-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PrCjVj6PLNGYuxcFvsGo6t2fOYHjWhS4xmp9LN7y1ccy10g/pf7WXLyX+5E4l8sv P3iiNDDWvl5jUtQ2qbjaIQ== 0000713975-00-000004.txt : 20000331 0000713975-00-000004.hdr.sgml : 20000331 ACCESSION NUMBER: 0000713975-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN BANCORP INC CENTRAL INDEX KEY: 0000713975 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232233584 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14745 FILM NUMBER: 586118 BUSINESS ADDRESS: STREET 1: P O BOX 57 STREET 2: 2-16 SOUTH MARKET ST CITY: SELINSGROVE STATE: PA ZIP: 17870 BUSINESS PHONE: 7173741131 MAIL ADDRESS: STREET 1: P O BOX 57 STREET 2: 2-16 SOUTH MARKET ST CITY: SELINSGROVE STATE: PA ZIP: 17870 10-K 1 FORM 10-K --- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1999 ----------------------------------------------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] 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, PA 17870 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 570-374-1131 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None - --------------------------- ------------------------ Securities registered pursuant to Section 12(g) of the Act: Common stock, No Par Value - -------------------------------------------------------------------------------- (Title of Class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 10, 2000, the Registrant had 6,789,358 shares of common stock outstanding with a no par value. Based on the closing bid price of $17.50 on the same date, the aggregate market value of the voting stock held by nonaffiliates of the Registrant was $118,813,765. Portions of the 1999 Annual Report to Shareholders are incorporated by reference in Parts I, II, and III hereof. Portions of the 2000 Proxy Statement for the Annual Shareholders' Meeting to be held on April 27, 2000 are incorporated by reference in Part III hereof. The index to exhibits included in this filing appears on page 5. PART I ------ ITEM 1 - BUSINESS SUN BANCORP, INC. (SUN) is a holding company incorporated under the laws of Pennsylvania and registered under the Bank Holding Company Act of 1956, as amended, on November 26, 1982. SUN acquired the Snyder County Trust Company in June 1983 and The Watsontown National Bank in November 1987. On December 1, 1993, the two banks merged into one bank under the legal title of Sun Bank (Bank). The banks continue to do business as Snyder County Trust Company, Incorporated as Sun Bank and Watsontown Bank, Incorporated as Sun Bank. SUN also owns the Pennsylvania SUN Life Insurance Company, a credit life and disability insurance company formed in 1993. SUN is a limited partner in two partnerships for the purpose of building, owning, and operating an affordable elderly apartment complex in SUN's market area. As part of the agreement, SUN is able to recognize tax credits from this economic development project. On June 30, 1997, SUN acquired Bucktail Bank and Trust Company (Bucktail) from FNB Corporation. Concurrently, Bucktail was merged into Sun Bank. Five branches of Bucktail located in Lycoming County were renamed and doing business under the name Central Pennsylvania Bank, Incorporated as Sun Bank. The remaining branches in Elk and Cameron Counties continue under the name Bucktail Bank and Trust Company, Incorporated as Sun Bank. Sun Bank, a state-chartered bank regulated by Pennsylvania Banking Law, provides full service commercial and retail banking services primarily in central Pennsylvania. Sun Bank operates fifteen banking offices and one trust services office serving Snyder, Union, Northumberland, Lycoming, Cameron, and Elk Counties. At December 31, 1999, Sun Bank had total assets of $708,461,000 and total shareholders' equity of $53,915,000. Net income for 1999 was $8,447,000. The Bank offers a wide range of services including demand deposit accounts, savings accounts, Christmas and all-purpose clubs, time certificates of deposit, and individual retirement accounts, as well as commercial loans, consumer loans, mortgage loans, and safe deposit services. The Bank also operates a trust department that provides full fiduciary services. Also, 34 Automated Teller Machines (ATMs) and cash dispensing units throughout the service area provide 24-hour banking service. Sun Bank's activities are such that the loss of one single customer or a few customers would not have a material adverse effect on its operations. Additionally, the Bank's business is not seasonal in nature and does not engage in foreign transactions. The majority of the loan portfolio is comprised of residential real estate loans and consumer loans (predominately automobiles). The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) in the amount allowed by law. The Pennsylvania SUN Life Insurance Company (SUN Life) provides credit life and disability insurance to Sun Bank's credit customers. SUN Life is subject to supervision and regulation by the Arizona Department of Insurance, the Insurance Department of the Commonwealth of Pennsylvania, and the Board of Governors of the Federal Reserve Bank. At December 31, 1999, Pennsylvania SUN Life had total assets of $776,000 and total shareholders' equity of $394,000. Net income for 1999 was $85,000. Competition continues to heighten in the financial services industry not only among banks but with savings and loan associations, credit unions, discount brokerage firms, insurance companies, and other nonbank financial service providers. Changing regulatory and economic conditions affect SUN's ability to compete effectively in its market area. Most of the competition is centered around the setting of interest rates to be charged on loans and rates paid on deposits, fees on deposit accounts and customer service. SUN's management feels it competes effectively in its market area. SUN is subject to regulation and supervision by the Board of Governors of the Federal Reserve Bank and the Pennsylvania Department of Banking. SUN files quarterly and annual reports with the Federal Reserve Bank (FRB) of Philadelphia and periodic on-site exams of SUN are done by the FRB. Regular examinations of the Bank are conducted by the FDIC and the Pennsylvania Department of Banking. SUN and the Pennsylvania SUN Life Insurance Company do not have any employees. At December 31, 1999, the Bank employed 229 persons. The Bank offers a variety of benefit programs and feels its relationship with its employees is good. ITEM 2 - PROPERTIES SUN's corporate office is located in Sun Bank's main banking office. SUN owns all of its properties with the exception of an off-site ATM, (Item 8), Johnsonburg (Item 13), and South Williamsport (Item 18), which are leased. In 1995, SUN purchased parcels of land in Liverpool for the purpose of building a branch in the future. On June 30, 1997, SUN completed its acquisition of Bucktail Bank and Trust Company. This acquisition added eight additional locations. In 1999, a financial services center was constructed in Williamsport (Item 19) and the South Williamsport office (Item 18) was opened. All properties are in good condition and adequate for the bank's purposes. The following is a list of the banking offices, the addresses, and a brief description of each office. Office Address Description ------ ------- ----------- 1. Main 2-16 South Market Street Brick structure Selinsgrove, Pennsylvania 17870 2. Shamokin Dam 200 Susquehanna Trail Brick structure Shamokin Dam, Pennsylvania 17876 3. New Berlin Market & Plum Streets Brick structure New Berlin, Pennsylvania 17855 4. Sunbury 11 South Second Street Brick structure Sunbury, Pennsylvania 17801 5. Middleburg Route 522 & Dock Hill Road Brick structure Middleburg, Pennsylvania 17842 6. Trust Division 100 West Pine Street Brick structure Selinsgrove, Pennsylvania 17870 7. Automated Teller 108 West Pine Street Brick structure Machine Selinsgrove, Pennsylvania 17870 8. Automated Teller 700 North Broad Street Brick structure Machine Selinsgrove, Pennsylvania 17870 9. Watsontown 300 Main Street Brick structure Watsontown, Pennsylvania 17777 10. Northumberland 96 Duke Street Brick structure Northumberland, Pennsylvania 17857 11. Liverpool Rts. 11 & 15 South Land Liverpool, Pennsylvania 17045 12. Emporium 2 East Fourth Street Brick structure Emporium, PA 15834 13. Johnsonburg RR 2 Box 1A Brick structure Johnsonburg, PA 15845 14. Hughesville 2 South Main Street Brick structure Hughesville, PA 17737 15. Newberry 2131 W. Fourth Street Brick structure Williamsport, PA 17701 16. Montoursville 301 Broad Street Brick structure Montoursville, PA 17754 17. Squire Hays 3155 Lycoming Creek Road Stone and frame Williamsport, PA 17701 structure 18. South Williamsport 2 East Mountain Ave. Brick structure S. Williamsport, PA 17702 19. Maynard Street 90 Maynard Street Brick structure Williamsport, PA 17701 ITEM 3 - LEGAL PROCEEDINGS Various legal actions arise against the Corporation in the normal course of business. In the opinion of management and counsel, when such actions currently pending or threatened have been resolved, they should not have a material adverse effect on the business or financial condition of the Corporation. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS Not applicable PART II ------- ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS In April 1993, the common stock of SUN BANCORP, INC. began trading publicly on the NASDAQ national market system under the symbol SUBI. Prior to this date, the stock was not traded on an established stock exchange; however, it was traded on the over-the-counter market. As of March 10, 2000, SUN had approximately 2,105 holders of its common stock. SUN offers its shareholders a Dividend Reinvestment Plan whereby holders of stock may have their quarterly cash dividends automatically invested in additional shares of common stock of SUN. The payment of dividends by SUN is at the discretion of the Board of Directors and to the extent funds are legally available for that purpose. SUN may not pay dividends in any year in excess of the total of the current year's net income and the retained net income of the prior two years without the approval of the Federal Reserve Bank. Additionally, bank regulations limit the amount of dividends that may be paid to SUN by the subsidiary bank without prior approval from the regulatory agencies. Additional stock information is incorporated by reference to Shareholder Information found on page 43 of the 1999 Annual Report to Shareholders. ITEM 6 - SELECTED FINANCIAL DATA This item is incorporated by reference to information under the heading Five Year Financial Highlights on page 25 of the 1999 Annual Report to Shareholders. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This item is incorporated by reference to Management's Discussion and Analysis on pages 26 through 42 of the 1999 Annual Report to Shareholders. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is incorporated by reference to Management's Discussion and Analysis on pages 37 through 40 of the 1999 Annual Report to Shareholders. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item is incorporated by reference to the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Independent Auditors' Report set forth on pages 4 through 24 of the 1999 Annual Report to Shareholders. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III -------- ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information concerning directors and executive officers of the Registrant is incorporated herein by reference to Board of Directors on page 6 of the Corporation's 2000 Proxy Statement. Information regarding disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference to Compliance with Securities and Exchange Act on page 19 of the Corporation's 2000 Proxy Statement. ITEM 11 - EXECUTIVE COMPENSATION Information relating to management remuneration and compensation is incorporated herein by reference to Executive Compensation and Other Information on page 13 of the 2000 Proxy Statement. ITEM 12 - SECURITY OWNERSHIP OR CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to Security Ownership of Directors and Executive Officers of the Corporation on page 10 of the 2000 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to footnote 15 on page 19 of the 1999 Annual Report to Shareholders and under the heading of Transactions with Management on page 19 of the 2000 Proxy Statement. PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements and independent auditors' report of SUN BANCORP, INC. and subsidiaries included in the Annual Report to Shareholders for the year ended December 31, 1999 are incorporated by reference in Part II, Item 8: Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Income - Years Ended December 31, 1999, 1998, and 1997 Consolidated Statements of Changes in Shareholders' Equity - Years Ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements Independent Auditors' Report (2) All schedules applicable to the Registrant are shown in the respective financial statements or the notes thereto. Financial statement schedules not included are omitted because the information is not required under the related instructions or it is inapplicable. (3) Exhibits 3(i) The Articles of Incorporation of the Corporation are incorporated herein by reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File Number 0-14745). 3(ii) The By-Laws, as amended and restated, are incorporated herein by reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File Number 0-14745). 13 Annual Report to Shareholders of SUN BANCORP, INC. for the year ended December 31, 1999 is filed herewith. Such report, except for those portions thereof which are expressly incorporated by reference herein, is furnished for information of the Securities and Exchange Commission only and it is not considered "filed" as part of the Form 10-K filing. 21 Subsidiaries of the Registrant are filed herewith. 22 Published Report Regarding Matters Submitted To Vote Of Shareholders is filed herewith, the 2000 Proxy Statement of SUN BANCORP, INC. 22 Consent of Independent Auditors is filed herewith. (b) No reports on Form 8-K were required to be filed during the fourth quarter of 1999. (c) Exhibits - the required exhibits are included under Item 14(a) (3) of the Form 10-K. (d) Financial statement schedules are omitted because the required information is not applicable or is included elsewhere herein. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SUN BANCORP, INC. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUN BANCORP, INC. ----------------------------- (Registrant) Date: 3/23/00 By: /s/ Fred W. Kelly, Jr. --------------- ----------------------------------- Fred W. Kelly, Jr. President & Chief Executive Officer Date: 3/23/00 By: /s/Jeffrey E. Hoyt --------------- ------------------------------------ Jeffrey E. Hoyt Executive Vice President, Chief Operating Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the Registrant and in the capacities and on the dates indicated. Name Date /s/ Fred W. Kelly, Jr. 3/23/00 Fred W. Kelly, Jr. President, Chief Executive Officer and Director /s/ Jeffrey E. Hoyt 3/23/00 Jeffrey E. Hoyt Executive Vice President, Secretary and Chief Operating Officer /s/ Max E. Bingaman 3/23/00 Max E. Bingaman, Director /s/ David R. Dieck 3/23/00 David R. Dieck, Director /s/ Louis A. Eaton 3/23/00 Louis A. Eaton, Director /s/ Dr. Robert E. Funk 3/23/00 Dr. Robert E. Funk, Director /s/ Stephen J. Gurgovits 3/23/00 Stephen J. Gurgovits, Director /s/ Thomas B. Hebble 3/23/00 Thomas B. Hebble, Director /s/ Robert A. Hormell 3/23/00 Robert A. Hormell, Director /s/ Paul R. John 3/23/00 Paul R. John, Director /s/ George F. Keller 3/23/00 George F. Keller, Director /s/ Lehman B. Mengel 3/23/00 Lehman B. Mengel, Director /s/ Howard H. Schnure 3/23/00 Howard H. Schnure, Director /s/ Marlin T. Sierer 3/23/00 Marlin T. Sierer, Director /s/ Jerry A. Soper 3/23/00 Jerry A. Soper, Director /s/ Dennis J. Van 3/23/00 Dennis J. Van, Director EX-13 2 CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 (In Thousands, Except Share Data) 1999 1998
--------- --------- ASSETS Cash and due from banks $ 15,079 $ 13,350 Interest-bearing deposits in banks 980 880 --------- --------- Total cash and cash equivalents 16,059 14,230 Securities available for sale 282,616 254,780 Loans, net 377,485 326,928 Bank premises and equipment, net 10,542 9,139 Intangible asset, goodwill - net 9,436 10,191 Accrued interest and other assets 14,783 8,309 --------- --------- Total assets $710,921 $623,577 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 37,783 $ 36,429 Interest-bearing 362,338 327,457 --------- --------- Total deposits 400,121 363,886 Short-term borrowings 35,966 25,750 Other borrowed funds 214,000 161,500 Accrued interest and other liabilities 4,821 4,640 --------- --------- Total liabilities 654,908 555,776 --------- --------- Shareholders' equity: Common stock, no par value per share; 20,000,000 authorized shares; issued 6,985,680 in 1999 and 6,627,139 in 1998 81,520 72,913 Retained earnings (deficit) (10,498) (4,949) Accumulated other comprehensive income (loss) (10,667) 2,016 Less: Treasury stock at cost, 192,844 shares in 1999 and 97,263 shares in 1998 (4,342) (2,179) --------- --------- Total shareholders' equity 56,013 67,801 --------- --------- Total liabilities and shareholders' equity $710,921 $623,577 ========= =========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1999, 1998, and 1997
(In Thousands, Except Net Income Per Share) 1999 1998 1997 ------- ------- ------- Interest income: Interest and fees on loans $29,841 $28,826 $24,312 Income from available for sale securities: Taxable 14,642 9,870 5,701 Tax exempt 1,818 2,685 2,669 Dividends 997 679 700 Interest on deposits in banks and other financial institutions 156 617 271 ------- ------- ------- Total interest and dividend income 47,454 42,677 33,653 Interest expense: Interest on deposits 14,880 13,905 10,180 Interest on short-term borrowings 843 707 907 Interest on other borrowed funds 10,507 7,855 5,532 ------- ------- ------- Total interest expense 26,230 22,467 16,619 ------- ------- ------- Net interest income 21,224 20,210 17,034 Provision for possible loan losses 1,925 1,200 1,175 ------- ------- ------- Net interest income after provision for possible loan losses 19,299 19,010 15,859 ------- ------- ------- Other operating income: Service charges on deposit accounts 1,213 1,151 936 Trust income 722 617 432 Net securities gains 1,962 1,403 1,779 Income from insurance subsidiary 223 170 151 Other income 840 749 527 ------- ------- ------- Total other operating income 4,960 4,090 3,825 ------- ------- ------- Other operating expenses: Salaries and employee benefits 6,204 5,686 4,783 Net occupancy expenses 653 709 570 Furniture and equipment expenses 1,038 872 648 Pennsylvania shares tax 553 485 380 Amortization of goodwill 755 755 378 Expenses of insurance subsidiary 129 186 163 Other expenses 2,747 2,602 2,451 ------- ------- ------- Total other operating expenses 12,079 11,295 9,373 ------- ------- ------- Income before income tax provision 12,180 11,805 10,311 Income tax provision 3,425 3,079 2,510 ------- ------- ------- Net income $ 8,755 $ 8,726 $ 7,801 ======= ======= ======= Net income per share - Basic $ 1.28 $ 1.27 $ 1.23 ======= ======= ======= Net income per share - Diluted $ 1.28 $ 1.26 $ 1.22 ======= ======= ======= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 1999, 1998, and 1997 (In Thousands, Except Per Share Data)
