<PAGE>
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, 2000
------------------------------------------------
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 6,781,448
------------------------------------- ------------------------------------
Class Outstanding Shares At August 8, 2000
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
CONTENTS PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheet as of June 30, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statement of Income for the Three and Six Months Ended
June 30, 2000 and June 30, 1999 (Unaudited) 5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2000 and June 30, 1999 (Unaudited) 7
Notes to the Consolidated Financial Statements (Unaudited) 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited) (Note)
------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,575 $ 15,079
Interest-bearing deposits in banks 18,594 980
-------- --------
Total cash and cash equivalents 32,169 16,059
Securities available for sale 278,107 282,616
Loans, net 399,035 379,297
Bank premises and equipment, net 10,723 10,542
Intangible asset, goodwill-net 9,059 9,436
Accrued interest and other assets 12,826 12,971
-------- --------
Total assets $741,919 $710,921
======== ========
</TABLE>
3
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(Continued)
(In Thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited) (Notex)
------------- -----------------
<S> <C> <C>
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 46,298 $ 37,783
Interest-bearing 378,069 362,338
------------- -----------------
Total deposits 424,367 400,121
Short-term borrowings 17,588 35,966
Other borrowed funds 237,000 214,000
Accrued interest and other liabilities 5,633 4,821
------------- -----------------
Total liabilities 684,588 654,908
------------- -----------------
Shareholders' equity:
Common stock, no par value per share;
20,000,000 authorized shares;
issued 7,225,213 in 2000 and
6,985,680 in 1999 81,610 81,520
Retained earnings (deficit) (11,862) (10,498)
Accumulated other comprehensive income
(loss) (7,795) (10,667)
Less: Treasury stock, at cost
442,449 shares in 2000 and
401,049 shares in 1999 (4,622) (4,342)
------------- -----------------
Total shareholders' equity 57,331 56,013
------------- -----------------
Total liabilities and
shareholders' equity $ 741,919 $ 710,921
============= =================
</TABLE>
Note: The balance sheet at December 31, 1999 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, Except for Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 8,471 $ 7,259 $16,647 $14,505
Income from available-for-sale securities:
Taxable 4,177 3,476 8,395 6,566
Tax Exempt 224 491 476 1,100
Dividends 310 234 591 444
Interest on deposits in banks 73 14 80 77
-------- -------- --------- -------
Total interest income 13,255 11,474 26,189 22,692
-------- -------- --------- -------
Interest expense:
Interest on deposits 4,261 3,554 8,209 7,058
Interest on short-term borrowings 241 191 582 337
Interest on other borrowed funds 3,196 2,520 6,317 4,931
-------- -------- --------- -------
Total interest expense 7,698 6,265 15,108 12,326
-------- -------- --------- -------
Net interest income 5,557 5,209 11,081 10,366
Provision for possible loan losses 700 450 1,300 900
-------- -------- --------- -------
Net interest income, after provision
for possible loan losses $ 4,857 $ 4,759 $ 9,781 $ 9,466
-------- -------- --------- -------
</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>
<CAPTION>
(In Thousands, Except for Per Share Data) For the Three Months For the Six Months
Ended June 30 Ended June 30
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Other operating income:
Service charges on deposit accounts $ 332 $ 306 $ 646 $ 577
Trust income 210 165 420 324
Net security gains (losses) (2,265) 427 (2,250) 1,019
Income from insurance subsidiary 60 61 141 114
Other income 167 220 268 441
----------- ----------- ----------- -----------
Total other operating income (loss) (1,496) 1,179 (775) 2,475
----------- ----------- ----------- -----------
Other operating expenses:
Salaries and employee benefits 1,600 1,516 3,211 3,055
Net occupancy expenses 166 164 345 341
Furniture and equipment expenses 296 268 535 524
Amortization of goodwill 188 188 377 377
Expenses of insurance subsidiary 47 4 95 5
Other expenses 1,133 763 1,988 1,481
----------- ----------- ----------- -----------
Total other operating expenses 3,430 2,903 6,551 5,783
----------- ----------- ----------- -----------
Income (loss) before income tax
provision (credit) (69) 3,035 2,455 6,158
Income tax provision (credit) (155) 814 561 1,694
----------- ----------- ----------- -----------
Net income $ 86 $ 2,221 $ 1,894 $ 4,464
=========== =========== =========== ===========
PER SHARE DATA
Net income per share - Basic $ 0.01 $ 0.33 $ 0.28 $ 0.65
=========== =========== =========== ===========
Weighted average number of shares
outstanding - Basic 6,784,333 6,809,665 6,787,483 6,827,086
=========== =========== =========== ===========
Net income per share - Diluted $ 0.01 $ 0.33 $ 0.28 $ 0.65
