfaces.
SUN is well along in the Validation Phase which involves testing the Mission
Critical Systems. Multiple levels of testing are being conducted both in-house
and by the vendors. Most testing will be substantially complete by year-end
1998 with the remaining tests being completed during the first quarter of 1999.
Additional personnel resources are being allocated to this phase of the project
to assure its timely completion. At this time, no significant Year 2000
problems have been identified.
15
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Project Team is also developing contingency plans that can be readily
instituted in the case of any Mission Critical Systems being unavailable.
Individual sub-task teams have been formed to create and test these plans. This
process will continue throughout much of the first quarter of 1999.
Excluding the personnel costs, which are expensed as incurred, the total cost
associated with Year 2000 readiness is not significant. To date, the associated
costs are less than $20,000. Currently, there are no major hardware or software
system replacements or modifications required that are related to Year 2000.
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 November 1998, the Board of Directors approved an increased quarterly
dividend payment from $.210 per share to $.215 per share for shareholders of
record November 27, 1998, payable December 11, 1998.
On August 12, 1998, SUN filed registration statements under form S-8 for the
company's 1998 Stock Incentive Plan, 1998 Independent Directors Stock Option
Plan, and 1998 Employee Stock Purchase Plan, respectively.
Item 6 -- Exhibits and Reports on Form 8-K
a. No reports on Form 8-K were filed for the quarter ending September 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 11/13/98 /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
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