Accumulated Common Stock Additional Retained Other Total --------------- Paid-in Earnings Comprehensive Treasury Shareholders' Shares Amount Capital (Deficit) Income (Loss) Stock Equity ------ ------- ---------- --------- ------------- -------- ------------- Balance, December 31, 1996 3,417 $ 4,272 $30,404 $ 4,927 $ 672 $(1,409) $38,866 Comprehensive income: -------- Net income - - - 7,801 - - 7,801 Unrealized gains on securities available for sale, net of reclassification adjustments and tax effects - - - - 2,504 - 2,504 -------- Total comprehensive income 10,305 -------- Stock issued: Stock dividends 169 211 5,815 (6,026) - - - Employee benefit plans 31 16 580 - - - 596 Acquisition of Bucktail 565 707 19,356 - - - 20,063 Stock split, three-for-two 2,090 - - - - - - Cash dividends declared, $.65 per share - - - (4,217) - - (4,217) ----- ------- -------- --------- --------- -------- -------- Balance, December 31, 1997 6,272 5,206 56,155 2,485 3,176 (1,409) 65,613 -------- Comprehensive income: Net income - - - 8,726 - - 8,726 Unrealized losses on securities available for sale, net of reclassification adjustments and tax effects - - - - (1,160) - (1,160) -------- Total comprehensive income 7,566 -------- Stock issued: Stock dividends 311 10,791 - (10,791) - - - Employee benefit plans 44 627 - - - - 627 Reclassification of capital accounts to reflect no par value - 56,155 (56,155) - - - - Purchase of treasury stock (26,000 shares) - - - - - (770) (770) Cash dividends declared, $.78 per share - - - (5,369) - - (5,369) Tax benefit of exercised stock options - 134 - - - - 134 ----- ------- -------- -------- -------- -------- -------- Balance, December 31, 1998 6,627 72,913 - (4,949) 2,016 (2,179) 67,801 -------- Comprehensive income: Net income - - - 8,755 - - 8,755 Unrealized losses on securities available for sale, net of reclassification adjustments and tax effects - - - - (12,683) - (12,683) -------- Total comprehensive loss (3,928) -------- Stock issued: Stock dividends 332 8,169 - (8,169) - - - Employee benefit plans 27 398 - - - - 398 Purchase of treasury stock (87,932 shares) - - - - - (2,163) (2,163) Cash dividends declared, $.90 per share - - - (6,135) - - (6,135) Tax benefit of exercised stock options - 40 - - - - 40 ----- ------- -------- --------- --------- -------- -------- Balance, December 31, 1999 6,986 $81,520 $ - $(10,498) $(10,667) $(4,342) $56,013 ===== ======= ======== ========= ========= ======== ========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1999, 1998, and 1997
(In Thousands) 1999 1998 1997 --------- --------- -------- Cash flows from operating activities: Net income $ 8,755 $ 8,726 $ 7,801 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 1,925 1,200 1,175 Provision for depreciation 715 683 607 Amortization of goodwill 755 755 378 Amortization and accretion of securities, net 253 356 211 Deferred income tax 2 254 316 Net securities gains (1,962) (1,403) (1,779) Gain on sale of bank premises and equipment - - (83) Net change in other assets and liabilities 1,142 689 (463) --------- --------- -------- Net cash provided by operating activities 11,585 11,260 8,163 --------- --------- -------- Cash flows from investing activities: Proceeds from sales of available for sale securities 37,104 48,194 26,386 Proceeds from maturities of available for sale securities 29,497 53,587 18,281 Purchases of available for sale securities (111,945) (191,987) (52,266) Net increase in loans (53,345) (20,247) (382) Proceeds from sales of bank premises and equipment - - 266 Capital expenditures (2,118) (858) (1,330) --------- --------- -------- Net cash used in investing activities (100,807) (111,311) (9,045) --------- --------- -------- Cash flows from financing activities: Net increase in deposits 36,235 36,868 7,365 Net increase (decrease) in short-term borrowings 10,216 5,491 (16,664) Proceeds from other borrowed funds 75,000 80,000 55,000 Repayments of other borrowed funds (22,500) (11,525) (45,681) Cash dividends paid (6,135) (5,369) (4,217) Proceeds from sale of stock for employee benefits program 398 627 596 Purchase of treasury stock (2,163) (770) - Cash and cash equivalents received from issuance of stock related to acquisition of Bucktail Bank and Trust Company - - 6,093 Offering costs paid - - (150) --------- --------- -------- Net cash provided by financing activities 91,051 105,322 2,342 --------- --------- -------- Net increase in cash and cash equivalents 1,829 5,271 1,460 Cash and cash equivalents at beginning of year 14,230 8,959 7,499 --------- --------- -------- Cash and cash equivalents at end of year $ 16,059 $ 14,230 $ 8,959 ========= ========= ======== Supplemental disclosure of cash flow information: Interest paid $ 25,769 $ 21,706 $16,131 ========= ========= ======== Income taxes paid $ 3,550 $ 2,360 $ 2,030 ========= ========= ======== Supplemental schedule of noncash investing and financing activities: - Loans with an estimated value of $864,000 in 1999 and $224,000 in 1998, were reclassified to foreclosed assets held for sale. - The tax benefit of exercised stock options of $40,000 in 1999 and $134,000 in 1998, was credited to common stock. - On June 30, 1997, SUN acquired all of the capital stock of Bucktail in exchange for shares of SUN's common stock valued at $20,213,000. In conjunction with the acquisition, liabilities were assumed as follows (in thousands): 1997 --------- Cash and cash equivalents acquired $ 6,093 Fair value of other assets acquired 118,706 Excess of cost over fair value of assets acquired (goodwill) 11,324 --------- 136,123 Value of stock issued by SUN, net of offering costs (20,063) --------- Liabilities assumed $116,060 =========
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies The accounting and financial reporting policies of SUN BANCORP, INC. and subsidiaries (SUN) conform with generally accepted accounting principles and with general practice within the financial institution industry. Certain prior year amounts have been reclassified to conform to current year classifications. The following is a description of the more significant of those policies: Basis of Consolidation The consolidated financial statements include the accounts of SUN BANCORP, INC., the parent company, and its wholly-owned subsidiaries, Sun Bank (Bank), doing business as Snyder County Trust Company, Central Pennsylvania Bank, Bucktail Bank and Trust Company (Bucktail), and Watsontown Bank, and Pennsylvania SUN Life Insurance Company (SUN Life). The transactions of SUN Life are not material to the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations SUN provides a full range of banking services to individual and corporate customers through the fifteen offices of its subsidiary in central Pennsylvania. The offices are located in Snyder, Union, Northumberland, Lycoming, Cameron, and Elk counties. All six counties have diversified economies with an emphasis on manufacturing. SUN's primary deposit products are interest-bearing checking and savings accounts, and certificates of deposit. Its primary lending products are single-family residential loans, secured consumer loans (predominately automobiles), and secured loans to small businesses. Use of Estimates In preparing the financial statements in accordance with generally accepted accounting principles, management is required to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. A material estimate particularly susceptible to significant change in the near term is the allowance for possible loan losses. In connection with the determination of the allowance for possible loan losses, management obtains independent appraisals for significant properties. A majority of SUN's loan portfolio consists of single-family residential loans in the counties of Snyder, Union, Northumberland, and Lycoming. With the acquisition of Bucktail, SUN's indirect consumer loans have increased. The regional economy depends heavily on the manufacturing industry, which is currently stable. Real estate prices in the market are also stable. Accordingly, the ultimate collectibility of a substantial portion of SUN's loan portfolio is susceptible to changes in local market conditions. Management believes the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review SUN's allowance for possible loan losses. Such agencies may require SUN to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible the allowance for possible loan losses may change materially in the near term. Securities Available for Sale Available for sale securities include debt and both restricted and unrestricted equity securities. Such securities, except for restricted equity securities, are reported at fair value, with unrealized gains and losses, net of taxes, excluded from earnings and reported as a component of accumulated other comprehensive income (loss) within shareholders' equity. The restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh (FHLB) stock, which are carried at cost and evaluated for impairment. The fair value of available for sale securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Amortization of premiums and accretion of discounts on available for sale securities are recorded using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Realized gains and losses on the sale of available for sale securities are computed on the basis of specific identification of the adjusted carrying value of each security. Loans Interest income on loans is recognized on the accrual basis based upon the principal amount outstanding. Interest income is not accrued when, in the opinion of management, its collectibility is doubtful. When a loan is designated as nonaccrual, any accrued interest receivable is generally charged against current earnings. The placement of a loan on the nonaccrual basis for revenue recognition does not necessarily imply a potential charge-off of principal. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance. Loan fees and costs of loan origination are deferred and recognized over the life of the loan as a component of interest income using the interest method. Loan Servicing Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgages serviced for others was $30,645,000 at December 31, 1999. The balance of capitalized mortgage servicing rights included with accrued interest and other assets in the consolidated balance sheet was approximately $50,000 at December 31, 1999. Mortgage servicing rights are recorded at their fair value and are amortized over the period of estimated net servicing income or loss. SUN uses a valuation model calculating the present value of future cash flows to determine the fair value of servicing rights. This valuation model incorporates assumptions market participants would use in estimating future net servicing income including loan types and interest rates, and estimates of the cost of servicing the loan, discount rate, and prepayment speeds. The value of the mortgage servicing rights is periodically evaluated for impairment using the same market assumptions. Allowance for Possible Loan Losses The allowance for possible loan losses is established through a provision for possible loan losses charged to expense. The allowance for possible loan losses is based on management's judgment of an adequate amount to absorb possible losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the portfolio, off-balance sheet risk, and management's estimate of anticipated loan losses. Foreclosed Assets Held for Sale Foreclosed assets, all of which are held for sale, are carried at the lower of cost or fair value of the assets less estimated selling costs. SUN had foreclosed assets held for sale, which are included with accrued interest and other assets in the consolidated balance sheet, in the amount of $533,000 at December 31, 1999 and $273,000 at December 31, 1998. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend the useful life of an asset are capitalized and other repair expenditures are expensed as incurred. When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to income. Depreciation expense is computed on the straight-line method. Goodwill Goodwill represents the excess of the cost over the fair value of the Bucktail assets acquired in 1997 (Note 4) and is amortized using the straight-line method over a period of 15 years. Amortization of goodwill amounted to $755,000 in 1999 and 1998 and $378,000 in 1997. The carrying value of goodwill is periodically reviewed by SUN based on fair values or undiscounted operating cash flows. Based upon its most recent analysis, SUN believes no material impairment of goodwill exists at December 31, 1999. Income Taxes Provision for deferred income taxes is made as a result of temporary differences in financial reporting and income tax methods of accounting. These differences relate primarily to loan losses, depreciation, the excess of historical cost over fair value of loans acquired from Bucktail, and income from loan fees. Off-Balance Sheet Financial Instruments In the ordinary course of business, SUN has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Cash Flows SUN utilizes the net reporting of cash receipts and cash payments for certain deposit and lending activities. Cash equivalents include cash and due from banks and interest-bearing deposits in banks. Generally, federal funds are purchased and sold for one-day periods. Trust Assets and Income Assets held by SUN in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of SUN. Trust income is reported on a cash basis, which is not materially different from the accrual basis. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Net Income Per Share Net income per share is computed based on the weighted average number of shares of stock outstanding for each year presented. Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," requires presentation of two amounts, basic and diluted net income per share. The number of shares used in calculating net income per share and dividends per share reflect the retroactive effect of 5% stock dividends in the second quarters of 1999, 1998, and 1997 and a three-for-two stock split in the fourth quarter of 1997. The following data shows the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options:
Common Net Income Shares Income Per Numerator Denominator Share ----------- ----------- ---------- 1999 - ---- Net income per share - Basic $8,755,000 6,813,956 $1.28 ===== Dilutive effect of potential common stock arising from stock options: Exercise of options outstanding 238,137 Hypothetical share repurchase at $23.41 (191,979) ---------- ---------- Net income per share - Diluted $8,755,000 6,860,114 $1.28 ========== ========== ===== 1998 - ---- Net income per share - Basic $8,726,000 6,856,955 $1.27 ===== Dilutive effect of potential common stock arising from stock options: Exercise of options outstanding 246,817 Hypothetical share repurchase at $26.43 (180,406) ---------- ---------- Net income per share - Diluted $8,726,000 6,923,366 $1.26 ========== ========== ===== 1997 - ---- Net income per share - Basic $7,801,000 6,348,379 $1.23 ===== Dilutive effect of potential common stock arising from stock options: Exercise of options outstanding 267,330 Hypothetical share repurchase at $22.19 (200,113) ---------- ---------- Net income per share - Diluted $7,801,000 6,415,596 $1.22 ========== ========== =====
3. Comprehensive Income (Loss) Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component in the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss). The components of other comprehensive income (loss) and related tax effects are as follows:
(In Thousands) Years Ended December 31 ------------------------------- 1999 1998 1997 --------- -------- ------- Unrealized holding gains (losses) on available for sale securities $(17,255) $ (355) $5,573 Less: Reclassification adjustment for gains realized in income (1,962) (1,403) (1,779) --------- -------- ------- Net unrealized gains (losses) (19,217) (1,758) 3,794 Income tax benefit (expense) 6,534 598 (1,290) --------- -------- ------- Net $(12,683) $(1,160) $2,504 ========= ======== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Purchase of Bucktail Bank and Trust Company On June 30, 1997, SUN acquired Bucktail from FNB Corporation, a multi-bank holding company headquartered in Hermitage, Pennsylvania. Concurrently, Bucktail was merged into Sun Bank and the results of Bucktail's operations have been included herein from the consummation date of June 30, 1997. The acquisition, which was accounted for as a purchase, resulted in the issuance of 935,004 shares of SUN common stock, adjusted for subsequent stock splits and dividends, in exchange for all of the outstanding shares of Bucktail. Based on the market price of SUN's common stock as of June 30, 1997, the total cost of the acquisition was $20,063,000. 5. Restrictions on Cash and Due From Bank Accounts SUN is required to maintain reserves in the form of cash and balances with the Federal Reserve Bank of Philadelphia (FRB) primarily based on its deposit liabilities. The average of such reserves was $531,000 in 1999, $4,459,000 in 1998, and $1,924,000 in 1997. In 1999, SUN acquired software which analyzes account activity. Based on this analysis, a reclassification of transaction accounts to non-transaction accounts occurred. This reclassification reduced the required reserve amount for 1999 at FRB. These reserves were $594,000 at December 31, 1999 and $5,038,000 at December 31, 1998. Deposits with any one financial institution are insured up to $100,000. SUN maintains cash and cash equivalents with certain other financial institutions in excess of the insured amount. 6. Securities Available for Sale The amortized cost and fair value of investment securities at December 31, 1999 and 1998 were as follows:
(In Thousands) December 31, 1999 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- 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 ======== ==== ========= ========
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 ======== ======= ====== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and estimated fair value of SUN's securities at December 31, 1999 and 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(In Thousands) December 31, 1999 December 31, 1998 -------------------- ------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- -------- Debt securities: Due in one year or less $ 15 $ 15 $ 579 $ 597 Due after one year through five years 60 60 14,749 15,472 Due after five years through ten years 40,008 37,474 23,532 23,575 Due after ten years 21,459 20,926 29,983 31,034 Mortgage-backed securities 216,612 205,493 164,948 165,247 -------- -------- -------- -------- Total debt securities 278,154 263,968 233,791 235,925 Equity securities 20,623 18,648 17,933 18,855 -------- -------- -------- -------- Total $298,777 $282,616 $251,724 $254,780 ======== ======== ======== ========
Securities with a carrying value of $263,000,000 at December 31, 1999 and $171,000,000 at December 31, 1998 were pledged to secure public deposits, trust deposits, securities sold under agreements to repurchase, FHLB borrowings, and other items required by law. There is no concentration of investments exceeding 10% of shareholders' equity for any individual issuer, excluding those guaranteed by the U.S. government or its agencies. In 1999, gross realized gains from the sale of available for sale securities were $1,967,000, while gross realized losses were $5,000. In 1998, gross realized gains were $1,550,000, while gross realized losses were $147,000. In 1997, gross realized gains were $1,942,000, while gross realized losses were $163,000. 7. Loans The composition of the loan portfolio at December 31, 1999 and 1998 was as follows:
(In Thousands) December 31 --------------------- 1999 1998 --------- --------- Real estate - Mortgages $178,876 $192,592 Real estate - Construction 3,318 3,353 Agricultural 1,059 971 Commercial and industrial 114,193 52,823 Individual 85,255 83,343 Other 104 383 --------- --------- Total 382,805 333,465 Less: Unearned income on loans (740) (1,666) Unamortized net discount on purchased loans (508) (1,270) Deferred loan fees (215) (274) Allowance for possible loan losses (3,857) (3,327) --------- --------- Net $377,485 $326,928 ========= =========
