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 end September 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 6,799,314
- -------------------------- ----------------------------------------
Class Outstanding Shares At September 30, 1999
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
CONTENTS Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1 - Financial Statements:
Consolidated Balance Sheet as of September 30, 1999
(Unaudited) and December 31, 1998 3
Consolidated Statement of Income for the Three and Nine
Months Ended September 30, 1999 and September 30, 1998
(Unaudited) 5
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1999 and September 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
<TABLE>
(In Thousands) September 30, 1999 December 31, 1998
(Unaudited) (Note)
------------------ -----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 10,094 $ 13,350
Interest-bearing deposits in banks 3,509 880
-------- --------
Total cash and cash equivalents 13,603 14,230
Securities available for sale 293,765 254,780
Loans, net 356,370 329,123
Bank premises and equipment, net 9,826 9,139
Intangible asset, goodwill-net 9,625 10,191
Accrued interest and other assets 12,863 6,114
-------- --------
Total assets $696,052 $623,577
======== ========
</TABLE>
3
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(Continued)
<TABLE>
(In Thousands) September 30, 1999 December 31, 1998
(Unaudited) (Note)
------------------ -----------------
LIABILITIES & SHAREHOLDERS' EQUITY
<S> <C> <C>
Deposits
Noninterest-bearing $ 36,635 $ 36,429
Interest-bearing 376,648 327,457
--------- ---------
Total deposits 413,283 363,886
Short-term borrowings 9,191 25,750
Other borrowed funds 209,000 161,500
Accrued interest and other liabilities 5,145 4,640
--------- ---------
Total liabilities 636,619 555,776
Shareholders' equity
Common stock, no par value per share;
Authorized 20,000,000 shares
issued 6,982,158 shares in 1999 and
6,627,139 shares in 1998 81,425 72,913
Retained earnings (deficit) (10,941) (4,949)
Accumulated other comprehensive income (loss) (6,917) 2,016
Less: Treasury stock, at cost
182,844 shares in 1999 and
97,263 shares in 1998 (4,134) (2,179)
--------- ---------
Total shareholders' equity 59,433 67,801
--------- ---------
Total liabilities and shareholders' equity $696,052 $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)
-----------
<TABLE>
(In Thousands, Except for Per Share Data) For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,453 $ 7,156 $21,958 $21,430
Income from available for sale securities
Taxable 3,808 2,633 10,374 6,986
Tax exempt 411 675 1,511 2,039
Dividends 259 174 703 461
Interest on deposits in banks 60 232 137 526
------- ------- ------- -------
Total interest income 11,991 10,870 34,683 31,442
------- ------- ------- -------
Interest expense:
Interest on deposits 3,727 3,584 10,785 10,321
Interest on short-term borrowings 273 171 610 512
Interest on other borrowed funds 2,629 2,078 7,560 5,577
------- ------- ------- -------
Total interest expense 6,629 5,833 18,955 16,410
------- ------- ------- -------
Net interest income 5,362 5,037 15,728 15,032
Provision for possible loan losses 450 300 1,350 900
------- ------- ------- -------
Net interest income, after provision
for possible loan losses $ 4,912 $ 4,737 $14,378 $14,132
------- ------- ------- -------
</TABLE>
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, Except for Per Share Data) For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Other operating income:
Service charges on deposit accounts $ 312 $ 290 $ 889 $ 854
Trust income 200 165 524 450
Net security gains 517 256 1,536 985
Income from insurance subsidiary 73 32 187 114
Other income 173 188 614 400
------ ------ ------ ------
Total other operating income 1,275 931 3,750 2,803
------ ------ ------ ------
Other operating expense:
Salaries and employee benefits 1,555 1,405 4,610 4,226
Net occupancy expenses 163 170 504 546
Furniture and equipment expenses 263 201 787 646
Amortization of goodwill 189 189 566 566
Expenses of insurance subsidiary 85 65 90 171
Other expenses 861 770 2,342 2,291
------ ------ ------ ------
Total other operating expenses 3,116 2,800 8,899 8,446
