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, 1999
-------------------------------------------------
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)
(570) 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 6,806,309
- -------------------------------------- ------------------------------------
Class Outstanding Shares At June 30, 1999
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
CONTENTS Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Financial Statements:
Consolidated Balance Sheet as of June 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statement of Income for the Three and Six
Months Ended June 30, 1999 and June 30, 1998 (Unaudited) 5
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1999 and June 30, 1998 (Unaudited) 7
Notes to the Consolidated Financial Statements (Unaudited) 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II - OTHER INFORMATION
- ---------------------------
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
June 30, 1999 December 31, 1998
(Unaudited) (Note)
------------- -----------------
ASSETS
<TABLE>
<S> <C> <C>
Cash and due from banks $ 9,096 $ 13,350
Interest-bearing deposits in banks 857 880
-------- --------
Total cash and cash equivalents 9,953 14,230
Securities available for sale 274,065 254,780
Loans, net 343,080 329,123
Bank premises and equipment, net 9,270 9,139
Intangible asset, goodwill-net 9,814 10,191
Accrued interest and other assets 11,682 6,114
-------- --------
Total assets $657,864 $623,577
======== ========
</TABLE>
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, 1999 December 31, 1998
(Unaudited) (Note)
------------- -----------------
<TABLE>
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 38,056 $ 36,429
Interest-bearing 333,813 327,457
--------- ---------
Total deposits 371,869 363,886
Short-term borrowings 35,486 25,750
Other borrowed funds 184,000 161,500
Accrued interest and other liabilities 5,137 4,640
--------- ---------
Total liabilities 596,492 555,776
--------- ---------
Shareholders' Equity:
Common Stock, No par value per share;
Authorized 20,000,000 shares;
Issued 6,974,153 shares in 1999 and
6,627,139 shares in 1998 81,295 72,913
Retained earnings (deficit) (11,629) (4,949)
Accumulated other comprehensive income (loss) (4,521) 2,016
Less: Treasury stock, at cost
167,844 shares in 1999 and
97,263 shares in 1998 (3,773) (2,179)
--------- ---------
Total shareholders' equity 61,372 67,801
--------- ---------
Total liabilities and
shareholders' equity $657,864 $623,577
========= =========
</TABLE>
Note: The balance sheet at December 31, 1998 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
-------------------- ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 7,259 $ 7,105 $14,505 $14,274
Income from available-for-sale securities:
Taxable 3,476 2,447 6,566 4,353
Tax Exempt 491 707 1,100 1,364
Dividends 234 154 444 287
Interest on deposits in banks 14 200 77 294
------- ------- ------- -------
Total interest income 11,474 10,613 22,692 20,572
------- ------- ------- -------
Interest Expense:
Interest on deposits 3,554 3,454 7,058 6,737
Interest on short-term borrowings 191 170 337 341
Interest on other borrowed funds 2,520 1,992 4,931 3,499
------- ------- ------- -------
Total interest expense 6,265 5,616 12,326 10,577
------- ------- ------- -------
Net interest income 5,209 4,997 10,366 9,995
Provision for possible loan losses 450 300 900 600
------- ------- ------- -------
Net interest income, after provision
for possible loan losses $ 4,759 $ 4,697 $ 9,466 $ 9,395
------- ------- ------- -------
</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
-------------------- ------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
------ ------ ------ ------
Other Operating Income:
Service charges on deposit account $ 306 $ 284 $ 577 $ 564
Trust income 165 165 324 285
Net security gains 427 419 1,019 729
Income from insurance subsidiary 61 42 114 82