Transactions in the allowance for possible loan losses were as follows:
Years Ended December 31 ------------------------------- (In Thousands) 1999 1998 1997 ------- ------- ------- Balance, beginning of year $3,327 $3,130 $2,490 Provision for possible loan losses 1,925 1,200 1,175 Allowance for possible loan losses assumed upon acquisition of Bucktail - - 1,292 Recoveries 211 248 175 Loans charged off (1,606) (1,251) (2,002) ------- ------- ------- Balance, end of year $3,857 $3,327 $3,130 ======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Most of SUN's business activity is with customers located within its defined market area. The loan portfolio is well diversified. As of December 31, 1999 and 1998, SUN had loans to automobile dealers of $14,329,000 and $9,253,000, respectively. These loans are generally secured by assets and are expected to be repaid from cash flow or proceeds from the sale of assets of the borrower. SUN has not experienced any significant losses on loans to borrowers in this industry. Although SUN has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions in its market area. Nonaccrual and restructured loans were $2,285,000 at December 31, 1999 and $922,000 at December 31, 1998. Interest income which would have been recognized on all nonaccrual and restructured loans outstanding was approximately $200,000 in 1999, $82,000 in 1998 and $147,000 in 1997. The following is a summary of the past due and nonaccrual loans as of December 31, 1999 and 1998:
(In Thousands) Past Due Past Due 90 Days December 31, 1999 30-89 Days or More Nonaccrual - ----------------- ---------- -------- ---------- Real estate $2,466 $ 501 $1,506 Individual 2,128 324 94 Commercial and all other 360 190 365 ------ ------ ------ Total $4,954 $1,015 $1,965 ====== ====== ====== December 31, 1998 - ----------------- Real estate $4,985 $2,071 $ 486 Individual 3,165 535 7 Commercial and all other 396 261 142 ------ ------ ------ Total $8,546 $2,867 $ 635 ====== ====== ======
SUN had loans amounting to $2,517,000 at December 31, 1999 and $2,523,000 at December 31, 1998, specifically classified as impaired. The average balance of impaired loans was $3,288,000 in 1999, $3,661,000 in 1998, and $4,277,000 in 1997. The allowance for loan losses related to impaired loans was $459,000 at December 31, 1999 and $277,000 at December 31, 1998. The following is a summary of cash receipts on these loans during the period they were classified as impaired in 1999, 1998, and 1997:
(In Thousands) 1999 1998 1997 ------ ------ ---- Cash receipts applied to reduce principal balance $1,374 $1,959 $212 Cash receipts recognized as interest income 253 496 267 ------ ------ ---- Total $1,627 $2,455 $479 ====== ====== ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Bank Premises and Equipment Bank premises and equipment at December 31, 1999 and 1998 consisted of the following:
(In Thousands) December 31 ------------------ 1999 1998 -------- -------- Land $ 1,542 $ 1,542 Bank premises 9,281 7,739 Furniture and equipment 4,967 4,391 -------- -------- Total cost 15,790 13,672 Less: Accumulated depreciation (5,248) (4,533) -------- -------- Bank premises and equipment, net $10,542 $ 9,139 ======== ========
Depreciation expense was $715,000 in 1999, $683,000 in 1998, and $607,000 in 1997. 9. Deposits The following table reflects certificates of deposit and other time deposits and their remaining maturities as of December 31, 1999: 2000 $162,853 2001 27,506 2002 5,836 2003 2,739 2004 1,620 Thereafter 54 -------- Total $200,608 ========
Included in interest-bearing deposits are certificates of deposit and other time deposits issued in amounts of $100,000 or more. These deposits and their remaining maturities, as of December 31, 1999, are as follows: (In Thousands)
Three months or less $15,322 Three through six months 6,649 Six through twelve months 8,867 Over twelve months 4,420 ------- Total $35,258 =======
Interest on deposits of $100,000 or more amounted to approximately $2,001,000 in 1999, $1,842,000 in 1998, and $1,309,000 in 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Borrowed Funds At December 31, 1999, SUN had a maximum borrowing capacity of $250,735,000 at FHLB with $15,310,000 in unused funds. At December 31, 1998, SUN's maximum borrowing capacity was $224,132,000 at FHLB with $38,401,000 in unused funds. SUN also maintains a line of credit with Allfirst Bank of $5,000,000, which has never been used. SUN's borrowed funds as of December 31, 1999 and 1998 included the following:
(In Thousands) December 31 ------------------- 1999 1998 -------- -------- Short-term Borrowings: Open Repo Plus (1) $ 21,425 $ 11,599 Securities sold under agreements to repurchase (2) 14,516 13,628 Treasury Tax and Loan Note Option (3) 25 523 -------- -------- Total Short-term Borrowings 35,966 25,750 Other Borrowed Funds, Federal Home Loan Bank of Pittsburgh advances (4) 214,000 161,500 -------- -------- Total Borrowed Funds $249,966 $187,250 ======== ========
(1) SUN utilizes an "Open Repo Plus" program through the FHLB as an overnight source of funds. As of December 31, 1999, the total commitment was $50,000,000. The maximum month end amount of such borrowings was $22,161,000 in 1999, $11,605,000 in 1998, and $19,836,000 in 1997. The daily average amount of such borrowings was $8,034,000 in 1999, $1,365,000 in 1998, and $6,017,000 in 1997, and the weighted average interest rate was 5.30% in 1999, 5.37% in 1998, and 5.54% in 1997. (2) Securities sold under agreements to repurchase represent deposit customers' cash management accounts. These repurchase agreements are collateralized by a blanket agreement with the Federal Reserve Bank of Philadelphia in which the actual ownership of the securities is not transferred. The maximum month end amount of securities sold under agreements to repurchase was $15,332,000 in 1999, $20,190,000 in 1998, and $12,149,000 in 1997. The average daily amount of such borrowings was $12,175,000 in 1999, $13,611,000 in 1998, and $9,737,000 in 1997 and the weighted average interest rates were 3.36% in 1999, 3.50% in 1998, and 3.89% in 1997. (3) Borrowings on the Treasury Tax and Loan Note Option (TT&L) represent tax funds deposited and held until the U.S. Treasury calls the balance. At December 31, 1999, the maximum amount available to borrow through the Note Options is $25,000. In February 1999, SUN reduced its TT&L Note Option borrowing capacity to allow SUN to obtain a more efficient use of its pledgeable assets. The maximum month end amount of such borrowings was $3,663,000 in 1999 and $10,000,000 in 1998 and 1997. The average daily amount of such borrowings was $199,000 in 1999, $3,030,000 in 1998, and $3,925,000 in 1997, and the weighted average interest rates were 4.52% in 1999, 5.21% in 1998, and 4.96% in 1997. (4) FHLB advances represent variable and fixed rate loans with stated maturities as follows:
(In Thousands) December 31 -------------------- 1999 1998 -------- -------- Variable rate of 6.07% at December 31, 1999, maturity 2000 $ 25,000 $ - Variable rates between 5.48% and 6.06%, at December 31, 1999, maturity 2001 10,000 20,000 Variable rates between 5.52% and 6.38%, at December 31, 1999, maturity 2002 55,000 55,000 Variable rates between 4.94% and 5.41%, at December 31, 1999, maturity 2008 70,000 80,000 Variable rates between 4.93% and 5.88%, at December 31, 1999, maturity 2009 50,000 - Fixed rate of 6.40%, maturity 2000 2,000 2,000 Fixed rates between 7.80% and 7.88%, maturity 2002 2,000 2,000 Fixed rate of 5.15%, maturity 1999 - 2,500 -------- -------- Total $214,000 $161,500 ======== ========
All FHLB advances are collateralized by SUN's investment in mortgage-backed securities and first mortgage loans. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Estimated Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that SUN disclose estimated fair values for its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time SUN's entire holdings of a particular financial instrument. Because no market exists for a significant portion of SUN's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates. Estimated fair values have been determined by SUN using historical data and an estimation methodology suitable for each category of financial instruments. The estimated fair value of SUN's securities available for sale is described in Note 6. The fair value estimates, methods, and assumptions are set forth below for SUN's other financial instruments. Cash and due from banks: The carrying amounts for cash and due from banks approximate fair value. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, agricultural, commercial and industrial, individual, and other The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on SUN's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information. The following table presents information for loans:
(In Thousands) December 31, 1999 December 31, 1998 -------------------- -------------------- Book Fair Book Fair Value Value Value Value -------- -------- -------- -------- Total loans $377,485 $374,772 $326,928 $330,992 ======== ======== ======== ========
Deposits: The fair value of deposits with no stated maturity, such as noninterest- bearing demand deposits, NOW accounts, savings deposits, and Insured Money Market Accounts, is equal to the amount payable on demand as of December 31, 1999 and 1998. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently being offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit resulting from the low- cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible. The following table presents information for deposits:
(In Thousands) December 31, 1999 December 31, 1998 -------------------- -------------------- Book Fair Book Fair Value Value Value Value -------- -------- -------- -------- Total deposits $400,121 $400,984 $363,886 $363,138 ======== ======== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Borrowed funds: Rates currently available to SUN for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of existing borrowed funds.
(In Thousands) December 31, 1999 December 31, 1998 -------------------- -------------------- Book Fair Book Fair Value Value Value Value -------- -------- -------- -------- Total borrowed funds $249,966 $244,986 $187,250 $185,210 ======== ======== ======== ========
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees Written: There is no material difference between the notional amount and the estimated fair value of off-balance sheet items which total $74,627,000 at December 31, 1999 and $65,406,000 at December 31, 1998, and are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. 12. Common Stock Plans SUN has three common stock plans for employees and directors. The 1998 Stock Incentive Plan, which is administered by a disinterested committee of the Board of Directors, provides for 716,625 shares of common stock for key officers and other management employees in the form of qualified options, nonqualified options, stock appreciation rights or restrictive stock. The 1998 Independent Directors Stock Option Plan allows for 115,763 shares of common stock to be issued to non-employee directors. Options under the 1998 Stock Incentive Plan and the 1998 Independent Directors Stock Option Plan expire ten years after the date of grant. Also, 248,063 shares have been allocated for the 1998 Employee Stock Purchase Plan, which permits all employees to purchase common stock at an option price per share that is not less than 85% of the market value per share on the date of exercise. Each option under the 1998 Employee Stock Purchase Plan will expire no later than 5 years from the date of grant, and this plan will terminate in 2008. SUN applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its common stock plans. Accordingly, no compensation expense has been recognized for the plans. Had compensation cost for the plans been determined based on the fair values at the grant dates for awards, consistent with the method of SFAS No. 123, SUN's net income and earnings per share for 1999, 1998, and 1997 would have been adjusted to the pro forma amounts indicated below:
1999 1998 1997 ---------- ---------- ---------- Net income As reported $8,755,000 $8,726,000 $7,801,000 Pro forma 8,188,000 $8,313,000 $7,441,000 Earnings per share - Basic As reported $ 1.28 $ 1.27 $ 1.23 Pro forma 1.20 $ 1.21 $ 1.17
For purposes of the pro forma calculations above, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants issued in 1999, 1998, and 1997:
1999 1998 1997 ------- ------- ------- Dividend yield 3% 3% 3% Volatility 24% 25% 24% Risk-free interest rates: Stock Incentive Plan 5.37% 5.57% 6.73% Independent Directors Plan 5.18% 5.63% 6.80% Expected option lives 4 years 4 years 4 years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of the common stock plans, adjusted retroactively for the effects of stock dividends and stock splits, is presented below:
1999 1998 1997 ------------------------ ------------------------ ------------------------ Weighted-average Weighted-average Weighted-average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ---------------- ------- ---------------- ------- ---------------- Outstanding, beginning of year 361,122 $23.82 294,960 $18.57 288,161 $14.29 Granted 124,943 23.82 131,870 33.05 96,352 22.97 Exercised (27,503) 14.49 (48,449) 12.96 (54,284) 12.82 Forfeited (22,204) 26.84 (17,259) 26.34 (35,269) 16.03 -------- ------ -------- ------ -------- ------ Outstanding, end of year 436,358 $23.25 361,122 $23.82 294,960 $18.57 ======== ====== ======== ====== ======== ====== Options exercisable at year end 346,862 262,106 228,108 ======== ======== ======== Fair value of options granted during the year $4.19 $7.24 $4.97 ====== ====== ======
The following table summarizes information about fixed stock options outstanding under the Stock Incentive Plan and the Independent Directors Plan at December 31, 1999:
Exercise Number Outstanding Remaining Number Exercisable Prices at December 31, 1999 Contractual Life at December 31, 1999 -------- -------------------- ---------------- -------------------- $9.57 298 5 years 298 $10.76 15,786 5 years 15,786 $11.22 2,469 6 years 2,469 $13.71 30,215 6 years 30,215 $16.24 6,330 7 years 6,330 $18.43 46,152 7 years 46,152 $19.19 9,053 8 years 9,053 $21.89 60,765 8 years 60,765 $32.11 11,522 9 years 11,522 $34.29 88,488 9 years 88,488 $22.28 11,018 10 years 11,018 $25.71 89,496 10 years - ------- --------- ------- 371,592 8.4 years 282,096 ======= ========= =======
13. Employee Benefit Plans SUN provides a defined contribution pension plan covering substantially all employees. SUN's contributions to this plan are based on employee contributions and compensation. In addition to the defined contribution plan, SUN provides supplemental payments to certain key employees upon retirement. SUN's contributions to the defined contribution plan were $327,000 in 1999, $328,000 in 1998, and $263,000 in 1997. Additionally, the amount charged to expense under the supplemental payment agreement was $37,000 in 1999, $35,000 in 1998, and $34,000 in 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Income Taxes The following temporary differences gave rise to a deferred tax asset at December 31, 1999 and a deferred tax liability at December 31, 1998:
(In Thousands) December 31 -------------------- 1999 1998 ------- -------- Deferred tax assets: Loan losses $1,242 $ 992 Discount on loans acquired from Bucktail 254 432 Loan fees and costs 67 84 Premium on deposits assumed from Bucktail 26 43 Nonaccrual interest 68 28 Supplemental compensation plan 91 79 Unrealized losses on investment securities 5,495 - Other 55 55 ------ ------- Total 7,298 1,713 ------ ------- Deferred tax liabilities: Unrealized gains on investment securities - 1,039 Bank premises and equipment 855 749 Other 23 37 ------ ------- Total 878 1,825 ------ ------- Deferred tax asset (liability), net $6,420 $ (112) ====== =======
SUN's income tax provision for 1999, 1998, and 1997 consists of the following:
(In Thousands) Years Ended December 31 ------------------------------- 1999 1998 1997 ------ ------ ------ Current provision $3,383 $2,691 $2,194 Deferred income tax provision 2 254 316 Tax expense from allocation of stock option tax benefits directly to equity 40 134 - ------ ------ ------ Income tax provision $3,425 $3,079 $2,510 ====== ====== ======
The following is a reconciliation between the actual income tax expense and the amount of income taxes which would have been recognized at the federal statutory rate:
(In Thousands) Years Ended December 31 ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Amount Rate Amount Rate Amount Rate ------- ----- ------- ----- ------- ----- Federal income tax at statutory rate $4,263 35.0% $4,132 35.0% $3,609 35.0% Tax exempt income (838) (6.9) (1,017) (8.6) (1,016) (9.9) Amortization of goodwill 264 2.2 264 2.2 132 1.3 Tax credits from limited partnerships (228) (1.9) (225) (1.9) (114) (1.1) Other items (36) (.3) (75) (.6) (101) (1.0) ------- ----- ------- ----- ------- ----- Income tax provision $3,425 28.1% $3,079 26.1% $2,510 24.3% ======= ===== ======= ===== ======= =====
15. Related Party Transactions Certain executive officers, corporate directors, or companies in which they have 10 percent or more beneficial ownership were indebted to SUN. A summary of loan activity with officers, directors, significant shareholders, and associates of such persons is listed below:
(In Thousands) Beginning New Other Ending Balance Loans Repayments Changes Balance --------- ------- ---------- ------- ------- 9 Directors, 6 Executive Officers 1999 $ 7,167 $ 106 $(1,600) $ - $5,673 11 Directors, 6 Executive Officers 1998 8,844 1,708 (3,385) - 7,167 9 Directors, 6 Executive Officers 1997 10,323 559 (1,088) (950) 8,844
The above transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risks of collectibility. Other changes are transfers in and out of the related party category. Deposit accounts of related parties were $3,886,000 at December 31, 1999, $2,622,000 at December 31, 1998, and $2,666,000 at December 31, 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Off-Balance Sheet Risk SUN is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. SUN uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Evaluation of each customer's creditworthiness is done on a case-by-case basis. The amount of collateral obtained if deemed necessary upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, equipment, and income-producing commercial properties. Commitments to extend credit totaled $72,091,000 at December 31, 1999 and $63,225,000 at December 31, 1998. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The terms of the letters of credit vary from one month to 24 months and may have renewal features. The credit risk involved in issuing letters of credit is essentially the same as in extending loans to customers. SUN holds collateral supporting those commitments for which collateral is deemed necessary. Standby letters of credit totaled $2,536,000 at December 31, 1999 and $2,181,000 at December 31, 1998. 17. Regulatory Matters SUN (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on SUN's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, SUN and the Bank must meet specific capital guidelines involving quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require SUN and the Bank to maintain minimum amounts and ratios (set forth in the table below for SUN) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999 and 1998, that SUN and the Bank meet all capital adequacy requirements to which they are subject. To be categorized as well capitalized, SUN must maintain minimum total risk- based, Tier I risk-based, and Tier I leverage ratios as set forth in the table.