------ ------ ------ ------
Income before income tax provision 3,071 2,868 9,229 8,489
Income tax provision 820 744 2,514 2,183
------ ------ ------ ------
Net income $2,251 $2,124 $6,715 $6,306
====== ====== ====== ======
PER SHARE DATA
Net income per share - Basic $ 0.33 $ 0.31 $ 0.98 $ 0.92
====== ====== ====== ======
Weighted average number of shares
outstanding - Basic 6,801,918 6,865,358 6,818,697 6,856,598
========= ========= ========= =========
Net income per share - Diluted $ 0.33 $ 0.31 $ 0.98 $ 0.91
====== ====== ====== ======
Weighted average number of shares
outstanding - Diluted 6,863,007 6,947,346 6,863,839 6,932,528
========= ========= ========= =========
Dividends paid $0.230 $0.200 $0.665 $0.576
====== ====== ====== ======
</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)
-----------
<TABLE>
(In Thousands) For the Nine Months
Ended September 30
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,715 $ 6,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 1,350 900
Provision for depreciation 561 575
Amortization of goodwill 566 566
Amortization and accretion of securities, net 200 267
Net security gains (1,536) (985)
Decrease in accrued interest and other assets 656 1,174
Increase (decrease) in accrued interest and
other liabilities 505 (380)
--------- ---------
Net cash provided by operating activities 9,017 8,423
--------- ---------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 35,157 30,134
Proceeds from maturities of available for sale securities 23,613 34,459
Purchases of available for sale securities (109,955) (134,833)
Net increase in loans (31,399) (9,148)
Capital expenditures (1,248) (621)
--------- ---------
Net cash used in investing activities (83,832) (80,009)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 49,397 24,773
Net (decrease) increase in short-term borrowings (16,559) 2,778
Proceeds from other borrowed funds 50,000 95,000
Repayments of other borrowed funds (2,500) (25,525)
Cash dividends paid (4,537) (3,964)
Proceeds from sale of stock for employee benefits program 342 499
Purchase of treasury stock (1,955) (325)
--------- ---------
Net cash provided by financing activities 74,188 93,236
--------- ---------
Net (decrease) increase in cash and cash equivalents (627) 21,650
Cash and cash equivalents at beginning of period 14,230 8,959
--------- ---------
Cash and cash equivalents at end of period $ 13,603 $ 30,609
========= =========
</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)
<TABLE>
For the Nine Months
Ended September 30
-------------------
1999 1998
------- -------
<S> <C> <C>
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
Interest $18,646 $15,711
Income taxes 2,675 1,760
</TABLE>
Loans with an estimated value of $608,000 and $320,000 were
reclassified to other real estate owned, during the
nine-month periods ended September 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 nine
months ended September 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 resulting 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, 1999 compared to the corresponding periods in
1998, but comprehensive income over the same periods has declined.
<TABLE>
(In Thousands) For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income $2,251 $2,124 $ 6,715 $6,306
------ ------ ------- ------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities:
Gains (losses) arising during the period (3,113) 1,309 (11,999) 609
Reclassification adjustment - realized
gains included in net income (517) (256) (1,536) (985)
------- ------- -------- -------
Other comprehensive income (loss)
before income tax provision (3,630) 1,053 (13,535) (376)
Income tax expense/benefit related to
other comprehensive income (loss) 1,234 (358) 4,602 128
------- ------- -------- -------
Other comprehensive income (loss) (2,396) 695 (8,933) (248)
------- ------- -------- -------
Comprehensive income (loss) $ (145) $2,819 $(2,218) $6,058
======= ======= ======== =======
</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 September 30,
1999 and December 31, 1998 were as follows:
<TABLE>
September 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 $262,233 $ 45 $ (9,548) $252,730