Other income 220 83 441 212
------ ------ ------ ------
Total other operating income 1,179 993 2,475 1,872
------ ------ ------ ------
Other Operating Expense:
Salaries and employee benefits 1,516 1,361 3,055 2,821
Net occupancy expenses 164 195 341 376
Furniture and equipment expenses 268 226 524 445
Amortization of goodwill 188 188 377 377
Expenses of insurance subsidiary 4 30 5 106
Other expenses 763 801 1,481 1,521
------ ------ ------ ------
Total other operating expense 2,903 2,801 5,783 5,646
------ ------ ------ ------
Income before income tax provision 3,035 2,889 6,158 5,621
Income tax provision 814 750 1,694 1,439
------ ------ ------ ------
Net income $2,221 $2,139 $4,464 $4,182
====== ====== ====== ======
</TABLE>
<TABLE>
PER SHARE DATA
<S> <C> <C> <C> <C>
Net income per share - Basic $0.33 $0.31 $0.65 $0.61
====== ====== ====== ======
Weighted average number of shares
outstanding - Basic 6,809,665 6,862,149 6,827,086 6,852,218
========= ========= ========= =========
Net income per share - Diluted $0.33 $0.30 $0.65 $0.60
====== ====== ====== ======
Weighted average number of shares
outstanding - Diluted 6,830,506 6,950,817 6,864,255 6,940,886
========= ========= ========= =========
Dividends paid $0.225 $0.195 $0.435 $0.376
====== ====== ====== ======
</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)
For the Six Months
Ended June 30
-------------------
1999 1998
-------- --------
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,464 $ 4,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 900 600
Provision for depreciation 374 384
Amortization of goodwill 377 377
Amortization and accretion of securities, net 129 167
Net security gains (1,019) (729)
Decrease in accrued interest and
other assets 321 670
Increase (decrease) in accrued interest and
other liabilities 497 (722)
-------- --------
Net cash provided by operating activities 6,043 4,929
-------- --------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 26,475 13,681
Proceeds from maturities of available for sale securities 18,296 20,478
Purchases of available for sale securities (73,071) (95,638)
Net increase in loans (17,378) (456)
Capital expenditures (505) (252)
-------- --------
Net cash used in investing activities (46,183) (62,187)
-------- --------
Cash flows from financing activities:
Net increase in deposits 7,983 23,980
Net decrease in short-term borrowings 9,736 459
Proceeds from other borrowed funds 25,000 65,000
Repayments of other borrowed funds (2,500) (17,500)
Cash dividends paid (2,973) (2,592)
Proceeds from sale of stock for employee benefits program 211 471
Purchase of treasury stock (1,594) (180)
-------- --------
Net cash provided by financing activities 35,863 69,638
-------- --------
Net (decrease) increase in cash and cash equivalents (4,277) 12,380
Cash and cash equivalents at beginning of period 14,230 8,959
-------- --------
Cash and cash equivalents at end of period $ 9,953 $21,339
======== ========
</TABLE>
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
------------------
1999 1998
<S> <C> <C>
------- -------
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
Interest $12,049 $10,109
Income taxes 1,800 1,085
Loans with an estimated value of $327,000 and $290,000 were reclassified
to other real estate owned, during the six-month periods ended
June 30, 1999 and 1998, respectively.
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 Sun Bank and
Pennsylvania Sun Life Insurance Company. The Bank does business as Snyder
County Trust Company, Central Pennsylvania Bank, Bucktail Bank and Trust
Company, and Watsontown Bank. 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, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
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 8 and 9 of the 1998 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, 1999 compared to the corresponding periods in 1998,
but comprehensive income over the same periods has declined.