(In Thousands) To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- As of December 31, 1999: - ------------------------ Total Capital (to Risk Weighted Assets) $59,792 16.1% $29,790 8.0% $37,238 10.0% Tier I Capital (to Risk Weighted Assets) $55,935 15.0% $14,895 4.0% $22,343 6.0% Tier I Capital (to Average Assets) $55,935 8.5% $26,444 4.0% $33,055 5.0% As of December 31, 1998: - ------------------------ Total Capital (to Risk Weighted Assets) $59,336 17.0% $27,920 8.0% $34,900 10.0% Tier I Capital (to Risk Weighted Assets) $55,594 15.9% $13,960 4.0% $20,940 6.0% Tier I Capital (to Average Assets) $55,594 9.7% $23,032 4.0% $28,790 5.0%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Condensed Financial Information - Parent Company Only
CONDENSED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (In Thousands) 1999 1998 -------- -------- Assets: Cash $ 25 $ 124 Securities available for sale 654 1,513 Subsidiary investments: Sun Bank 53,915 63,644 Pennsylvania SUN Life Insurance Company 393 308 Investment in limited partnerships - 1,506 Receivable from SUN Bank 1,019 691 Other assets 12 22 -------- -------- Total assets $56,018 $67,808 ======== ======== Liabilities, Accounts payable $ 5 $ 7 -------- -------- Shareholders' Equity: Common stock 81,520 72,913 Retained earnings (deficit) (10,498) (4,949) Accumulated other comprehensive income (loss) (10,667) 2,016 Treasury stock (4,342) (2,179) --------- -------- Total shareholders' equity 56,013 67,801 --------- -------- Total liabilities and shareholders' equity $56,018 $67,808 ========= ========
CONDENSED STATEMENTS OF INCOME Years Ended December 31, 1999, 1998, and 1997 (In Thousands) 1999 1998 1997 ------- ------- ------- Income: Dividends from Sun Bank $5,714 $5,545 $4,772 Net security gains 198 226 226 Interest and other income 26 49 90 ------- ------- ------- Total income 5,938 5,820 5,088 ------- ------- ------- Expenses: Stationery and printing 23 20 18 Professial fees 87 46 101 Other expenses 143 104 104 Loss from investment in limited partnerships 29 171 134 ------- ------- ------- Total expenses 282 341 357 ------- ------- ------- Income before income taxes and equity in undistributed earnings of subsidiaries 5,656 5,479 4,731 Income tax benefit (281) (294) (256) ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 5,937 5,773 4,987 Equity in undistributed earnings of subsidiaries 2,818 2,953 2,814 ------- ------- ------- Net income $8,755 $8,726 $7,801 ======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 1999, 1998, and 1997 (In Thousands) 1999 1998 1997 ------- ------- ------- Cash flows from operating activities: Net income $8,755 $8,726 $7,801 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (2,818) (2,953) (2,814) Loss from investment in limited partnerships 29 171 134 Realized net security gains (198) (226) (226) Increase in other assets (176) (87) (370) Decrease in liabilities (2) (2) - ------- ------- ------- Net cash provided by operating activities 5,590 5,629 4,525 ------- ------- ------- Cash flows from investing activities: Proceeds from transfer of investment in limited partnerships to SUN Bank 1,488 - - Proceeds from sales of securities 833 804 387 Purchases of available for sale securities (110) (908) (340) Purchases of investment in limited partnerships - - (844) ------- ------- ------- Net cash provided by (used in) investing activities 2,211 (104) (797) ------- ------- ------- Cash flows from financing activities: Cash dividends (6,135) (5,369) (4,217) Purchase of treasury stock (2,163) (770) - Proceeds from sale of stock for employee benefit program 398 627 596 ------- ------- ------- Net cash used in financing activities (7,900) (5,512) (3,621) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (99) 13 107 Cash and cash equivalents at beginning of year 124 111 4 ------- ------- ------- Cash and cash equivalents at end of year $ 25 $ 124 $ 111 ======= ======= =======
No interest or income taxes were paid by the parent company during 1999, 1998, or 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. Consolidated Quarterly Financial Data (Unaudited) (Dollars in Thousands, Except Per Share Data)
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total -------- -------- -------- -------- -------- Interest income $11,218 $11,474 $11,991 $12,771 $47,454 Interest expense (6,061) (6,265) (6,629) (7,275) (26,230) -------- -------- -------- -------- -------- Net interest income 5,157 5,209 5,362 5,496 21,224 Provision for possible loan losses (450) (450) (450) (575) (1,925) Net security gains 592 427 517 426 1,962 Other operating income 704 752 758 784 2,998 Other operating expenses (2,880) (2,903) (3,116) (3,180) (12,079) -------- -------- -------- -------- -------- Income before income taxes 3,123 3,035 3,071 2,951 12,180 Income tax provision (880) (814) (820) (911) (3,425) -------- -------- -------- -------- -------- Net income $ 2,243 $ 2,221 $ 2,251 $ 2,040 $ 8,755 ======== ======== ======== ======== ======== Net income per share - Basic $ .32 $ .33 $ .33 $ .30 $ 1.28 ======== ======== ======== ======== ======== Net income per share - Diluted $ .32 $ .33 $ .33 $ .30 $ 1.28 ======== ======== ======== ======== ========
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total -------- -------- -------- -------- -------- Interest income $ 9,959 $10,613 $10,870 $11,235 $42,677 Interest expense (4,961) (5,616) (5,833) (6,057) (22,467) -------- -------- -------- -------- -------- Net interest income 4,998 4,997 5,037 5,178 20,210 Provision for possible loan losses (300) (300) (300) (300) (1,200) Net security gains 310 419 256 418 1,403 Other operating income 569 574 675 869 2,687 Other operating expenses (2,845) (2,801) (2,800) (2,849) (11,295) -------- -------- -------- -------- -------- Income before income taxes 2,732 2,889 2,868 3,316 11,805 Income tax provision (689) (750) (744) (896) (3,079) -------- -------- -------- -------- -------- Net income $ 2,043 $ 2,139 $ 2,124 $ 2,420 $ 8,726 ======== ======== ======== ======== ======== Net income per share - Basic $ .30 $ .31 $ .31 $ .35 $ 1.27 ======== ======== ======== ======== ======== Net income per share - Diluted $ .30 $ .30 $ .31 $ .35 $ 1.26 ======== ======== ======== ======== ========
20. Subsequent Event On January 27, 2000, the Board of Directors declared a cash dividend of $0.24 per common share payable on March 10, 2000 to shareholders of record on February 25, 2000. INDEPENDENT AUDITORS' REPORT PARENTE RANDOLPH The Power of Ideas To the Shareholders and Board of Directors of SUN BANCORP, INC: We have audited the accompanying consolidated balance sheets of SUN BANCORP, INC. and subsidiaries (SUN) as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of SUN's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SUN BANCORP, INC. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Parente Randolph, PC Williamsport, Pennsylvania February 11, 2000 FIVE YEAR FINANCIAL HIGHLIGHTS
Five Year Financial Highlights Selected Financial Data 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Balance Sheet Data (In Thousands) - ------------------ Assets $710,921 $623,577 $510,728 $367,390 $319,626 Deposits 400,121 363,886 327,018 205,619 196,592 Loans 377,485 326,928 310,300 213,225 199,444 Securities available for sale 282,616 254,780 165,284 136,538 107,125 Shareholders' equity 56,013 67,801 65,613 38,866 36,020 Average equity 63,537 67,063 51,470 36,886 32,025 Average assets 661,099 575,797 440,181 344,473 309,623 Earnings Data (In Thousands) - ------------- Interest income $ 47,454 $ 42,677 $ 33,653 $ 27,199 $ 24,439 Interest expense 26,230 22,467 16,619 13,689 12,087 Net interest income 21,224 20,210 17,034 13,510 12,352 Provision for possible loan losses 1,925 1,200 1,175 650 360 Net interest income after provision for possible loan losses 19,299 19,010 15,859 12,860 11,992 Net security gains 1,962 1,403 1,779 358 130 Other operating income 2,998 2,687 2,046 1,606 1,666 Other operating expenses 12,079 11,295 9,373 6,228 5,984 Income before income tax provision 12,180 11,805 10,311 8,596 7,804 Income tax provision 3,425 3,079 2,510 2,197 2,154 Net income 8,755 8,726 7,801 6,399 5,650 Dividends paid 6,135 5,369 4,217 3,134 2,317 Ratios - ------ Return on average assets 1.32% 1.51% 1.77% 1.86% 1.83% Return on average assets (excluding goodwill) 1.46% 1.68% 1.92% 1.86% 1.83% Return on average equity 13.78% 13.01% 15.16% 17.35% 17.64% Return on average equity (excluding goodwill) 17.70% 16.78% 17.77% 17.35% 17.64% Equity to assets (year end) 7.88% 10.87% 12.85% 10.58% 11.27% Loans to deposits (year end) 94.34% 89.84% 94.89% 103.70% 101.45% Loans to assets (year end) 53.10% 52.43% 60.76% 58.04% 62.40% Dividend payout (percentage of net income) 70.07% 61.53% 54.06% 48.98% 41.01%
Per Share Data - -------------- Net income per share - Basic $ 1.28 $ 1.27 $ 1.23 $ 1.09 $ .97 Net income per share - Diluted $ 1.28 $ 1.26 $ 1.22 $ 1.08 $ .97 Net income per share - Basic (exclusive of goodwill amortization) $ 1.40 $ 1.38 $ 1.29 $ 1.09 $ .97 Cash dividends per share $ .90 $ .78 $ .65 $ .53 $ .42 Book value per share $ 8.25 $ 9.89 $ 9.60 $ 6.64 $ 6.17 Book value per share (excluding goodwill) $ 6.86 $ 8.40 $ 8.00 $ 6.64 $ 6.17 Average shares outstanding - Basic 6,813,956 6,856,955 6,348,379 5,873,069 5,823,943 Average shares outstanding - Diluted 6,860,114 6,923,366 6,415,596 5,930,306 5,835,856 Approximate number of shareholders 2,105 1,977 1,757 1,518 1,337
MANAGEMENT'S DISCUSSION AND ANALYSIS 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 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. Current performance does not guarantee or assure similar performance in the future, and may not be indicative of future results. BACKGROUND SUN is a bank holding company whose principal subsidiary is Sun Bank. Sun Bank, trading as Snyder County Trust Company, Central Pennsylvania Bank, Bucktail Bank and Trust Company, and Watsontown Bank, operates fifteen branch banking offices and one trust services office in its principal market of Snyder, Union, Northumberland, Lycoming, Cameron, and Elk counties. SUN also owns a captive insurance company, Pennsylvania SUN Life Insurance Company, which provides credit life and disability insurance to Sun Bank's credit customers. SUN is a limited partner in two partnerships which were formed for the purpose of building, owning, and operating affordable elderly apartment complexes in SUN's market area. At December 31, 1999, SUN had 197 full time equivalent employees. ANALYSIS OF RESULTS OF OPERATIONS Summary SUN achieved record earnings for the year ended December 31, 1999. Net income reached $8,755,000 in 1999, representing a $29,000 increase over the $8,726,000 recorded in 1998. Basic earnings per share also reached record levels at $1.28 compared to the $1.27 earned in 1998. This earnings performance is further reflected through a solid 1.32% return on average assets and a 13.78% return on average equity. In 1998, these ratios were 1.51% and 13.01%. Net Interest Income Profitability for banks is primarily determined by its net interest income, which is the difference between the income earned on earning assets and the interest paid on interest-bearing liabilities, such as deposits and borrowed funds. Net interest income is also measured as a percentage of earning assets, known as net interest margin. SUN's net interest income for 1999 increased $1,014,000 or 5.02% to $21,224,000 from $20,210,000 in 1998. On a tax equivalent basis, the net interest margin spread decreased from 4.01% in 1998 to 3.57% in 1999. Interest income increased $4,777,000 or 11.19% to $47,454,000 in 1999 from $42,677,000 in 1998. Interest expense increased $3,763,000 or 16.75% to $26,230,000 in 1999 from $22,467,000 in 1998. Interest on deposits and interest on borrowed funds represented an increase of $3,627,000, while interest on short-term borrowings increased $136,000. In 1998, interest income rose $9,024,000 or 26.81% as interest expense increased $5,848,000 or 35.19%. Increases in average balance of loans and investments in both taxable and tax exempt securities accounted for most of the increase in interest income. Growth in average balance of time deposits and other borrowed funds accounted for most of the increase in interest expense in 1998. Interest on deposits in 1999 rose $975,000 or 7.01% as the average rate on deposits decreased by 15 basis points while average deposits increased 10.82%. This increase was mainly attributable to an increase in deposit levels throughout 1999. The average rate on short-term borrowings increased as the rate on other borrowed funds decreased slightly from 1998 to 1999. The overall rate on interest-bearing liabilities decreased seven basis points to 4.73% in 1999 from 4.80% in 1998. Interest on deposits in 1998 rose $3,725,000 or 36.59% as the average rate on deposits increased. This increase in average rate was mainly attributable to the higher rates on time deposits. The average rate on short-term borrowings fell in 1998 from 1997. The overall rate on interest- bearing liabilities increased ten basis points to 4.80% in 1998 from 4.70% in 1997. MANAGEMENT'S DISCUSSION AND ANALYSIS Balance Sheet Average assets grew $85,302,000 or 14.81% to $661,099,000 in 1999 from $575,797,000 in 1998. Average loans grew $33,896,000 or 10.68%, with the rate earned on loans decreasing 57 basis points from 9.14% in 1998 to 8.57% in 1999. Average taxable investments increased $72,888,000 or 43.13% to $241,875,000 in 1999 from $168,987,000 in 1998 with the rate earned increasing 23 basis points to 6.47% in 1999. Tax exempt securities decreased by $14,493,000 or 32.00% while the tax equivalent yield remained relatively the same at 8.94%. Total noninterest-earning assets increased $1,563,000 as cash levels were increased in anticipation of Y2K demands. SUN's average assets grew $135,616,000 or 30.81% to $575,797,000 in 1998 from $440,181,000 in 1997. Average loans grew $50,709,000 or 19.02%, with the rate on loans remaining constant from 9.17% in 1997 to 9.14% in 1998. Average taxable investments increased $70,192,000 or 71.05% to $168,987,000 in 1998 with the rate earned dropping 24 basis points to 6.24% in 1998. Tax exempt investments remained stable in 1998 with an average balance of $45,295,000 and rate of 8.98%. The yield on total earning assets decreased 28 basis points to 8.14% in 1998 from 8.42% in 1997. Total noninterest-earning assets rose $9,896,000 due primarily to a 55.40% increase in cash and due from banks and a 54.99% increase in accrued interest and other assets in 1998. Average interest-bearing liabilities rose $86,975,000 or 18.56% from $468,545,000 in 1998 to $555,520,000 in 1999. Total average interest-bearing deposits grew $33,625,000 or 10.82%. NOW's and Insured Money Market Accounts grew $22,207,000 to $95,215,000 in 1999 from $73,008,000 in 1998. The majority of the growth in NOW accounts was the result of attracting increased levels of government funds. Average time deposits increased $9,489,000 to $203,356,000 in 1999. Short term borrowings increased $2,402,000 to $20,408,000 in 1999. Average other borrowed funds increased $50,948,000 to $190,692,000 in 1999 from $139,744,000 in 1998. During 1999, additional term borrowings were made to take advantage of special rates offered by the Federal Home Loan Bank of Pittsburgh (FHLB). Average noninterest bearing demand deposits increased by $1,603,000 or 4.38%. In 1998, SUN's average interest-bearing liabilities rose $114,869,000 or 32.48% from $353,676,000 in 1997 to $468,545,000 in 1998. Total average interest-bearing deposits grew $72,870,000 or 30.63%. NOW's and Insured Money Market Accounts grew $22,822,000 to $73,008,000 in 1998 from $50,186,000 in 1997. Savings deposits increased $6,944,000 to $43,920,000 in 1998 from $36,976,000 in 1997. Time deposits increased by $43,104,000 to $193,867,000 in 1998 from $150,763,000 in 1997. Short-term borrowings decreased $1,673,000 to $18,006,000 in 1998 from $19,679,000 in 1997. Other borrowed funds increased $43,672,000 in 1998 from $96,072,000 in 1997 to $139,744,000 due to the decrease in short-term borrowings and additional usage of wholesale funding through the FHLB. Average demand deposits rose $6,810,000 or 22.83%. MANAGEMENT'S DISCUSSION AND ANALYSIS AVERAGE BALANCE AND NET INTEREST INCOME ANALYSIS The table below presents an analysis of the composition of average daily balances and net interest income on a fully taxable equivalent basis.