=========== =========== =========== ===========
Weighted average number of shares
outstanding - Diluted 6,805,255 6,830,506 6,806,506 6,864,255
=========== =========== =========== ===========
Dividends paid $ 0.240 $ 0.225 $ 0.480 $ 0.435
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
SUN BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,894 $ 4,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 1,300 900
Provision for depreciation 387 374
Amortization of goodwill 377 377
Amortization and accretion of securities, net 84 129
Net security losses (gains) 2,250 (1,019)
Increase (decrease) in accrued interest and
other assets (1,088) 321
Increase in accrued interest and
other liabilities 812 497
--------- ---------
Net cash provided by operating activities 6,016 6,043
--------- ---------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 45,759 26,475
Proceeds from maturities of available for sale securities 11,467 18,296
Purchases of available for sale securities (50,699) (73,071)
Net increase in loans (21,285) (17,378)
Capital expenditures (568) (505)
--------- ---------
Net cash used in investing activities (15,326) (46,183)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 24,246 7,983
Net (decrease) increase in short-term borrowings (18,378) 9,736
Proceeds from other borrowed funds 75,000 25,000
Repayments of other borrowed funds (52,000) (2,500)
Cash dividends paid (3,258) (2,973)
Proceeds from sale of stock for employee benefits program 90 211
Purchase of treasury stock (280) (1,594)
--------- ---------
Net cash provided by financing activities 25,420 35,863
--------- ---------
Net increase (decrease) in cash and cash equivalents 16,110 (4,277)
Cash and cash equivalents at beginning of period 16,059 14,230
--------- ---------
Cash and cash equivalents at end of period $ 32,169 $ 9,953
========= =========
</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>
<CAPTION>
For the Six Months
Ended June 30
--------------------
2000 1999
------- -------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $14,688 $12,049
======= =======
Income taxes $ 1,639 $ 1,800
======= =======
</TABLE>
Loans with an estimated value of $247,000 at June 30, 2000 and $290,000 at
June 30, 1999 were reclassified to foreclosed assets held for sale.
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
(Bank) and Pennsylvania Sun Life Insurance Company (SUN Life). The Bank does
business as Snyder County Trust Company, Central Pennsylvania Bank, Bucktail
Bank and Trust Company, and Watsontown Bank. The transactions of SUN Life are
not material to the consolidated financial statements. 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
periods are included. Operating results for the three and six month periods
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
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 1999 Annual Report to Shareholders.
Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
Note 2 - NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
shares of stock outstanding for each period presented. Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," requires presentation of two
amounts, basic and diluted net income per share.
The following data shows the amounts used in computing net income per share
and the weighted average number of shares of dilutive stock options for the
three and six month periods ended June 30, 2000 and 1999:
9
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
Note 2 - NET INCOME PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
For the Three Months Ended June 30
------------------------------------------
Common Net
Income Shares Income Per
Numerator Denominator Share
----------- ----------- ----------
<S> <C> <C> <C>
2000
----
Net income per share - Basic $ 86,000 6,784,333 $ 0.01
========
Dilutive effect of stock options 20,922
Net income per share - Diluted $ 86,000 6,805,255 $ 0.01
========== ========== ========
1999
----
Net income per share - Basic $2,221,000 6,809,665 $ 0.33
========
Dilutive effect of stock options 20,841
---------
Net income per share - Diluted $2,221,000 6,830,506 $ 0.33
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30
-----------------------------------------
Common Net
Income Shares Income Per
Numerator Denominator Share
---------- ----------- ----------
<S> <C> <C> <C>
2000
----
Net income per share - Basic $1,894,000 6,787,483 $ 0.28
========
Dilutive effect of stock options 19,023
----------
Net income per share - Diluted $1,894,000 6,806,506 $ 0.28
========== ========== ========
1999
----
Net income per share - Basic $4,464,000 6,827,086 $ 0.65
========
Dilutive effect of stock options 37,169
----------
Net income per share - Diluted $4,464,000 6,864,255 $ 0.65
========== ========== ========
</TABLE>
10
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
Note 3 - CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
The purpose of reporting comprehensive income (loss) 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 (loss)" 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 (loss), comprehensive income (loss) may