</TABLE>
<TABLE>
For the Three Months For the Six Months
Ended June 30 Ended June 30
-------------------- ------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
-------- ------- -------- -------
Net Income $ 2,221 $2,139 $ 4,464 $4,182
-------- ------- -------- -------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities:
Gains (losses) arising during the period (5,773) 216 (8,885) (699)
Reclassification adjustment - realized
gains included in net income (427) (419) (1,019) (729)
-------- ------- -------- -------
Other comprehensive income (loss)
before income tax provision (6,200) (203) (9,904) (1,428)
Income tax expense/benefit related to
other comprehensive income (loss) 2,108 69 3,367 485
-------- ------- -------- -------
Other comprehensive income (loss) (4,092) (134) (6,537) (943)
-------- ------- -------- -------
Comprehensive income (loss) $(1,871) $2,005 $(2,073) $3,239
======== ======= ======== =======
</TABLE>
10
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
Note 3 - Securities Available for Sale
-----------------------------
The amortized cost and fair value of investment securities at June 30, 1999
December 31, 1998 were as follows:
<TABLE>
June 30, 1999
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Debt securities:
Obligations of U.S. government agencies $232,023 $ 46 $(7,404) $224,665
Obligations of states and political subdivisions 29,228 641 (325) 29,544
Other corporate 500 - - 500
-------- ------ -------- --------
Total debt securities 261,751 687 (7,729) 254,709
-------- ------ -------- --------
Equity securities
Marketable equity securities 8,755 834 (643) 8,946
Restricted equity securities 10,410 - - 10,410
-------- ------ -------- --------
Total equity securities 19,165 834 (643) 19,356
-------- ------ -------- --------
Total $280,916 $1,521 $(8,372) $274,065
======== ====== ======== ========
</TABLE>
<TABLE>
Decemeber 31, 1998
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Debt securities
Obligations of U.S. government agencies $188,948 $ 701 $(485) $189,203
Obligations of states and political subdivisions 44,343 1,901 (22) 46,222
Other corporate 500 - - 500
-------- ------ ------ --------
Total debt securities 233,791 2,641 (507) 235,925
-------- ------ ------ --------
Equity securities
Marketable equity securities 8,871 1,078 (156) 9,793
Restricted equity securities 9,062 - - 9,062
-------- ------ ------ --------
Total equity securities 17,933 1,078 (156) 18,855
-------- ------ ------ --------
Total $251,724 $3,719 $(663) $254,780
======== ====== ====== ========
</TABLE>
11
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 1998 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 six months ended June 30, 1999 amounted to
$4,464,000, an increase of 6.74% over the same period of 1998. Basic and
diluted earnings per share were $.65 for the six months ended June 30, 1999
compared to $.61 basic and $.60 diluted for the same period in 1998. SUN
achieved a 1.40% return on average assets and a 13.68% return on average equity
for the six months ended June 30, 1999, compared to ratios of 1.52% and 12.60%
for the previous comparable period. Since the acquisition of Bucktail Bank and
Trust Company 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 1.54% and return on average
equity would be 17.46% for the six months ended June 30, 1999. For the three
months ended June 30, 1999, SUN's earnings amounted to $2,221,000, an increase
of 3.83% over the same period of 1998. Basic and diluted earnings per share
were $.33 for the three months ended June 30, 1999 compared to $.31 basic and
$.30 diluted for the same period in 1998. Earnings per share data has been
adjusted to reflect a 5% stock dividend on June 11, 1999.
Results of Operations - Three Months Ended June 30, 1999 and 1998
- -----------------------------------------------------------------
Net interest income increased to $5,209,000 from $4,997,000 for the three
months ended June 30, 1999 and 1998 respectively. Total interest and dividend
income increased $861,000 to $11,474,000 for the three months ended June 30,
1999. A majority of this increase, $1,029,000, is the result of our increased
investment in mortgage-backed securities, while tax exempt security income
decreased $216,000. Total interest expense increased $649,000 for the three
months ended June 30, 1999 as compared to 1998. Of the increase, $549,000 is
the result of increased borrowings which were reinvested in higher yielding
mortgage backed securities as noted above. In addition, the provision for
possible loan losses increased 50.0% to $450,000 for the three months ended
June 30, 1999. The change is due to increased net loan charge offs and growth
in our net loan portfolio of $35,314,000 from June 30, 1998 to 1999.
12
<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 increased $186,000 or 18.7%, for the three months
ended June 30, 1999 compared to the same period of 1998. Service charge on
deposit accounts increased 7.7% to $306,000 for the three months ended June 30,
1999. Other income increased 165.1% to $220,000 from $83,000 for the three
months ended June 30, 1999. The increase is the result of non-yield related
loan fees increasing $39,000 from $52,000 for the three months ended June 30,
1998. The majority of the remaining change is the result of a change in the
recognition of the writedown of SUN's role as a limited partner in two
affordable elderly housing projects.
Other operating expenses increased to $2,903,000 for the three months ended
June 30, 1999, compared to $2,801,000 in the same period of 1998. Expenses of
the insurance subsidiary decreased to $4,000 from $30,000 for the three months
ended June 30, 1998. This reduction was due to a decrease in the required claim
reserves which offset claims incurred during the same period. Net occupancy and
furniture and equipment expenses increased 2.6% to $432,000. Salaries and
employee benefits increased 11.4% to $1,516,000 as we continue to attract new
employees to expand our market area coverage. In addition, due to a decrease in
our indirect consumer lending, the amount of wages capitalized to comply with
Statement of Financial Accounting Standards No. 91 decreased $70,000.