(In Thousands) 1999 1998 1997 --------------------------- ----------------------------- ----------------------------- Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- -------- ------ --------- -------- ------ --------- -------- ----- ASSETS Interest-earning assets: Interest-bearing deposits $ 3,101 $ 156 5.03% $ 11,653 $ 617 5.29% $ 6,282 $ 271 4.31% Loans (net of unearned income) (1) (2) 351,181 30,097 8.57 317,285 28,953 9.13 266,576 24,439 9.17 Investments: Taxable 241,875 15,640 6.47 168,987 10,542 6.24 98,795 6,402 6.48 Tax exempt (2) 30,802 2,755 8.94 45,295 4,068 8.98 45,847 4,044 8.82 --------- ------- ----- --------- -------- ----- --------- -------- ----- Total interest-earning assets 626,959 48,648 7.76 543,220 44,180 8.13 417,500 35,156 8.42 ------- ----- -------- ----- --------- ----- Noninterest-earning assets: Cash and due from banks 11,291 10,973 7,061 Bank premises & equipment 9,502 8,939 8,740 Goodwill 9,795 10,554 5,644 Accrued interest and other assets 7,285 5,855 4,943 Less: Allowance for loan losses (3,592) (3,388) (3,014) Unamortized loan fees (141) (356) (693) --------- --------- --------- Total assets $661,099 $575,797 $440,181 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: NOW Accounts $ 73,240 2,118 2.89% $ 51,628 1,226 2.37% $ 35,162 708 2.01% Insured Money Market Accounts 21,975 788 3.58 21,380 775 3.62 15,024 593 3.95 Savings deposits 45,849 915 2.00 43,920 986 2.24 36,976 858 2.32 Time deposits 203,356 11,059 5.46 193,867 10,918 5.63 150,763 8,021 5.32 Short-term borrowings 20,408 843 4.13 18,006 707 3.93 19,679 907 4.61 Other borrowed funds 190,692 10,507 5.51 139,744 7,855 5.62 96,072 5,532 5.76 --------- ------- ----- --------- ------- ----- -------- ------- ----- Total interest-bearing liabilities 555,520 26,230 4.73 468,545 22,467 4.80 353,676 16,619 4.70 ------- ----- -------- ----- -------- ----- Noninterest-bearing liabilities and shareholders' equity: Demand deposits 38,243 36,640 29,830 Accrued interest and other liabilities 3,799 3,549 5,205 Shareholders' equity 63,537 67,063 51,470 --------- --------- --------- Total liabilities and shareholders' equity $661,099 $575,797 $440,181 ========= ========= ========= Interest rate spread 3.03% 3.33% 3.72% ===== ===== ===== Net interest income/margin $22,418 3.57% $21,713 4.00% $18,537 4.44% ======= ===== ======= ===== ======= =====
(1) Average loan balances include non-accrual loans and interest income includes fees on loans. (2) Yields on tax exempt loans and investments have been adjusted to a fully taxable equivalent basis using the federal income tax rate of 35%. MANAGEMENT'S DISCUSSION AND ANALYSIS VOLUME AND RATE ANALYSIS Changes in interest income and interest expense can result from variances in both volume and rates. The following table shows an analysis of the effect of volume and rate variances on taxable equivalent interest income, interest expense, and net interest income.
(In Thousands) 1999 Compared to 1998 1998 Compared to 1997 Increase (Decrease) Increase (Decrease) ----------------------------- -------------------------- Volume Rate Net Volume Rate Net ------- -------- -------- -------- ------ ------- Interest earned on: Interest-bearing deposits $ (453) $ (8) $ (461) $ 231 $ 115 $ 346 Loans 3,092 (2,001) 1,091 4,656 (142) 4,514 Investments: Taxable 4,544 547 5,091 4,548 (408) 4,140 Tax exempt (1,302) (11) (1,313) (49) 73 24 ------- -------- -------- ------- ------ ------- Total interest-earning assets 5,881 (1,473) 4,408 9,386 (362) 9,024 ------- -------- -------- ------- ------ ------- Interest paid on: NOW Accounts 510 382 892 330 188 518 Insured Money Market Accounts 20 (7) 13 252 (70) 182 Savings deposits 41 (112) (71) 161 (33) 128 Time deposits 531 (390) 141 2,293 604 2,897 Short-term borrowings 95 41 136 (77) (123) (200) Other borrowed funds 2,862 (210) 2,652 2,517 (194) 2,323 ------- -------- -------- ------- ------ ------- Total interest-bearing liabilities 4,059 (296) 3,763 5,476 372 5,848 ------- -------- -------- ------- ------ ------- Net interest income $1,822 $(1,177) $ 645 $3,910 $(734) $3,176 ======= ======== ======== ======= ====== =======
Income on tax exempt loans and investments have been adjusted to a fully taxable equivalent basis using the federal income tax rate of 35%. The change in interest income and interest expense attributable to the combined impact of both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. MANAGEMENT'S DISCUSSION AND ANALYSIS ANALYSIS OF CHANGES IN INCOME AND EXPENSE The table below presents an analysis of the comparative changes in income and expense relating to the consolidated income statements for the periods indicated. The table also reflects the changes in average volume of assets and liabilities as it relates to income and expense. The tax exempt income is not shown on a tax equivalent basis.
(In Thousands) 1999 Compared to 1998 1998 Compared to 1997 ------------------------------------ ------------------------------------- Average Volumes Income/Expense Average Volumes Income/Expense $ Change % Change $ Change % Change $ Change % Change $ Change % Change -------- -------- -------- -------- -------- -------- -------- -------- Loans, net $33,896 10.68% $1,015 3.52% $ 50,709 19.02% $4,514 18.47% Investment securities 58,395 27.25 4,223 31.91 69,640 48.15 4,164 39.86 Interest-bearing deposits (8,552) (73.39) (461) 74.72 5,371 85.50 346 127.68 -------- ------- ------- ------- -------- ------- ------ ------- Total interest- earning assets $83,739 15.42% $4,777 11.19% $125,720 30.11% $9,024 25.67% ======== ======= ======= ======= ======== ======= ====== ======= NOW Accounts $21,612 41.86% $ 892 72.76% $ 16,466 46.83% $ 518 73.16% Insured Money Market Accounts 595 2.78 13 1.68 6,356 42.31 182 30.69 Savings deposits 1,929 4.39 (71) 7.20 6,944 18.78 128 14.92 Time deposits 9,489 4.89 141 1.29 43,104 28.59 2,897 36.12 Short-term borrowings 2,402 13.34 136 19.24 (1,673) (8.50) (200) (22.05) Other borrowed funds 50,948 36.46 2,652 33.76 43,672 45.46 2,323 41.99 -------- ------- ------- ------- --------- ------- ------- ------- Total interest bearing liabilities $86,975 18.56% $3,763 16.75% $114,869 32.48% $5,848 35.19% ======== ======= ======= ======= ========= ======= ======= ======= Net interest income $1,014 5.02% $3,176 18.65% Provision for possible loan losses 725 60.42 25 2.12 ------- ------ ------- ------- Net interest income after provision for possible loan losses 289 1.52 3,151 19.87 ------- ------ ------- ------- Service charges on deposit accounts 62 5.39 215 22.97 Trust income 105 17.02 185 42.82 Net securities gains 559 39.84 (376) (21.14) Income from insurance subsidiary 53 31.18 19 12.58 Other income 91 12.15 222 42.13 ------- ------- ------- ------- Total other operating income 870 21.27 265 6.93 ------- ------- ------- ------- Salaries and employee benefits 518 9.11 903 18.88 Net occupancy and equipment expenses 110 6.96 363 29.80 Pennsylvania shares tax 68 14.02 105 27.63 Amortization of goodwill - - 377 99.74 Expenses of insurance subsidiary (57) (30.65) 23 14.11 Other expenses 145 5.57 151 6.16 ------- ------- ------- ------- Total other operating expenses 784 6.94 1,922 20.51 ------- ------- ------- ------- Income before income tax provision 375 3.18 1,494 14.49 Income tax provision 346 11.24 569 22.67 ------- ------- ------- ------- Net income $ 29 .33% $ 925 11.86% ======= ======= ======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS OTHER OPERATING INCOME SUN's total other operating income increased $870,000 or 21.27% in 1999. Service charges on deposit accounts increased to $1,213,000. The increase was due primarily to increased fee income from transaction accounts and increased ATM usage. Trust income increased $105,000 to $722,000 as trust accounts and balances continue to show growth. Net security gains increased $559,000 to $1,962,000. Other income, mainly comprised of non-yield related loan fees and other miscellaneous income, increased $91,000 or 12.15%. The increase is mainly the result of a change in the method of recognizing amortization of SUN's investment in limited partnerships for two affordable elderly housing projects, resulting in an increase of $142,000 over 1998. This accounting change was not deemed to be significant as it relates to SUN's overall financial statements. In addition, gains on sale of loans increased $74,000 while gains on sale of other real estate owned decreased $58,000 from 1998. The remaining change is the result of decreased miscellaneous income and a reduction in non-yield related loan fees. In 1998, SUN's total other operating income increased $265,000 or 6.93%. Service charges on deposit accounts increased to $1,151,000. The increase was due primarily to transaction accounts acquired through the Bucktail acquisition and an increase in ATM usage. Trust income increased $185,000 to $617,000, due primarily to the addition of trust accounts from Bucktail along with an increase in trust accounts and balances. Net security gains decreased $376,000 to $1,403,000. Other income, mainly comprised of non-yield related loan fees and other miscellaneous income, increased $222,000 or 42.13% with $154,000 of the increase resulting from gains on sale of loans, while gains on sale of other real estate owned increased $93,000. The table below illustrates the changes in other operating income for the years ended December 31, 1999, 1998, and 1997.
(In Thousands) 1999 % Change 1998 % Change 1997 ------ -------- ------ -------- ------ Service charges on deposit accounts $1,213 5.39% $1,151 22.97% $ 936 Trust income 722 17.02 617 42.82 432 Net securities gains 1,962 39.84 1,403 (21.14) 1,779 Income from insurance subsidiary 223 31.18 170 12.58 151 Other income 840 12.15 749 42.13 527 ------ ------ ------ ------- ------ Total other operating income $4,960 21.27% $4,090 6.93% $3,825 ====== ====== ====== ======= ====== OTHER OPERATING EXPENSES SUN's total other operating expenses increased $784,000 or 6.94% to $12,079,000 in 1999. Increases in salaries and employee benefits, and furniture and equipment expenses were reflective of SUN's opening of two branch locations and SUN's continued emphasis on expanding SUN's market area. At December 31, 1999, SUN had 197 full-time equivalent employees, representing an increase of nine employees from 1998. Also, the increase in salaries and employee benefits was the direct result of SUN's decreased indirect consumer lending which caused the amount of wages capitalized to comply with Statement of Financial Accounting Standards No. 91 to decrease $181,000 from 1998. Pennsylvania shares tax increased $68,000 as a continued result of the Bucktail acquisition. Amortization of goodwill remained constant at $755,000 for 1999. The amortization is the result of goodwill related to the acquisition of Bucktail. Expenses of the insurance subsidiary decreased $57,000 to $129,000 for 1999. This reduction of expense was due to a decrease in the required claim reserves, which offset claims incurred during the year. Other expenses increased $145,000 in 1999 due to increases in general operating expenses such as marketing, insurance, supplies and postage. SUN's total other operating expenses rose $1,922,000 or 20.51% to $11,295,000 in 1998. Increases in salaries and employee benefits, net occupancy expense, and furniture and equipment expense were reflective of increased operating costs associated with the addition of seven former Bucktail locations. At December 31, 1998, SUN had 188 full-time equivalent employees, which represents an increase of three employees from 1997. Pennsylvania shares tax increased by $105,000 as a direct result of the Bucktail acquisition. Amortization of goodwill increased $377,000 to $755,000 in 1998. The amortization is the result of goodwill related to the acquisition of Bucktail. Expenses of the insurance subsidiary remained relatively unchanged at $186,000. Other expenses rose $151,000 in 1998 due to increases in general operating expenses such as marketing, insurance, supplies, and postage due to the addition of seven branch offices and one administrative office of the former Bucktail. The table below illustrates the changes in other operating expenses for the years ended December 31, 1999, 1998, and 1997.
(In Thousands) 1999 % Change 1998 % Change 1997 ------- -------- ------- -------- ------ Salaries and employee benefits $ 6,204 9.11% $ 5,686 18.88% $4,783 Net occupancy expenses 653 (7.90) 709 24.39 570 Furniture and equipment expenses 1,038 19.04 872 34.57 648 Pennsylvania shares tax 553 14.02 485 27.63 380 Amortization of goodwill 755 - 755 99.74 378 Expenses of insurance subsidiary 129 (30.65) 186 14.11 163 Other expenses 2,747 5.57 2,602 6.16 2,451 ------- ------- ------- ------ ------ Total other operating expenses $12,079 6.94% $11,295 20.51% $9,373 ======= ======= ======= ====== ======
MANAGEMENT'S DISCUSSION AND ANALYSIS INVESTMENT PORTFOLIO SUN's total portfolio is classified as available for sale, which means it is reported at fair value with unrealized gains or losses, net of taxes, excluded from earnings and reported as accumulated other comprehensive income (loss) within shareholders' equity. SUN had net unrealized losses on investment securities of $16,161,000 at December 31, 1999, and net unrealized gains of $3,056,000 at December 31, 1998. The majority of SUN's portfolio is comprised of fixed-rate mortgage-backed securities that have monthly principal and interest paydowns. There are no single-issuer concentrations in municipal securities. The following table shows the actual maturity distribution of investment securities, including mortgage-backed securities at their contractual maturities, at December 31, 1999.
(In Thousands) Within After One But After Five But After One Year Within Five Years Within Ten Years Ten Years Total ------------- ----------------- ---------------- --------------- --------------- Amort- Amort- Amort- Amort- Amort- ized ized ized ized ized Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield ------ ------ ------ ------ ------- ------ -------- ------ -------- ----- Obligations of U.S. government agencies $393 6.45% $2,273 7.29% $45,634 6.68% $208,305 6.84% $256,605 6.81% Obligations of states and political subdivisions (1) 15 13.85 60 13.85 15 13.85 20,959 8.35 21,049 8.37 Corporate - - - - - - 500 9.00 500 9.00 ---- ------ ------ ------ ------- ------ -------- ----- -------- ----- Total $408 6.72% $2,333 7.46% $45,649 6.68% $229,764 6.96% 278,154 6.93 ==== ====== ====== ====== ======= ====== ======== ===== ----- Equity securities (2) 20,623 -------- Total investment securities $298,777 6.45% ======== =====
(1) The federal income tax rate of 35% was used to adjust the income to a taxable equivalent basis. (2) Equity securities have no stated maturity and the related dividend income has no stated rate. MANAGEMENT'S DISCUSSION AND ANALYSIS LOAN PORTFOLIO Total loans, gross, increased $49,340,000 or 14.71% from $333,465,000 in 1998 to $382,805,000 in 1999. The real estate mortgage portfolio decreased $13,716,000 or 7.12%, while commercial and industrial loans increased $61,370,000 or 116.18%, and individual loans increased $1,912,000 or 2.29% from 1998 to 1999. In 1999, SUN experienced a change in demand for real estate and consumer loans. SUN shifted its efforts to offering fixed and variable commercial loan products to fulfill the needs of local businesses. These efforts resulted from the hiring of several experienced commercial lenders and the development of improved underwriting standards for commercial loans. In 1998, SUN's total loans increased $15,748,000 or 4.96% from $317,717,000 in 1997. The loan portfolio is carefully analyzed on a routine basis to ensure the asset quality remains strong. Real estate loans account for 47.59% of the portfolio and these loans are generally well-secured with minimal credit risk. Lending activities are concentrated within SUN's market area; therefore, there are no foreign loans. Also, SUN does not engage in lease financing. Management believes the loan portfolio is adequately diversified and there are no concentrations exceeding 10% of total loans. The following table identifies the composition of the loan portfolio, net of unearned income, unamortized discounts on purchased loans, deferred loan fees, and allowance for possible loan losses, for the five years ended December 31, 1999.
(In Thousands) 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Real estate - Mortgage $178,876 $192,592 $202,882 $158,310 $144,746 Real estate - Construction 3,318 3,353 3,632 5,107 4,729 Agricultural 1,059 971 1,157 769 724 Commercial and industrial 114,193 52,823 34,560 24,554 25,713 Individual 85,255 83,343 75,396 32,848 31,205 Other 104 383 90 145 60 Unearned income on loans (740) (1,666) (1,961) (5,357) (5,074) Deferred loan fees (215) (274) (533) (661) (468) Unamortized net discount on purchased loans (508) (1,270) (1,793) - - Allowance for possible loan losses (3,857) (3,327) (3,130) (2,490) (2,191) --------- --------- --------- --------- --------- Total loans, net $377,485 $326,928 $310,300 $213,225 $199,444 ======== ========= ========= ========= =========
The following tables set forth the loan maturities and interest rate sensitivity of commercial and industrial, agricultural and other loans, and real estate - construction loans as of December 31, 1999. These tables represent gross loan balances.