Obligations of states and political subdivisions 21,358 235 (281) 21,312
Other corporate 500 - - 500
-------- ---- --------- --------
Total debt securities 284,091 280 (9,829) 274,542
-------- ---- --------- --------
Equity securities:
Marketable equity securities 9,446 374 (1,306) 8,514
Restricted equity securities 10,709 - - 10,709
-------- ---- --------- --------
Total equity securities 20,155 374 (1,306) 19,223
-------- ---- --------- --------
Total $304,246 $654 $(11,135) $293,765
======== ==== ========= ========
December 31, 1998
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Debt securities:
Obligations of U.S. government agencies $188,948 $ 740 $(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
<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 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 nine months ended September 30, 1999 amounted to
$6,715,000, an increase of 6.49% over the same period of 1998. Basic and
diluted earnings per share were $.98 for the nine months ended September 30,
1999 compared to $.92 basic and $.91 diluted for the same period in 1998. SUN
achieved a 1.38% return on average assets and a 13.78% return on average equity
for the nine months ended September 30, 1999, compared to ratios of 1.49% and
12.63% for the previous comparable period. Without the effect of goodwill,
SUN's return on average assets would be 1.52% and return on average equity
would be 17.59% for the nine months ended September 30, 1999. For the three
months ended September 30, 1999, SUN's earnings amounted to $2,251,000, an
increase of 5.98% over the same period of 1998. Basic and diluted earnings per
share were $.33 for the three months ended September 30, 1999 compared to $.31
basic and 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 September 30, 1999 and 1998
- ----------------------------------------------------------------------
Net interest income increased to $5,362,000 from $5,037,000 for the three
months ended September 30, 1999 and 1998 respectively. Total interest and
dividend income increased $1,121,000 to $11,991,000 for the three months ended
September 30, 1999. A majority of this increase, $1,175,000, was the result of
SUN's increased investment in mortgage-backed securities, while tax exempt
security income decreased $264,000. In addition, interest and fees on loans
increased $297,000 or 4.2% to $7,453,000 for the three months ended September
30, 1999. Interest on deposits in banks decreased 74.1% to $60,000 for the
three months ended September 30, 1999 as SUN utilized its cash to fund loan and
investment growth. Total interest expense increased $796,000 for the three
months ended September 30, 1999 as compared to 1998. Of the increase,
$653,000 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
September 30, 1999. The change is due to increased net loan charge offs and
growth in SUN's net loan portfolio of $40,390,000 from September 30, 1998 to
September 30, 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, excluding security gains of $517,000, increased
$83,000 or 12.3% for the three months ended September 30, 1999 compared to the
same period of 1998. Service charge on deposit accounts increased 7.6% to
$312,000 for the three months ended September 30, 1999. Trust income increased
$35,000 to $200,000 for the three months ended September 30, 1999. Income from
the insurance subsidiary increased $41,000 to $73,000 for the three months ended
September 30, 1999.
Other operating expenses increased to $3,116,000 for the three months
ended September 30, 1999, compared to $2,800,000 in the same period of 1998.
Expenses of the insurance subsidiary increased to $85,000 from $65,000 for the
three months ended September 30, 1998. Net occupancy and furniture and
equipment expenses increased 14.8% to $426,000. Salaries and employee benefits
increased 10.7% to $1,555,000 as SUN continues to attract new employees to
expand SUN's market area coverage. In addition, due to a decrease in SUN's
indirect consumer lending, the amount of wages capitalized to comply with
Statement of Financial Accounting Standards No. 91 decreased $96,000. Other
expenses increased 11.8% to $861,000 for the three months ended September 30,
1999.