Results of Operations - Six Months Ended June 30, 1999 and 1998
- ---------------------------------------------------------------
The increase in SUN's net earnings for the six months ended June 30, 1999
compared to the same period in 1998 was attributable primarily to increases in
net interest income and other operating income. Net interest income for the six
months ended June 30, 1999 increased $371,000, or 3.7%, over the same period in
1998, principally due to our increased investment in mortgage-backed securities.
Other operating income increased $603,000, or 32.2%, over the same period of
1998, as net security gains, primarily from the sale of equity securities,
increased $290,000. Other income increased to $441,000 from $212,000 for the
six months ended June 30, 1998. This increase is the result of non-yield
related loan fees increasing $93,000 from $84,000 for the six months ended
June 30, 1998. The majority of the remaining change is the result of a change
in the recognition of the write down of SUN's role as a limited partner in two
affordable elderly housing projects. Other operating expenses increased
$137,000, or 2.4%, for the six months ended June 30, 1999 over the same period
in 1998 primarily to the reasons described above in the three month ended
June 30, 1999 analysis.
13
<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, 1999 and December 31, 1998
- ---------------------------------------------------
Total assets were $657,864,000 at June 30, 1999, an increase of 5.5% from
$623,577,000 at December 31, 1998. Cash and cash equivalents decreased
$4,277,000 or 30.1% from $14,230,000 at December 31, 1998. The decrease
occurred as SUN's management reinvested the cash in mortgaged-backed securities
and used the cash to aid the funding of the increased net loan volume of
$13,957,000 or a 4.2% increase from December 31, 1998. Securities available
for sale increased by $19,285,000 or 7.6%. The investment portfolio is mainly
comprised of mortgage-backed securities and state and municipal bonds. The
intangible asset, goodwill, was reduced to $9,814,000 at June 30, 1999. Also,
total liabilities increased $40,716,000, or 7.3% to $596,492,000 at June 30,
1999. Deposits increased by $7,983,000 to $371,869,000 at June 30, 1999. The
increase is due primarily to growth in NOW and certificate of deposit accounts.
Total borrowed funds increased $32,236,000, or 17.2% to $219,486,000 at
June 30, 1999 with the Federal Home Loan Bank of Pittsburgh (FHLB) term
borrowings increasing $22,500,000. These additional borrowings were made to
take advantage of special rates offered by the FHLB. Management reinvested the
additional borrowed funds in additional mortgage-backed securities, which aided
in increasing the net interest income. SUN's total shareholders' equity
decreased $6,429,000 or 9.5% from December 31, 1998 to June 30, 1999. The
decrease in shareholders' equity is the result of two factors. First, SUN has
purchased 62,932 shares of treasury stock with a cost of $1,594,000 over the
first six months of 1999. Secondly, SUN currently has an accumulated other
comprehensive loss of $4,521,000 as compared to accumulated other comprehensive
income of $2,016,000 at December 31, 1998. Accumulated other comprehensive
income is a volatile component of shareholders' equity as it is derived from
changes in the fair values of SUN's investments in bonds, mortgage-backed
securities, stocks, and other securities. Additionally, in the second quarter
of 1999, an accounting entry of $8,170,000 was recorded to reduce retained
earnings and increase common stock (no net effect on SUN's total shareholders'
equity) for the market value of th 5% stock dividend.
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, 1999, the allowance for possible loan losses was $3,568,000. This
allowance amount represents 1.03% 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.
14
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Equity Securities Risk
- ----------------------
SUN's equity securities portfolio consistis of restricted stock, primarily of
the FHLB, and investments in stocks of other banks and bank holding companies,
mainly based in Pennsylvania.
FHLB stock can only be sold back to the FHLB. Accordingly, SUN's investment
in FHLB stock is carried at cost, which equals par value, and is evaluated for
impairment. Factors that might cause FHLB stock to become impaired (decline in
value on an other than temporary basis) are primarily regulatory in nature and
are related to potential problems in the residential lending market; for
example, the FHLB may be required to make dividend or other payments the
Financing Corporation, the Resolution Funding Corporation, or other entities, in
amounts that could exceed the FHLB's total equity.