(In Thousands) Within After One But After One Year Within Five Years Five Years Total -------- ----------------- ---------- -------- Commercial and industrial, agricultural, and other loans $59,134 $21,624 $34,598 $115,356 Real estate - Construction 3,318 - - 3,318 ------- ------- ------- -------- Total $62,452 $21,624 $34,598 $118,674 ======= ======= ======= ========
Interest Rate Sensitivity ----------------------------------- Fixed Variable Rate Rate Total ------- -------- -------- Due within one year $13,257 $49,195 $ 62,452 Due after one year 43,462 12,760 56,222 ------- ------- -------- Total $56,719 $61,955 $118,674 ======= ======= ========
MANAGEMENT'S DISCUSSION AND ANALYSIS NONPERFORMING LOANS Nonperforming loans include nonaccrual, past due, and restructured loans. SUN's policy is to place a loan in nonaccrual status when management concludes the collection of interest income appears doubtful. Interest on loans classified as nonaccrual is recognized as it is received. Past due loans are loans which are contractually past due 90 days or more as to interest or principal payments and still accruing interest. Restructured loans are those whose terms have been renegotiated to provide a reduction or deferral of interest and/or principal because of a deterioration in the financial position of the borrower. At December 31, 1999, total nonperforming loans amounted to $3,300,000 or .86% of total gross loans. Total loans, gross, grew $49,340,000 or 14.71% to $382,805,000 in 1999. Even though total loans have substantially increased, nonperforming loans have decreased $445,000 or 11.88% from $3,745,000 in 1998. An integral part of our community bank philosophy is our ability to meet our customers' needs while maintaining prudent, yet flexible, lending practices. The improved balance of nonperforming loans can be attributed to the work of the problem loan committee which meets monthly in order to monitor existing problem loans, attempt to identify other potential problem loans, design strategies for minimizing the amount of losses from the loan portfolio, and to ensure the allowance for possible loan losses is adequate. The committee members include the Chief Executive Officer, Chief Operating Officer, Senior Vice President in charge of lending, and other members of senior management. Also in 1999, SUN engaged an independent consulting firm for a review of all loan relationships in excess of $250,000. This review was performed to provide management with some degree of assurance its internal review process is complete and accurate. A similar external loan review is planned for 2000. The following table presents information on nonaccrual, past due, and restructured loans for the five years ended December 31, 1999.
(In Thousands) 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Nonaccrual loans $1,965 $ 635 $1,110 $ 236 $ - Loans past due 90 days or more 1,015 2,867 2,988 1,863 1,989 Restructured loans 320 243 326 153 148 ------ ------ ------ ------ ------ Total nonperforming loans $3,300 $3,745 $4,424 $2,252 $2,137 ====== ====== ====== ====== ======
The total nonperforming loans above included "impaired" loans of approximately $2,517,000 at December 31, 1999 and $2,523,000 at December 31, 1998. In accordance with SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable all amounts due will not be collected according to the contractual terms of the loan agreement. This category does not apply to large groups of smaller balance loans collectively evaluated for impairment, such as residential mortgage and consumer installment loans. 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 December 31, 1999, 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. MANAGEMENT'S DISCUSSION AND ANALYSIS The following tables present the allocation of the allowance for possible loan losses and the changes in the allowance for the five years ended December 31, 1999.
(In Thousands) 1999 1998 1997 1996 1995 --------------- ---------------- ---------------- ---------------- ---------------- % of % of % of % of % of Total Total Total Total Total Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Real estate $ 844 47.59% $1,408 58.76% $1,651 65.00% $1,009 73.70% $ 631 72.15% Commercial and industrial 908 30.13 479 16.25 335 11.27 1,013 11.49 1,080 12.79 Individual 2,105 22.28 1,440 24.99 1,144 23.73 468 14.81 480 15.06 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Total allowance for possible loan losses $3,857 100.00% $3,327 100.00% $3,130 100.00% $2,490 100.00% $2,191 100.00% ====== ======= ====== ======= ====== ======= ====== ======= ====== =======
(In Thousands) 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Balance, beginning of year $3,327 $3,130 $2,490 $2,191 $1,999 ------- ------- ------- ------- ------- Loans charged off: Real estate (389) (271) (962) (18) (50) Commercial and industrial (169) (276) (145) (113) (37) Individual (1,048) (704) (895) (236) (89) ------- ------- ------- ------- ------ Total loans charged off (1,606) (1,251) (2,002) (367) (176) ------- ------- ------- ------- ------ Recoveries: Real estate 36 95 22 1 2 Commercial and industrial 26 32 48 4 5 Individual 149 121 105 11 1 ------- ------- ------- ------- ------ Total recoveries of loans charged off 211 248 175 16 8 ------- ------- ------- ------- ------ Net loans charged off (1,395) (1,003) (1,827) (351) (168) ------- ------- ------- ------- ------ Provision for possible loan losses 1,925 1,200 1,175 650 360 ------- ------- ------- ------- ------ Allowance for possible loan losses assumed upon acquisition of Bucktail - - 1,292 - - ------- ------- ------- ------- ------ Balance, end of year $3,857 $3,327 $3,130 $2,490 $2,191 ======= ======= ======= ======= ======= Ratios: Net charge-offs to average loans .40% .32% .69% .17% .09% ======= ======= ======= ======= ======= Allowance for possible loan losses to total loans at December 31 1.01% 1.00% .99% 1.12% 1.06% ======= ======= ======= ======= ======= Allowance for possible loan losses to total nonperforming loans 116.88% 88.84% 70.75% 110.57% 102.53% ======== ====== ======= ======== =======
MANAGEMENT'S DISCUSSION AND ANALYSIS DEPOSITS AND BORROWED FUNDS SUN's total deposits were $400,121,000 at December 31, 1999 compared to $363,886,000 at December 31, 1998, an increase of $36,235,000 or 9.96%. SUN continues to obtain and maintain deposits by offering new and attractive deposit products, while remaining interest rate competitive. In 1998, total deposits increased $36,868,000 or 11.27% from $327,018,000 at December 31, 1997. SUN continued to actively utilize the credit products of the FHLB in 1999. At year end, overnight borrowings through the FHLB amounted to $21,425,000. The $214,000,000 in term advances at year end included $210,000,000 in variable rate advances with maturities ranging from September 8, 2000 to November 19, 2009 and $4,000,000 in fixed rate advances with maturities ranging from May 24, 2000 to June 12, 2002. All of these borrowings are collateralized by SUN's investment in mortgage-backed securities and first mortgage loans. Other sources of funds include deposit customers' cash management accounts, classified as securities sold under agreements to repurchase, and the Treasury Tax and Loan Note Option. The current market rates of both deposits and borrowings are continually monitored and analyzed to determine the best funding source. The following tables summarize the changes in deposit balances and related information for the periods indicated.
(In Thousands) % of % Change from 1999 Total Prior Year -------- ------- ------------- Demand deposits $ 37,783 9.44% 3.72% NOW accounts 98,051 24.51 54.74 Insured Money Market Accounts 20,304 5.07 (6.03) Savings deposits 43,375 10.84 .91 Time Certificates of Deposit of $100,000 or more 35,259 8.81 2.18 Other time deposits 165,349 41.33 .21 -------- ------- ------- Total deposits $400,121 100.00% 9.96% ======== ======= =======
% of % Change from 1998 Total Prior Year -------- ------- ------------- Demand deposits $ 36,429 10.01% 19.19% NOW accounts 63,366 17.41 31.54 Insured Money Market Accounts 21,606 5.94 10.45 Savings deposits 42,982 11.81 (1.05) Time Certificates of Deposit of $100,000 or more 34,506 9.48 16.58 Other time deposits 164,997 45.35 5.98 -------- ------- ------- Total deposits $363,886 100.00% 11.27% ======== ======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY SUN's liquidity is dependent upon its ability to convert assets to cash or acquire alternative sources of funds to meet customers' cash withdrawal needs and borrowers' credit needs. SUN's primary sources of liquidity are cash and due from banks, monthly principal and interest payments on mortgage-backed securities, and other short-term investment securities. Additional sources of funds include the overnight "Open Repo Plus" borrowings through the FHLB as well as term advances through the FHLB and a line of credit at Allfirst Bank. At December 31, 1999, SUN had approximately $15,310,000 in unused funds available through the FHLB and $5,000,000 through Allfirst Bank. There are no known trends, demands, commitments, or uncertainties resulting in liquidity increasing or decreasing in any material way. MARKET RISK - INTEREST RATE SENSITIVITY AND EQUITY SECURITIES RISK Interest Rate Sensitivity SUN's management closely monitors the interest rate sensitivity of assets and liabilities to achieve stability in the net interest margin. Interest rate sensitivity analysis involves controlling the timing of interest changes in order to maximize earnings. In an asset sensitive gap position, assets will reprice faster than liabilities, which is conducive to a rising interest rate environment. Conversely, in a declining interest rate environment, it is more beneficial to be in a liability sensitive gap position. SUN's objective in interest rate sensitivity analysis is to adjust its gap position when needed to increase earnings. The following tables present estimated principal cash flows and the estimated fair values of SUN's interest-bearing assets and liabilities as of December 31, 1999 and 1998. The tables reflect estimates of loan charge-offs, principal prepayments on loans and mortgage-backed securities, and call activity on other debt securities. Approximately 78% of the deposit liabilities which have no stated maturity date, such as Savings, NOW and Insured Money Market Accounts, were assumed to be core deposits. The remaining balances were assumed to "roll-off" within the first two years of expected cash flows. Time deposits and borrowed funds are shown based on contractual maturity dates. Current market interest rates as of December 31, 1999 and 1998 for each significant type of loan, available for sale security, and deposit, were utilized in determining these estimates. In evaluating SUN's exposure to interest rate risk, certain limitations inherent in the method of analysis presented in the tables must be considered. For example, the information is presented based on estimated maturity rather than showing SUN's interest rate sensitivity based on repricing of variable rate instruments. Based on this method of presentation, SUN has a one year negative gap position of $167,531,000 in 1999 and $96,726,000 in 1998, meaning it has more liabilities maturing than assets in the period. However, SUN has $109,569,000 in 1999 and $76,127,000 in 1998, in its variable rate loan portfolio with the majority of the loans having the ability to reprice within one year. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. All deposits are presented as fixed rate in this table; however, Savings, NOW, and Insured Money Market Accounts typically reprice with changes in the market. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates in the short-term and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Management considers all of these factors in monitoring the Bank's exposure to interest rate risk. MANAGEMENT'S DISCUSSION AND ANALYSIS
(In Thousands) December 31, 1999 -------------------- Expected Cash Flows: 2000 2001 2002 2003 2004 Thereafter Total Fair Value --------- -------- --------- -------- -------- ----------- ---------- ---------- Assets: - ------- Interest-bearing deposits Fixed rate $ 980 $ - $ - $ - $ - $ - $ 980 $ 980 Average interest rate 5.03% - - - - - 5.03% Debt securities available for sale Fixed rate 40,067 47,616 23,323 24,440 28,712 112,334 276,492 262,337 Average interest rate 6.58% 6.72% 6.70% 6.28% 6.87% 6.84% 6.72% Variable rate 171 154 138 124 222 853 1,662 1,631 Average interest rate 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% Loans Fixed rate 18,703 10,895 23,971 28,578 31,902 153,867 267,916 265,203 Average interest rate 8.34% 10.09% 9.72% 9.34% 8.56% 8.02% 8.48% Variable rate 3,328 3,035 7,240 1,724 1,113 93,129 109,569 109,569 Average interest 8.45% 8.13% 7.96% 8.64% 7.85% 7.49% 7.59% --------- ---------- ---------- ---------- --------- --------- --------- ---------- Total interest-bearing assets Fixed rate $ 59,750 $ 58,511 $ 47,294 $ 53,018 $ 60,614 $266,201 $ 545,388 $ 528,520 Average interest rate 7.11% 7.35% 8.23% 7.93% 7.76% 7.52% 7.59% ========== ========== ========== ========== ========= ========= ========= ========== Variable rate $ 3,499 $ 3,189 $ 7,378 $ 1,848 $ 1,335 $ 93,982 $ 111,231 $ 111,200 Average interest rate 8.35% 8.05% 7.93% 8.49% 7.62% 7.48% 7.57% ========== ========== ========== ========== ========= ========= ========= ========== Liabilities: - ------------ Interest-bearing deposits Fixed rate $ 182,355 $ 45,085 $ 5,836 $ 2,739 $ 1,620 $124,703 $ 362,338 $ 363,201 Average interest rate 5.29% 3.41% 5.29% 5.26% 4.75% 2.71% 4.16% Borrowed funds Fixed rate 2,000 - 2,000 - - - 4,000 3,975 Average interest rate 6.40% - 7.84% - - - 7.12% Variable rate 46,425 10,000 55,000 - - 134,541 245,966 241,011 Average interest rate 5.71% 5.77% 5.80% - - 5.11% 5.40% --------- ---------- ---------- --------- --------- --------- --------- --------- Total interest-bearing liabilities Fixed rate $ 184,355 $ 45,085 $ 7,836 $ 2,739 $ 1,620 $124,703 $ 366,338 $367,176 Average interest rate 5.30% 3.41% 5.94% 4.78% 4.90% 2.71% 4.19% ========= ========== ========== ========== ========= ========= ========= ========== Variable rate $ 46,425 $ 10,000 $ 55,000 $ - $ - $134,541 $ 245,966 $241,011 Average interest rate 5.71% 5.77% 5.80% - - 5.11% 5.40% ========= ========== ========== ========== ========= ========= ========= ========== Interest rate sensitivity gap By period Fixed rate $(124,605) $ 13,426 $ 39,458 $ 50,279 $ 58,994 $141,498 $ 179,050 $ 161,344 Variable rate $ (42,926) $ (6,811) $ (47,622) $ 1,848 $ 1,335 $(40,559) $(134,735) $(129,811) ========== ========== ========== ========= ========= ========= ========== ========== Cumulative Total $(167,531) $(160,916) $(169,080) $(116,953) $(56,624) $ 44,315 ========== ========== ========== ========== ========= ========= Cumulative interest-bearing assets as a percentage of cumulative deposits and borrowings 27.41% 43.71% 51.51% 66.72% 83.96% 107.24% ========== ========== ========== ========== ========= =========
MANAGEMENT'S DISCUSSION AND ANALYSIS
(In Thousands) December 31, 1998 ----------------------- Expected Cash Flows: 1999 2000 2001 2002 2003 Thereafter Total Fair Value --------- --------- --------- -------- --------- ---------- ----------- ---------- Assets: - ------- Interest-bearing deposits Fixed rate $ 880 $ - $ - $ - $ - $ - $ 880 $ 880 Average interest rate 5.29% - - - - - 5.29% Debt securities available for sale Fixed rate 42,924 28,504 37,522 26,332 21,740 72,841 229,863 231,989 Average interest rate 6.65% 6.74% 6.28% 6.38% 6.19% 6.87% 6.60% Variable rate 943 716 545 414 315 995 3,928 3,936 Average interest rate 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% 7.07% Loans Fixed rate 13,628 10,751 21,276 31,324 40,015 133,807 250,801 254,865 Average interest rate 7.91% 10.17% 10.14% 10.01% 9.16% 8.37% 8.90% Variable rate 2,312 2,109 5,030 1,198 773 64,705 76,127 76,127 Average interest rate 8.62% 8.17% 8.20% 8.54% 8.84% 8.69% 8.64% --------- --------- ---------- -------- -------- ---------- --------- ---------- Total interest-bearing assets Fixed rate $ 57,432 $ 39,255 $ 58,798 $57,656 $ 61,755 $206,648 $ 481,544 $487,734 Average interest rate 6.88% 7.68% 7.68% 8.35% 8.11% 7.84% 7.80% ========= ========= ========== ========= ======== ========== ========= ========= Variable rate $ 3,255 $ 2,825 $ 5,575 $ 1,612 $ 1,088 $ 65,700 $ 80,055 $ 80,063 Average interest rate 8.17% 7.89% 8.09% 8.16% 8.33% 8.67% 8.56% ========= ========= ========== ========= ======== ========== ========= ========== Liabilities: - ------------ Interest-bearing deposits Fixed rate $142,816 $ 70,652 $ 8,374 $ 2,866 $ 1,477 $101,272 $ 327,457 $326,709 Average interest rate 5.13% 4.70% 5.66% 5.26% 4.75% 2.57% 4.26% Borrowed funds Fixed rate 2,500 2,000 - 2,000 - - 6,500 6,372 Average interest rate 5.15% 6.40% - 7.84% - - 6.36% Variable rate 12,097 - 20,000 55,000 - 93,653 180,750 178,838 Average interest rate 5.36% - 5.74% 5.80% - 4.98% 5.34% --------- ---------- --------- -------- ---------- -------- ---------- -------- Total interest-bearing liabilities Fixed rate $145,316 $ 76,652 $ 8,374 $ 4,866 $ 1,477 $101,272 $ 333,957 $333,081 Average interest rate 5.13% 4.75% 5.66% 6.32% 4.75% 2.57% 4.30% ========= ========== ========= ======= ========== ========= ========== ======== Variable rate $ 12,097 $ - $ 20,000 $55,000 $ - $ 93,653 $ 180,750 $178,838 Average interest rate 5.36% - 5.74% 5.80% - 4.98% 5.34% ======== ========= ========== ========= ======= ========== ========= ========== Interest rate sensitivity gap By period Fixed rate $(87,884) $ (33,397) $ 50,424 $ 52,790 $ 60,278 $105,376 $ 147,587 $154,653 Variable rate $ (8,842) $ 2,825 $(14,425) $(53,288) $ 1,088 $(27,953) $(100,695) $(98,775) ========= ========= ======== ========= ======== ======== ========= ======== Cummulative Total $(96,726) $(127,298) $(91,299) $(91,897) $(30,531) $ 46,892 ========= ========== ========= ======== ======== ======== Cumulative interest-bearing assets as a percentage of cumulative deposits and borrowings 38.55% 44.67% 64.67% 71.13% 90.45% 109.11% ======= ======= ======= ======= ======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS In addition to internally generated gap reports, SUN also utilizes an externally generated shock analysis to monitor SUN's interest rate sensitivity. The third party, using information supplied by SUN, generates this model on a quarterly basis. The model calculates the income effect and present value of SUN's balance sheet, if rates were to decrease or increase 200 basis points during the next year. The model uses estimated cash flows based on prepayment and contractual terms to arrive at the income effect caused by the projected interest rate change. The following table illustrates the income effect, if rates were to decrease or increase 200 basis points over the next year based on SUN's current balance sheet structure.