vary substantially between reporting periods due to fluctuations in the market
prices of securities held. This is evidenced by the fact SUN's net income
decreased for the three and six months ended June 30, 2000 compared to the
corresponding periods in 1999, but comprehensive income (loss) over the same
period has increased.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
---------------------- ----------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 86 $ 2,221 $ 1,894 $ 4,464
------- -------- -------- --------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities:
Gains (losses) arising during the period (418) (5,773) 2,102 (8,886)
Reclassification adjustment - realized
gains included in net income 2,265 (427) 2,250 (1,019)
------- -------- -------- --------
Other comprehensive income (loss)
before income taxes 1,847 (6,200) 4,352 (9,905)
Income tax (expense) benefit related to
other comprehensive income (loss) (628) 2,108 (1,480) 3,368
------- -------- -------- --------
Other comprehensive income (loss) 1,219 (4,092) 2,872 (6,537)
------- -------- -------- --------
Comprehensive income (loss) $1,305 $(1,871) $ 4,766 $(2,073)
======= ======== ======== ========
</TABLE>
11
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
Note 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of investment securities at June 30, 2000
and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Debt securities:
Obligations of U.S. government agencies $ 242,290 $ 169 $ (9,490) $ 232,969
Obligations of states and political subdivisions 16,633 26 (477) 16,182
Other corporate 10,935 - - 10,935
--------- --------- ---------- ---------
Total debt securities 269,858 195 (9,967) 260,086
--------- --------- ---------- ---------
Equity securities:
Marketable equity securities 7,429 47 (2,085) 5,391
Restricted equity securities 12,630 12,630 - -
--------- --------- ---------- ---------
Total equity securities 20,059 47 (2,085) 18,021
--------- --------- ---------- ---------
Total $ 289,917 $ 242 $ (12,052) $ 278,107
========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Debt securities:
Obligations of U.S. government agencies $256,605 $ 9 $(13,662) $242,952
Obligations of states and political subdivisions 21,049 117 (650) 20,516
Other corporate 500 - - 500
------------- -------------- --------------- ---------------
Total debt securities 278,154 126 (14,312) 263,968
------------- -------------- --------------- ---------------
Equity securities:
Marketable equity securities 8,398 5 (1,980) 6,423
Restricted equity securities 12,225 - - 12,225
------------- -------------- --------------- ---------------
Total equity securities 20,623 5 (1,980) 18,648
------------- -------------- --------------- ---------------
Total $298,777 $131 $(16,292) $282,616
============= ============== =============== ===============
</TABLE>
12
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 1. Financial Statements
Note 5 - CONTINGENCY
In April 2000, SUN received correspondence from one of its executives
requesting payment of certain amounts and benefits under the executive's
interpretation of his employment agreement. SUN management disagrees with this
interpretation, therefore no provision for any estimated costs has been made in
the six months ended June 30, 2000 financial statements.
13
<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.
(SUN), a bank holding company, and its wholly-owned subsidiaries, Sun Bank
(Bank) and Pennsylvania SUN Life Insurance Company. 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 1999 Annual Report. Current performance does not guarantee
or assure similar performance in the future, and may not be indicative of future
results.
The quarterly earnings decrease resulted primarily from two management
actions. First, investment portfolio restructuring produced a $2,265,000 loss on
securities sales (compared to a $427,000 gain for the second quarter 1999).
Second, an additional $250,000 provision for possible loan loss augmented SUN's
allowance for loan losses. Excluding those two management actions, net income
would be $1,746,000 (or $0.26 per share basic) for the quarter ended June 30,
2000.
Management's ongoing efforts to improve credit quality resulted in
significant improvement in the loan delinquency ratio (all loans past due),
which declined to 1.27%. Loan delinquency is now at a ten year low. In addition,
SUN reported record levels of net interest income, deposits, loans, and total
assets.
The six-month decrease in earnings resulted primarily from the
aforementioned security loss (compared to security gains of $1,019,000 for the
six months ended June 30, 1999) and a $400,000 increase in provision for loan
loss. Excluding those management actions, net income would have been $3,643,000
(or $0.54 per share) for the six months ended June 30, 2000. The six-month
earnings produced Return on Average Assets (ROA) of 0.52% and Return on Average
Equity (ROE) of 6.64%. For the same period in 1999, SUN's ROA was 1.40% and ROE
was 13.68%. Excluding the security loss, SUN's ROA and ROE would have been 0.93%
and 11.85%, respectively.