Investments in bank stocks are subject to the risk that factors affecting the
banking industry generally, including competition from non-bank entities, credit
risk, interest rate risk, and other factors, could result in a decline in market
prices. Also, losses could occur in individual stocks held by SUN because of
specific circumstances reltaed to each bank. Further, because of the
concentration of its holdings in Pennsylvania banks, these investments could
decline in value if there were a downturn in the state's economy. SUN's
management continually monitors its risk associated with its equity securities.
Equity securities held as of June 30, 1999 and December 31, 1998.
<TABLE>
June 30, 1999
------------------
Fair
Cost Value
<S> <C> <C>
------- -------
Banks and bank holding companies $ 8,755 $ 8,946
FHLB stock 10,410 10,410
------- -------
Total $19,165 $19,356
======= =======
December 31, 1998
------------------
Fair
Cost Value
------- -------
Banks and bank holding companies $ 8,871 $ 9,793
FHLB stock 9,062 9,062
------- -------
Total $17,933 $18,855
======= =======
15
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, 1999:
Total Capital $59,731 18.0% 8.0%
(to Risk Weighted Assets)
Tier I Capital 56,073 16.9% 4.0%
(to Risk Weighted Assets)
Tier I Capital 56,073 8.8% 4.0%
(to Average Assets)
As of December 31, 1998:
Total Capital $59,336 17.0% 8.0%
(to Risk Weighted Assets)
Tier I Capital 55,594 15.9% 4.0%
(to Risk Weighted Assets)
Tier I Capital 55,594 9.7% 4.0%
(to Average Assets)
16
<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 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 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 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 of
the company. Continuous progress is being made to ensure the company is ready
for Year 2000 compliance. Because of the unprecedented nature of the Year 2000
issue and due to the fact its effects will not be fully determined until the
year 2000, this project has top management's fullest support and is considered
one of the corporation's highest priorities.
The mission critical systems were evaluated and tested utilizing the dates
established by the Federal Financial Institutions Examination Council (FFIEC).
The project team has been dedicated to completing the contingency plan which
outlines the necessary steps to be followed in the event any one of the
Mission Critical Systems is unavailable. This plan identifies all mission
critical components required for daily operation of the organization. The team
also has formulated a plan and fully intends to test the contingency plan ahead
of the dates outlined by the FFIEC.
17
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Senior management continues to report the progress of the Year 2000 project to
SUN's Board of Directors on a quarterly basis. To date, there have been no
significant problems identified and the financial impact of the renovation,
validation, and implementation phases continue to have a minimal effect on the
organization.
18
<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
On August 9, 1999, the Board of Directors approved an increased quarterly
dividend payment from $.225 per share to $.23 per share for shareholders of
record August 27, 1999, payable September 10, 1999.
Item 6 -- Exhibits and Reports on Form 8-K
a. No reports on Form 8-K were filed for the quarter ending
June 30, 1999.
19
<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 8/12/99 /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
20
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 9096
<INT-BEARING-DEPOSITS> 857
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 280916
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 274065
<LOANS> 346648
<ALLOWANCE> 3568
<TOTAL-ASSETS> 657864
<DEPOSITS> 371869
<SHORT-TERM> 35486
<LIABILITIES-OTHER> 5137
<LONG-TERM> 184000
<COMMON> 81295
0
0
<OTHER-SE> (11629)
<TOTAL-LIABILITIES-AND-EQUITY> 657864
<INTEREST-LOAN> 14505
<INTEREST-INVEST> 8110
<INTEREST-OTHER> 77
<INTEREST-TOTAL> 22692
<INTEREST-DEPOSIT> 7058
<INTEREST-EXPENSE> 12326
<INTEREST-INCOME-NET> 10366
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 1019
<EXPENSE-OTHER> 5783
<INCOME-PRETAX> 6158
<INCOME-PRE-EXTRAORDINARY> 6158
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4464
<EPS-BASIC> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 3.52
<LOANS-NON> 2731
<LOANS-PAST> 1384
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3327
<CHARGE-OFFS> 754
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 3568
<ALLOWANCE-DOMESTIC> 2507
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1061
</TABLE>