(In Thousands) At December 31, 1999 ------------------------------------------------------ Base -200 -100 Present Value 100 200 ------- ------- ------------- ------- ------- Interest income: Loans $30,398 $31,845 $33,045 $34,173 $35,294 Investments 18,510 19,492 19,851 20,073 20,177 ------- ------- ------- ------- ------- Total interest income 48,908 51,337 52,896 54,246 55,471 ------- ------- ------- ------- ------- Interest expense: Deposits 12,735 14,039 15,344 16,648 17,952 Borrowings 11,200 12,369 13,538 14,708 15,877 ------- ------- ------- ------- ------- Total interest expense 23,935 26,408 28,882 31,356 33,829 ------- ------- ------- ------- ------- Net interest income $24,973 $24,929 $24,014 $22,890 $21,642 ======= ======= ======= ======= =======
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 possibly causing 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 possibly exceeding 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 are scheduled as follows:
(In Thousands) December 31, 1999 December 31, 1998 ----------------- ----------------- Fair Fair Cost Value Cost Value ------- ------- ------- ------- Banks and Bank Holding Companies $ 8,398 $ 6,423 $ 8,871 $ 9,793 FHLB and Other Restricted Stock 12,225 12,225 9,062 9,062 ------- ------- ------- ------- Total $20,623 $18,648 $17,933 $18,855 ======= ======= ======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS CAPITAL ADEQUACY SUN's management understands the importance of adequate capitalization as it relates to shareholder confidence and regulatory compliance. Currently, as well as in the past, SUN is a well-capitalized organization. Shareholders' equity decreased $11,788,000 in 1999. As previously discussed, unrealized gains or losses, net of taxes, on available for sale securities are reported as accumulated other comprehensive income (loss) within shareholders' equity. SUN had unrealized losses, net of tax,of $10,667,000 at December 31, 1999, as compared to unrealized gains, net of tax, of $2,016,000 at December 31, 1998. During 1999, SUN paid $6,135,000 in cash dividends as well as a 5% stock dividend. SUN is committed to providing its shareholders with the highest return on their investment while remaining a safe and sound organization. Management is not aware of any events or regulatory restrictions in the foreseeable future, that if implemented, would have a material effect on the capital position or earnings. YEAR 2000 READINESS SUN did not experience any problems related to the Year 2000 and does not expect to experience any, due to the extensive planning, evaluation, and testing completed by the Year 2000 project team. The project team includes senior management and members from all departments of the bank and is responsible for addressing all Year 2000 issues. The Year 2000 team will continue to monitor mission critical systems and all related issues throughout 2000 and beyond to ensure SUN's systems remain date compliant. The banking industry's regulatory agencies implemented a rigorous evaluation program to monitor all banks to assure they met the guidelines for Year 2000 readiness. SUN's Year 2000 project was completed ahead of the dates in the Federal Financial Institutions Examination Council (FFIEC) guidelines. Throughout 1999, awareness programs for customers, employees, and directors were held. This included an in-house training program for all employees, quarterly reports to the Board of Directors by senior management, articles in SUN's quarterly newsletter mailed to customers and shareholders, and letters to customers. Awareness programs will continue in 2000. To date, the Year 2000 project has not had a material financial effect on the bank. The total external cost is under $25,000. Additional costs will be minimal. Recent updates In anticipation of possible customer withdrawals at the end of 1999, SUN increased the cash available to meet withdrawal demands. However, no large or voluminous withdrawals occurred, and the excess cash was reduced in January 2000. SUN evaluated the vendors from which forms and other office supplies are purchased. As a precautionary measure, we identified forms and supplies that are either critical to the operation of our technology systems or are required for legal disclosures. Additional quantities of these items were purchased during the fourth quarter of 1999 to ensure our ability to continue operations if an unforeseen problem prevented a vendor from supplying these items. No such vendor problem has occurred, and the additional quantities purchased will be used during the normal course of business in the first quarter of 2000. SUN has a disaster recovery plan, which is tested at least annually at a hotsite. The hotsite provides a redundant computer system at a remote location to process our work, if SUN cannot use its own computer system for any reason. MANAGEMENT'S DISCUSSSION AND ANALYSIS REGULATORY ACTIVITY From time to time, various types of federal and state legislation have been proposed possibly resulting 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 possibly increasing 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 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. FORWARD OUTLOOK The performance of a bank is affected more by changes in interest rates than by inflation; therefore, the effect of inflation is normally not as significant as it is on other businesses and industries. During periods of high inflation, the money supply usually increases and banks normally experience above average growth in assets, loans, and deposits. A bank's operating expenses will usually increase during inflationary times as the prices of goods and services increase. A bank's performance is also affected during recessionary periods. In times of recession, a bank usually experiences a tightening on its earning assets and on its profits. A recession is usually an indicator of higher unemployment rates, which could mean an increase in the number of nonperforming loans because of continued layoffs and other deteriorations of consumers' financial conditions. This report contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance, assumptions, and other statements which are other than statements of historical fact. SUN and its subsidiaries wish to caution readers the following important factors among others, may have affected and could in the future affect SUN's actual results and could cause SUN's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of SUN herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which SUN must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as by the Financial Accounting Standards Board, (iii) changes in SUN's organization, compensation and benefit plans; (iv) the effect on SUN's competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations, as well as nonbank providers of various financial services; (v) the effect of changes in interest rates; and (vi) the effect of changes in the business cycle and downturns in the local, regional, or national economies. SUN's management and the Board of Directors are looking forward to taking advantage of the many opportunities 2000 is expected to present. SUN's acquisition of Bucktail in 1997 has allowed us to serve a new and broader customer base with a varied selection of financial products and services. In 2000, SUN anticipates offering an array of diversified financial services to include annuities and casualty insurance products. SUN is committed to remaining a community-based organization and intends to recognize continued growth in its consumer, mortgage, and commercial loan portfolios while obtaining and maintaining a strong core deposit base. The management of SUN feels SUN is positioned to offer the products and services demanded in today's rapidly changing technology-based marketplace. SHAREHOLDER INFORMATION Common Stock Market Prices and Dividends Per Share The common stock of SUN BANCORP, INC. is traded publicly on the NASDAQ national market system under the symbol SUBI. The high and low bid information does not include retail mark-ups or mark-downs or any commission to the broker-dealer.
1999 1998 ------------------------------- ------------------------------- Bid Information Bid Information --------------- Cash Dividends --------------- Cash Dividends Quarter Ended High Low Declared (1) High Low Declared (1) ------ ------ -------------- ------ ------ -------------- March 31 $26.67 $23.57 $.210 $34.47 $31.74 $.180 June 30 25.88 20.48 .225 31.74 27.86 .195 September 30 24.50 22.25 .230 29.76 26.67 .200 December 31 23.25 19.25 .235 29.52 25.71 .205
(1) Cash dividends declared are adjusted for the 5% stock dividends occurring in June of 1999. EX-21 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. 1) Filed by the Registrant ___ Filed by a Party other than the Registrant ___ Check the appropriate box: Preliminary Proxy Statement - --- Confidential, for Use of the Commission Only - --- (as permitted by Rule 14a-6(c) (2)) ___ Definitive Proxy Statement ___ Definitive Additional Materials Soliciting Material Pursuant to Section 240.14.a-11(c) or ___ Section 240.14a-12 - -------------------------------------------------------------------------------- SUN BANCORP, INC. - -------------------------------------------------------------------------------- Payment of Filing Fee (Check the appropriate box): X No Fee Required - --- ___ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and O-11 1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- 2) Aggregate number of securities to which transaction applies; - -------------------------------------------------------------------------------- 3) Per unit price of other underlying value of transaction computed pursuant to Exchange Act Rule O-11 (Set forth the amount on which the filing fee is calculated and state how it wa determined): - -------------------------------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- 5) Total fee paid: - -------------------------------------------------------------------------------- ___ Fee paid previously with preliminary materials ___ Check box if any part of the fee is offset as provided by Exchange Act O-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: - -------------------------------------------------------------------------------- 2) Form, Schedule of Registration Statement No: - -------------------------------------------------------------------------------- 3) Filing Party: - -------------------------------------------------------------------------------- 4) Date Filed: - -------------------------------------------------------------------------------- (LOGO) March 30, 2000 Dear Shareholder: It is a pleasure to invite you to the 2000 Annual Shareholders' Meeting of SUN BANCORP, INC. ("SUN") to be held on April 27, 2000. The notice of the meeting and the proxy statement address the formal business of the meeting, which includes the election of directors and the ratification of the appointment of SUN's auditors for 2000. At the meeting, SUN's management will address other corporate matters that will be of interest to you. You are cordially invited to the shareholders' luncheon that will be served promptly after the close of the Annual Meeting. Should you desire to stay for lunch, please complete and return the accompanying RSVP postcard by April 14, 2000 to SUN at 2-16 South Market Street, P.O. Box 57, Selinsgrove, Pennsylvania 17870. The reverse side of the RSVP card has been designated for questions you would like addressed at the Annual Meeting. We strongly encourage you to vote your shares, whether or not you plan to attend the meeting. It is very important that you sign, date and return the accompanying proxy in the postage prepaid envelope as soon as possible. If you do attend the meeting and wish to vote in person, you must give written notice thereof to the Secretary of the Corporation so that your proxy will be superseded by any ballot that you submit at the meeting. Sincerely, /s/ George F. Keller /s/ Fred W. Kelly, Jr. --------------------- ---------------------- George F. Keller Fred W. Kelly, Jr. Chairman of the Board President and CEO Enclosures - Notice of Meeting Proxy Statement Proxy Luncheon Reply Card Return Envelope for Proxy PROXY FOR ANNUAL SHAREHOLDERS' MEETING OF SUN BANCORP, INC. 2-16 SOUTH MARKET STREET P.O. BOX 57 SELINSGROVE, PENNSYLVANIA 17870 PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SUN BANCORP, INC. FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 27, 2000 KNOW ALL MEN BY THESE PRESENTS, that the undersigned Shareholder of SUN BANCORP, INC. hereby constitutes and appoints Robert C. Fogle and Calvin M. Witmer (neither of whom is a Director, Officer or Employee of SUN BANCORP, INC.) and each or any of them, proxies, with the powers the undersigned would possess if personally present, and with full power of substitution to attend and vote the shares of common stock of the undersigned of SUN BANCORP, INC. at the Annual Meeting of Shareholders of SUN BANCORP, INC., to be held at the Susquehanna Valley Country Club, Mill Road, Hummels Wharf, Pennsylvania, on Thursday, April 27, 2000, at 10:30 a.m., prevailing time, and at any adjournment or postponement thereof, upon all subjects that properly come before the meeting, including the matters described in the accompanying proxy statement, and especially: PLEASE MARK ALL VOTES AS FOLLOWS [X] 1. ELECTION OF DIRECTORS. THE NOMINEES FOR THE BOARD OF DIRECTORS TO SERVE FOR A THREE YEAR TERM EXPIRING AT THE ANNUAL MEETING IN 2003 ARE: Thomas B. Hebble Jeffrey E. Hoyt Paul R. John Fred W. Kelly, Jr. and until their successors are duly elected, qualified and take office. PLEASE CHECK ONLY ONE OF THE BOXES BELOW. IF BOX (c) IS CHECKED, PLEASE CROSS OUT THE NAME OF EACH NOMINEE FROM THE LIST ABOVE FOR WHOM YOU WISH YOUR PROXIES NOT TO VOTE FOR IN THE ELECTION OF DIRECTORS. [ ] (a) TO VOTE FOR all nominees listed above; [ ] (b) NOT TO VOTE FOR any of the nominees listed above; [ ] (c) TO VOTE FOR all the nominees listed above except those whose [ ] names are crossed out. 2. TO RATIFY THE APPOINTMENT OF PARENTE RANDOLPH, PC, CERTIFIED PUBLIC ACCOUNTANTS, AS THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR SUN BANCORP, INC. FOR THE YEAR ENDING DECEMBER 31, 2000. [ ] FOR [ ] AGAINST [ ] ABSTAIN The Board of Directors recommends a vote FOR this proposal. 3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF. The undersigned hereby ratifies and confirms all that said proxies and each of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTIONS TO THE CONTRARY ARE GIVEN BY THE SHAREHOLDER IN THIS PROXY, THE PROXYHOLDERS WILL VOTE FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSAL 2. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SUN BANCORP, INC. AND MAY BE REVOKED PRIOR TO ITS EXERCISE UPON WRITTEN NOTICE THEREOF TO THE SECRETARY OF THE CORPORATION. WITNESS the hand and seal of the undersigned, this ______ day of _______________________, A.D., 2000. ________________________________ (SEAL) Signature ________________________________ (SEAL) Signature ________________________________ (SEAL) Signature Number of Shares Owned _____________ Signatures above will be determined to have been as of March 10, 2000 signed for all matters in this proxy whether appearin on the face or the reverse side of this proxy. IMPORTANT NOTICE All joint owners should sign this proxy. Please sign this proxy as your stock is registered. When signing as attorney, executor, administrator, trustee, guardian, or other fiduciary, please give full title. If there is more than one fiduciary, all should sign, for a corporation the person signing this proxy should show the full corporate title and be an authorized officer. Please sign where indicated and promptly return this proxy to SUN BANCORP, INC. in the enclosed self-addressed postage prepaid envelope. If you do not sign and return this proxy, or attend the meeting and vote, your shares will not be voted. (LOGO) NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON THURSDAY, APRIL 27, 2000 To the Shareholders of SUN BANCORP, INC. (the "Corporation"): NOTICE is hereby given that the ANNUAL MEETING OF SHAREHOLDERS OF SUN BANCORP, INC., will be held at the Susquehanna Valley Country Club, Mill Road, Hummels Wharf, Pennsylvania on Thursday, April 27, 2000 at 10:30 a.m., prevailing time, for the following purposes: 1. To elect four (4) directors to serve for a three (3) year term and until their successors are elected, qualified and take office; 2. To ratify the appointment of Parente Randolph, PC, Independent Accountants, as the Corporation's independent auditors for the fiscal year ending December 31, 2000; and 3. To transact such other business as may properly come before the meeting and any adjournment or postponement thereof. Reference is hereby made to the accompanying proxy statement for details with regard to the above matters. The Board of Directors of the Corporation does not know of any matters, other than those listed above, which are likely to come before the meeting. Only shareholders of record on the Corporation's books at the close of business on March 10, 2000 will be entitled to vote at the meeting and any adjournment or postponement thereof. By Order of the Board of Directors of SUN BANCORP, INC. /s/ Jeffrey E. Hoyt Jeffrey E. Hoyt Executive Vice President, Chief Operating Officer and Secretary March 30, 2000 Selinsgrove, Pennsylvania Important Notice - ---------------- To assure your representation at the meeting, please complete, date, sign and promptly mail the accompanying proxy in the return envelope which has been provided. No postage is necessary if mailed in the United States. Any person giving a proxy has the power to revoke it prior to its exercise and shareholders who are present at the meeting may then revoke their proxy and vote in person after giving written notice thereof to the Secretary of the Corporation. (LOGO) PROXY STATEMENT FOR ANNUAL SHAREHOLDERS' MEETING TO BE HELD ON APRIL 27, 2000 GENERAL Introduction, Date, Time and Place of Annual Meeting This proxy statement is furnished in connection with the solicitation by the Board of Directors of SUN BANCORP, INC. ("SUN" or the "Corporation") of proxies to be voted at the 2000 Annual Meeting of Shareholders ("Annual Meeting"). The Annual Meeting is scheduled to be held on Thursday, April 27, 2000 at 10:30 a.m., prevailing time, at the Susquehanna Valley Country Club, Mill Road, Hummels Wharf, Pennsylvania and at any adjournment or postponement of the Annual Meeting in accordance with the Annual Meeting notice and By-Laws of SUN. The address of the principal executive office of the Corporation is 2-16 South Market Street, P.O. Box 57, Selinsgrove, Pennsylvania 17870, telephone number (570) 374-1131. All inquiries should be directed to Fred W. Kelly, Jr., President and CEO of SUN. The Corporation currently has two (2) wholly-owned subsidiaries, Sun Bank and Pennsylvania Sun Life Insurance Company. Matters to be Submitted to the Shareholders at the Annual Meeting The Board of Directors does not know of any matters that are likely to be brought before the Annual Meeting other than the matters set forth in the accompanying notice of Annual Meeting of Shareholders. If any other matters are properly presented to the Annual Meeting for action, the persons named in the accompanying proxy and acting thereunder will vote on such matters in accordance with their best judgment. Solicitation of Proxies for the Annual Meeting This proxy statement