Since the acquisition of Bucktail Bank and Trust Company on June 30, 1997,
generally accepting accounting principles require management to reflect the
effects of goodwill amortization expense on SUN's financial statements.
Excluding goodwill, SUN's ROA would be 0.64% and ROE would be 9.47%. For the
same period in 1999, excluding goodwill would have resulted in ROA of 1.54% and
ROE would be 17.46%
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net interest income increased to $5,557,000 for the three months ended
June 30, 2000 as compared to $5,209,000 for the same period of 1999. Total
interest and dividend income increased $1,781,000 to $13,255,000 for the three
months ended June 30, 2000 as compared to
14
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1999. Most of the increase, $1,212,000, is the result of SUN's continued growth
of the loan portfolio. The majority of the remaining increase is the result of
SUN's restructuring of the investment portfolio into higher yielding securities.
Total interest expense increased $1,433,000 to $7,698,000 for the three months
ended June 30, 2000, as compared to 1999. Of the increase, $726,000 is the
result of increased borrowings used to fund loan and investment growth. The
provision for possible loan losses increased 55.5% to $700,000 for the three
months ended June 30, 2000. This increase is the result of growth in our net
loan portfolio of $54,024,000, over the past year, even though the delinquency
ratio (all loans past due) has fallen to a ten year low of 1.27%.
Total other operating income remained constant, excluding security gains
(losses), for the three months ended June 30, 2000, compared to the same period
of 1999. Service charges on deposit accounts increased 8.5% to $332,000 for the
three months ended June 30, 2000. Trust income increased 27.3% to $210,000 for
the three months ended June 30, 2000, as SUN continues to grow this business
segment. Other income decreased 24.1% to $167,000 for the three months ended
June 30, 1999. A majority of the decrease is the result of decreased gains on
other real estate sold and decreased gains on the sale of loans.
Other operating expenses increased to $3,430,000 for the three months
ended June 30, 2000, compared to $2,903,000 in the same period of 1999. Expenses
of the insurance subsidiary increased $43,000 as the result of additional
reserve requirements. Salaries and employee benefits increased 5.5% to
$1,600,000 as SUN continues to attract new employees to expand SUN's market area
coverage. Net occupancy and furniture and equipment expenses increased 6.9% to
$462,000 as SUN opened two new branches since June 30, 1999. Other expenses
increased $370,000 to $1,133,000 for the three months ended June 30, 2000. The
increase is the result of several factors. First, in prior years, SUN charged
collection and recovery expenses to the associated loan; however SUN now
expenses these charges as incurred. Second, SUN has employed consultants to
advise management with regard to expanding SUN's infrastructure to pursue future
opportunities. Finally, there have been slight increases in other normal
business activities (including the FDIC assessment and the Pennsylvania Shares
Tax).
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net interest income for the six months ended June 30, 2000, increased
$715,000, or 6.9%, over the same period in 1999, principally due to net loan
growth and increased investment in mortgage-backed securities. Other operating
income, excluding security gains (losses), increased to $1,475,000. As discussed
earlier, increases in trust income and service charges on deposit accounts were
offset by a decrease in other income. Other operating expenses increased
$768,000, or 13.2%, for the six months ended June 30, 2000, over the same period
in 1999 primarily to the reasons described above in the three month ended June
30, 2000, analysis.
15
<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, 2000 AND DECEMBER 31, 1999
Total assets were $741,919,000 at June 30, 2000, an increase of
$30,998,000 from $710,921,000 at December 31, 1999. Cash and cash equivalents
increased $16,110,000 or 100.3% from $16,059,000 at December 31, 1999. The
increase occurred as SUN's management invested in cash equivalents in
anticipation of Federal Home Loan Bank (FHLB) term borrowings maturing in the
third quarter of 2000. Securities available for sale remained constant as SUN
used the growth in deposits of $24,246,000 to fund net loan growth of
$19,738,000. The intangible asset, goodwill, was reduced to $9,059,000 at June
30, 2000. Also, total liabilities increased $29,680,000, or 4.5 % to
$684,588,000 at June 30, 2000. Interest bearing deposits increased $15,731,000
to $378,069,000 due to growth of $13,489,000 in NOW accounts. Total borrowed
funds increased $4,622,000 to $254,588,000 at June 30, 2000, with the FHLB term
borrowings representing $23,000,000 of the increase. These additional borrowings
were taken to obtain advantageous rates offered by the FHLB and were used to
provide funds to retire maturing debt. SUN's total shareholders' equity
increased $1,318,000 from December 31, 1999 to June 30, 2000. The increase in
shareholders' equity is primarily the result of a change in accumulated other
comprehensive loss offset by the net income and dividends paid for the six
months ended June 30, 2000. In addition, SUN purchased 41,400 shares of treasury
stock with a cost of $849,000 over the past six months.