Results of Operations - Nine Months Ended September 30, 1999 and 1998
- ---------------------------------------------------------------------
The increase in SUN's net earnings for the nine months ended September 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
nine months ended September 30, 1999 increased $696,000, or 4.6%, over the same
period in 1998, principally due to SUN's increased investment in mortgage-backed
securities. Other operating income increased $947,000, or 33.8%, over the same
period of 1998, as net security gains, primarily from the sale of equity
securities and tax exempt municipal bonds, increased $551,000. Other income
increased to $614,000 from $400,000 for the nine months ended September 30,
1998. This increase is the result of non-yield related loan fees increasing
$73,000 from $214,000 for the nine months ended September 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 $453,000, or 5.4%, for the
nine months ended September 30, 1999 over the same period in 1998 primarily to
the reasons described above in the three months ended September 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 - September 30, 1999 and December 31, 1998
- --------------------------------------------------------
Total assets were $696,052,000 at September 30, 1999, an increase of 11.6%
from $623,577,000 at December 31, 1998. Cash and cash equivalents decreased
$627,000 or 4.4% 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 $27,247,000 or
an 8.3% increase from December 31, 1998. Securities available for sale
increased by $38,985,000 or 15.3%. The investment portfolio is mainly comprised
of mortgage-backed securities and state and municipal bonds. The intangible
asset, goodwill, was reduced to $9,625,000 at September 30, 1999. Also, total
liabilities increased $80,843,000, or 14.5% to $636,619,000 at September 30,
1999. Deposits increased by $49,397,000 due primarily to grwth of $7,439,000
in certificates of deposit and growth of $40,633,000 in NOW accounts. The
majority of the growth in NOW accounts is the result of SUN's obtaining the
accounts of a local government. Total borrowed funds increased $30,941,000, or
16.5% to $218,191,000 at September 30, 1999 with the Federal Home Loan Bank of
Pittsburgh (FHLB) term borrowings increasing $47,500,000, while overnight
borrowings decreased $16,559,000 from December 31, 1998. These additional term
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 $8,368,000 or 12.3% from December 31, 1998
to September 30, 1999. The decrease in shareholders' equity is the result of
two factors. First, SUN has purchased 77,932 shares of treasury stock with a
cost of $1,955,000 over the past nine months. Secondly, SUN currently has an
accumulated other comprehensive loss of $6,917,000 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.
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, 1999, the allowance for possible loan losses was $3,635,000. This
allowance amount represents 1.02% of total loans. 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. Future additions may be
necessary based on rcommendations of regulatory bodies, economic, or market
conditions.
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 consists 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 to 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 related 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 September 30, 1999 and December 31, 1999 are as
follows (in thousands):
<TABLE>
September 30, 1999
-----------------------
Fair
Cost Value
------- -------
<S> <C> <C>
Banks and bank holding companies $ 9,446 $ 8,514
FHLB stock 10,709 10,709
------- -------
Total $20,155 $19,223
======= =======
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
======= =======
</TABLE>
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.
<TABLE>
(In Thousands) For Capital
Actual Adequacy Purposes
----------------- -----------------
Amount Ratio Ratio
------- ----- -----
<S> <C> <C> <C>
As of September 30, 1999:
Total Capital $60,360 17.6% 8.0%
(to Risk Weighted Assets)
Tier I Capital 56,725 16.6% 4.0%
(to Risk Weighted Assets)
Tier I Capital 56,725 8.6% 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)
</TABLE>
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
wil 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. Future 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. All five phases as
outlined by the Federal Financial Institutions Examiners Council (FFIEC) have
been completed. These are awareness, assessment, renovations, validation, and
implementation.
There were many activities completed during these phases of which some of the
most notable were: we identified all of our key vendors and suppliers, contacted
them and confirmed that they were Year 2000 compliant. We identified and tested
all mission critical software and hardware systems, including all of our core
bank software applications. The mission critical systems are evaluated and
tested utilizing the dates established by the FFIEC. These tests were completed
by the deadlines established by the FFIEC. We evaluated our customer base and
assessed the risk associated with the large balance accounts, and we are
continuing to monitor these accounts. Significant training programs have been
conducted for all of our employees dealing with the Year 2000 issues, in
addition to communicating with our customers.
We have developed contingency plans as a backup to our mission critical
systems in the event of a failure. In addition to the contingency plans, SUN
has a disaster recovery plan for its core processing applications, which is
tested frequently. The Year 2000 project results and plans have been reviewed
by the FDIC examiners and by an outside consultant. The contingency plan
includes our procedures for cash liquidity for the branches and ATM's.
17
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
To date there have been no significant problems identified, with a few minor
Year 2000 issues, which have been corrected. The tangible cost of addressing
SUN's systems for Year 2000 is less than $25,000. Senior management is closely
involved in all aspects of the Year 2000 project with quarterly reports given to
the Board of Directors.
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 November 1, 1999, the Board of Directors approved an increased quarterly
dividend payment from $.230 per share to $.235 per share for shareholders of
record November 26, 1999, payable December 10, 1999.
Item 6 -- Exhibits and Reports on Form 8-K
a. No reports on Form 8-K were filed for the quarter ending
September 30, 1999.
19
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 11/12/99 /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
(570) 374-1131
20
<PAGE>
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