16
<PAGE>
SUN BANCORP, INC.
FORM 10-Q
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
The allowance for possible loan losses is evaluated based on management's
assessment of the losses inherent in the loan portfolio. Factors used in this
evaluation include historical data on losses by loan type, the composition of
the loan portfolio, current economic conditions, and possible losses related to
specific loans. The monthly analysis of possible losses includes identifying
loans where the internal credit rating is at or below a predetermined level and
includes management's assumptions as to the ability of the borrowers to service
the loans. During this review, it is decided when certain loans should be
charged off and if additions to the allowance are necessary.
The allowance consists of two components, the specific allocation and the
general allocation. The specific allocation reflects expected losses resulting
from the analysis of individual loans with internal credit ratings below a
predetermined level. The general allocation reflects management's evaluation of
the other factors, such as historical losses and current economic conditions in
the markets served by SUN. The general allocation also includes management's
determination of the amounts necessary for concentrations and changes in the mix
and volume of the loan portfolio. In addition to the management review, SUN
engages a consulting firm to perform an annual independent credit review of loan
relationships in excess of $250,000, and considers the results of this review in
determining the allowance.
At June 30, 2000, management deems the allowance to be adequate; however,
future additions may be necessary based on economic, market, or other
unforeseeable conditions, or if required by banking regulatory agencies.
Although management makes its best estimate as to the additions to the
allowance, there can be no assurance future material additions may not be
needed.
17
<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 (FHLB),
investments in stocks of other banks and bank holding companies, mainly based in
Pennsylvania, and several holdings of non-bank companies.
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 June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30, 2000
--------------------
Fair
Cost Value
------- -------
<S> <C> <C>
Banks and bank holding companies $ 7,342 $ 5,298
FHLB stock 12,630 12,630
Non-bank companies 87 93
------- -------
Total $20,059 $18,021
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Fair
Cost Value
------- -------
<S> <C> <C>
Banks and bank holding companies $ 8,398 $ 6,423
FHLB stock 12,225 12,225
------- -------
Total $20,623 $18,648
======= =======
</TABLE>
18
<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)
<TABLE>
<CAPTION>
Actual For Capital
------ Adequacy Purposes
Amount Ratio Ratio
------- ----- -----------------
<S> <C> <C> <C>
As of June 30, 2000:
Total Capital $58,777 14.8% 8.0%
(to Risk Weighted Assets)
Tier I Capital $54,718 13.8% 4.0%
(to Risk Weighted Assets)
Tier I Capital $54,718 7.7% 4.0%
(to Average Assets)
As of December 31, 1999:
Total Capital $59,792 16.1% 8.0%
(to Risk Weighted Assets)
Tier I Capital $55,935 15.0% 4.0%
(to Risk Weighted Assets)
Tier I Capital $55,935 8.5% 4.0%
(to Average Assets)
</TABLE>
19
<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. 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.
20
<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 July 27, 2000, the Registrant's Board of Directors approved a quarterly
dividend payment of $.15 per share for shareholders of record August 25, 2000,
payable September 8, 2000.
In addition, the Registrant's Board of Directors authorized the repurchase
of up to 10% of SUN BANCORP, INC.'s outstanding shares. The stock buy-back
program is effective until April 2001.
Item 6 -- Exhibits and Reports on Form 8-K
a. On April 3, 2000 the Registrant filed an 8-K announcing the retirement
of George F. Keller as Chairman of the Board and the appointment of
Fred W. Kelly, Jr. as Chairman of the Board and Chief Executive
Officer and Robert J. McCormack as President and Chief Operating
Officer.
b. On June 2, 2000 the Registrant filed an 8-K announcing a significant
drop in earnings for the second quarter of 2000 due to a restructuring
of the Registrant's investment portfolio.
21
<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 8/14/00 /s/ FRED W. KELLY, JR.
-----------------------------------
Fred W. Kelly, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ ROBERT J. MCCORMACK
-----------------------------------
Robert J. McCormack
President & Chief Operating Officer
(Principal Financial Officer and
Principal Accounting Officer)
SUN BANCORP, INC.
PO Box 57
Selinsgrove, PA 17870
(570) 374-1131
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