is furnished in connection with the solicitation by the Board of Directors of the Corporation for use at the Annual Meeting. The approximate date upon which this proxy statement and the accompanying proxy and notice of the Annual Meeting will first be made available and first sent to the shareholders is on or about March 30, 2000. In addition to using the mails, proxies may be solicited by personal interview, telephone calls or telecopiers by the directors, officers and regular employees of the Corporation and its wholly-owned banking subsidiary, Sun Bank. Cost of Solicitation of Proxies Will be Paid by Corporation The Corporation will bear the entire cost of preparing, assembling, printing and mailing this proxy statement, the proxies, and any additional material which the Corporation may furnish to shareholders in connection with the Annual Meeting. Copies of solicitation material will be furnished to brokerage houses, fiduciaries and custodians to forward to their principals. Discretionary Authority of Proxy - Right of Revocation of Proxy The accompanying proxy vests discretionary authority in the proxyholders to vote with respect to any and all of the following matters that come before the Annual Meeting: (i) matters about which the Corporation has no knowledge, a reasonable time before the proxy solicitation, that may be presented to the meeting, (ii) approval of the minutes of the most recent prior meeting of the shareholders, if such an action does not amount to ratification of the action taken at that meeting, (iii) the election of any person to any office for which a bona fide nominee is unable to serve or for good cause will not serve and (iv) matters incident to the conduct of the meeting. In connection with such matters, the persons named in the accompanying proxy will vote in accordance with their best judgment. Shareholders giving a proxy have a right to revoke it by a written instrument, including a later dated proxy, signed in the same manner as the prior proxy and received by the Secretary of the Corporation prior to the commencement of the Annual Meeting. Record Date - Voting Securities - Quorum The record date for the Annual Meeting is March 10, 2000. Only holders of record of common stock on the Corporation's books at the close of business on March 10, 2000 will be entitled to notice of and to vote at the Annual Meeting. On that date, the Corporation had outstanding 6,789,358 shares of common stock. The shareholders are entitled to one vote per share on any business which may properly come before the meeting. There is no cumulative voting with respect to the election of directors. Shares represented by proxies on the accompanying Proxy, if properly signed and returned, will be voted in accordance with the specifications made thereon by the shareholders. Any Proxy not specifying to the contrary will be voted FOR the election of the nominees for the directors named and FOR ratification of the appointment of Parente Randolph, PC, Independent Accountants, as the Corporation's independent auditors for the fiscal year ending December 31, 2000. Under Pennsylvania law and the By-Laws of the Corporation, the presence of a quorum is required for each matter to be acted upon at the Annual Meeting. The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast, will constitute a quorum for the transaction of business at the Annual Meeting. Votes withheld and abstentions will be counted in determining the presence of a quorum for the particular matter. Broker non-votes will not be counted in determining the presence of a quorum for the particular matter as to which the broker withheld authority. 2 Assuming the presence of a quorum, the four (4) nominees for director receiving the highest number of votes cast by shareholders entitled to vote for the election of directors shall be elected. Votes withheld from a nominee and broker non-votes will not be cast for such nominee. Assuming the presence of a quorum, the affirmative vote of a majority of all votes cast by shareholders on such matter is required for the ratification of the appointment of independent certified public accountants. Abstentions and broker non-votes are not deemed to constitute "votes cast" and therefore do not count either for or against such ratification. Abstentions and broker non- votes, however, have the practical effect of reducing the number of affirmative votes required to achieve a majority for each such matter by reducing the total number of shares voted from which the required majority is calculated. The Corporation has no present reason to believe that any of the Board's nominees will be unable to serve as a director, if elected. The Board of Directors does not know whether any nominations will be made at the Annual Meeting other than those specified in this proxy statement. If any such nominations are made, or if votes are cast for any candidates other than those nominated by the Board of Directors, the persons named as proxyholders will vote for those persons nominated by the Board and identified in this proxy statement. Security Ownership of Certain Beneficial Owners The following table sets forth, as of March 10, 2000, the name and address of each person who owns of record or who is known by the Board of Directors to be the beneficial owner of more than five percent (5%) of the Corporation's outstanding Common Stock, the number of shares beneficially owned by such person and the percentage of the Corporation's outstanding Common Stock so owned. Percent of Outstanding Shares Common Stock Beneficially Beneficially Name and Address Owned (1) Owned ---------------- --------- ----- F.N.B. Investment Corporation 1,043,922 15.37% Hermitage Square Hermitage, Pennsylvania 16148 (1) See footnote (1) to the Security Ownership of Nominees, Directors and Executive Officers" table on page 10 for the definition of "beneficially owned." 3 BOARD OF DIRECTORS General The By-Laws of the Corporation provide that the Corporation's business shall be managed by a Board of Directors of not less than six (6) and not more than twenty five (25) directors. The Corporation's Board, as provided in the By- Laws, is divided into three (3) classes of directors, with each class being as nearly equal in number as possible. The Board of Directors consists currently of fifteen (15) directors with (i) four (4) directors in the class whose term expires at the annual meeting in 2000, (ii) six (6) directors in a class whose term expires at the annual meeting in 2001, and (iii) five (5) directors in the class whose term expires at the annual meeting in 2002. Under the Corporation's By-Laws, persons elected by the Board of Directors to fill a vacancy on the Board serve as directors for a term expiring with the next annual meeting, unless the directors are appointed by the Board after the shareholder record date for that meeting, in which case the person serves as a director until the annual meeting following that meeting. The directors in each class normally serve terms of three (3) years each and until their successors are elected, qualified and take office. All of the nominees are current directors of the Corporation. General Information About the Board of Directors* The Corporation's and Sun Bank's Boards of Directors hold separate meetings. There were five (5) meetings of the Corporation's Board of Directors during 1999. Each incumbent director attended at least seventy five percent (75%) of the aggregate of the total number of meetings of the Corporation's Board of Directors held during the period for which such incumbent was a director, other than Messrs. Bingaman, Hebble and John, and each incumbent director, other than Messrs. Gurgovits, John and Schnure, attended at least seventy five percent (75%) of the total number of meetings held by all committees of the Board on which such incumbent served. The Committees of the Corporation's Boards Executive/Asset & Liability Management Committee (the "Executive/ALCO"). ------------------------------------------------------------------------ TheExecutive/ALCO Committee of the Corporation's Board may exercise the full authority of the Board of Directors in the management of the business and affairs of the Corporation between meetings of the Board and coordinate and control the Corporation's asset/liability management procedures. The Committee reviews and makes recommendations to the Board of Directors on all matters relating to the programs of the Corporation that will accomplish its long and short range objectives and goals. The Committee held four (4) meetings in 1999. The members of the Committee are: George F. Keller, Chairman; Max E. Bingaman; Jeffrey E. Hoyt; Fred W. Kelly, Jr.; and Lehman B. Mengel. Audit Committee. The Audit Committee recommends, for ratification by the ---------------- shareholders, the independent certified public accountants that will be retained by the Corporation and Sun Bank. The Audit Committee approves services to be performed by the independent accountants. The Committee held four (4) meetings in 1999. The members of the Committee are: Max E. Bingaman, Chairman; David R. Dieck; Louis A. Eaton; Dr. Robert E. Funk; Thomas B. Hebble; Marlin T. Sierer; and Jeffrey J. Kapsar, an ex officio member and the Corporation's Internal Auditor and Compliance/Loan Review Officer. ________________ * See Footnote Information Concerning Directors on Page 9. 4 Investment Committee. The Investment Committee, a subcommittee of the --------------------- Executive/ALCO Committee, develops and implements a portfolio investment policy for the Corporation. The Committee meets at the call of any member of the Committee. The Committee held two (2) meetings during 1999. The members of the Committee are: Jeffrey E. Hoyt, Chairman; Stephen J. Gurgovits; George F. Keller; and Fred W. Kelly, Jr. Long Range Planning/Merger & Acquisition Committee (the "Long Range Planning/ ----------------------------------------------------------------------------- M&A"). The Long Range Planning/M&A Committee develops and implements long range - ------ planning for the Corporation and develops and implements the Corporation's policy concerning mergers and acquisitions. The Committee meets at the call of the Chairman of the Committee. The Committee held seven (7) meetings during 1999. The members of the Committee are: Fred W. Kelly, Jr., Chairman; Robert A. Hormell; Jeffrey E. Hoyt; George F. Keller; and Raymond C. Bowen, an ex officio member. Nominating Committee. The Nominating Committee meets once a year, or more --------------------- often if necessary, to consider or nominate candidates for directorships. The Committee considers director nominees recommended by the Board and shareholders. Pursuant to Article II, Section 2 of the By-Laws, a shareholder wishing to nominate a candidate must file a written notice of the nomination or candidacy with the Secretary of the Corporation not less than one hundred twenty (120) days prior to the election of directors. When submitting a recommendation to the Secretary, the shareholder must send biographical information about the candidate, together with a statement of the candidate's qualifications and any other data supporting the recommendation. If it is determined that the candidate has no conflicts of interest or directorships with other companies that would disqualify the candidate from serving as a director of the Corporation, the candidate's name will be presented to the Nominating Committee for consideration. The Committee held two (2) meetings during 1999. The members of the Committee are: Louis A. Eaton, Chairman; Dr. Robert E. Funk; Fred W. Kelly, Jr.; Howard H. Schnure; and Marlin T. Sierer. Personnel and Retirement Committee. The Personnel and Retirement Committee ----------------------------------- meets to review the provisions of SUN's Pension Plan, 401(k) Plan and the Non- Qualified Supplemental Income Plan, to recommend appropriate changes in any of their provisions and to recommend to the Board, contributions to be made to the plans. In addition, the Committee determines the eligibility requirements for SUN's Pension Plan, 401(k) Plan and the Non-Qualified Supplemental Income Plan and determines who is eligible to participate and to obtain benefits pursuant to those plans. The Committee meets at the call of the Chairman of the Committee or the President of the Corporation. The Committee held seven (7) meetings during 1999. A subcommittee of the Personnel and Retirement Committee called the Compensation Committee, which is comprised of three (3) outside Directors (Mr. Keller, Mr. Bingaman and Mr. Hormell), determines the executive compensation policy of SUN and administers SUN's Stock Incentive Plan and SUN's Employee Stock Purchase Plan. The Committee meets at the call of its Chairman and held four (4) meetings in 1999. The members of the Personnel and Retirement Committee are: George F. Keller, Chairman; Robert A. Hormell, Vice Chairman; Max E. Bingaman; Jeffrey E. Hoyt; Paul R. John; Fred W. Kelly, Jr.; Lehman B. Mengel; Dennis J. Van; and as an ex officio member, Sun Bank's Director of Human Resources. 5 Members of the Boards of Directors - Biographical Information NOMINEES FOR ELECTION TO SERVE UNTIL 2003 THOMAS B. HEBBLE, age 39, is Executive Vice President of First National Bank of Pennsylvania and previously served as Senior Vice President of Metropolitan National Bank of Ohio. Mr. Hebble is a director of Gelvin, Jackson & Starr, Inc., an insurance subsidiary of FNB Corporation, a director of First National Insurance Services Company, an insurance subsidiary of First National Bank of Pennsylvania, a director of the Horizon Foundation, a fund raising arm of the University of Pittsburgh Medical Center and a director of the Sharon Country Club. He has served on the Board of the Corporation since 1997 and he serves on the Audit Committee. Mr. Hebble's term as a director expires in 2000 and if elected will serve until 2003. JEFFREY E. HOYT, age 44, is Executive Vice President, Chief Operating Officer and Secretary of the Corporation and Sun Bank. Mr. Hoyt is a Certified Public Accountant (CPA) and a Certified Financial Planner (CFP) and maintains membership both on a national and state level with these professional associations. He has served on the Boards of Sun Bank and the Corporation since 1996 and he serves on the Executive/ALCO, Investment, Long Range Planning/M&A and Personnel and Retirement Committees. Mr. Hoyt's term as a director expires in 2000 and if elected will serve until 2003. PAUL R. JOHN, age 62, is Chairman and Director of Ritz-Craft Corporation of PA, Inc., a housing manufacturer located in Mifflinburg, PA, and a director of Inter Industry Reinsurance Co., LTD, an offshore foreign independent insurance company; and a director of the John Family Foundation. He has served on Sun Bank's Board since 1990 and the Corporation's Board since 1994, and he serves on the Personnel and Retirement Committee. Mr. John's term as a director expires in 2000 and if elected will serve until 2003. FRED W. KELLY, JR., age 55, President and Chief Executive Officer of the Corporation and Sun Bank. Mr. Kelly is Chairman of Selinsgrove Area Industrial Development, Inc. He is a trustee and past president of Sunbury Community Hospital & Outpatient Center, director of the Central Susquehanna Valley Chamber of Commerce, past director of Susquehanna University, director of the PA Bankers Public Affairs Committee and a member of The Degenstein Charitable Foundation. He has served as President and Chief Executive Officer of the Corporation since its formation in 1982 and as President of Sun Bank since 1975 and its Chief Executive Officer since 1981 and has served on Sun Bank's Board since 1975 and the Corporation's Board since 1982, and he serves on all the Board Committees of the Corporation other than the Audit Committee. Mr. Kelly's term as a director expires in 2000 and if elected will serve until 2003. 6 DIRECTORS CONTINUING IN OFFICE UNTIL 2001 MAX E. BINGAMAN, age 64, President since 1969 of Bingaman and Son Lumber Company, Inc., supplier of hardwood lumber to the furniture and cabinet industry. Mr. Bingaman serves as a director of Bethesda Treatment Center, a privately operated program for troubled youth, located in Milton, the Pennsylvania Family Institute, a trustee of Sunbury Community Hospital & Outpatient Center, and he serves as a member of the Board of Associates of Messiah College at Grantham, PA. He has served on the Boards of Sun Bank and the Corporation since 1983 and his term as a director expires in 2001. He serves on the Audit, Executive/ALCO and Personnel and Retirement Committees. STEPHEN J. GURGOVITS, age 56, is Vice Chairman of FNB Corporation and President and CEO of First National Bank of Pennsylvania. Mr. Gurgovits is a director of FNB Corporation, First National Bank of Pennsylvania, Regency Finance Corporation, Gelvin, Jackson & Starr, Inc., an insurance subsidiary of FNB Corporation, Winner International Corporation, a marketer of security devices in Sharon, Pennsylvania, Walton Paint Company, and a part owner of Betres-Keelan, Inc., a builder and leasor of a strip plaza in Butler, Pennsylvania. He has served on the Board of the Corporation since 1997 and his term as a director expires in 2001. He serves on the Investment Committee. ROBERT A. HORMELL, age 52, is Assistant Director of the Susquehanna Economic Development Association - Council of Governments (SEDA-COG) which provides management of economic and community development for an eleven (11) county organization in central Pennsylvania. Mr. Hormell is president of the Central Pennsylvania Forum for the Future and a director of the Warrior Run Community Corporation. He has served on Sun Bank's Board since 1991 and the Corporation's Board since 1994, and his term as a director expires in 2001. He serves on the Long Range Planning/M & A and Personnel and Retirement Committees. LEHMAN B. MENGEL, age 72, Chairman and Director of L/B Water Service South, Inc. since 1984, which provides the water and sewer works industry with materials and service, a director and treasurer of the Sunbury Grouse Club and a a director of the Susquehanna Valley Country Club. He has served on the Board of Sun Bank since 1974 and the Corporation's Board since 1982, and his term as a director expires in 2001. He serves on the Executive/ALCO and Personnel & Retirement Committees. HOWARD H. SCHNURE, age 89, owner from 1936 to 1984 and since 1984 part owner of Central Penn Wilbert Vault Company, manufacturer of burial vaults. He has served on Sun Bank's Board since 1967 and the Corporation's Board since 1982, and his term as a director expires in 2001. He serves on the Nominating Committee. MARLIN T. SIERER, age 77, prior owner for 32 years of the Sierer Brothers Fruit Farm, Inc. Mr. Sierer sold the business in 1974 and retired in 1985 from that company. He has served on the Boards of Sun Bank and the Corporation since 1982, and his term as a director expires in 2001. He serves on the Audit and Nominating Committees. 7 DIRECTORS CONTINUING IN OFFICE UNTIL 2002 DAVID R. DIECK, age 66, President and co-owner of Lancaster Laundry, Inc., Lancaster, Pennsylvania, since July 1, 1990. He is a former Vice President and co-owner of Valley Glass Company of Sunbury, Pennsylvania, and a former partner in Valley Realty Company having sold his interest in both businesses as of June 30, 1990. Mr. Dieck was employed by Brush Industries in Sunbury, Pennsylvania, for thirty four (34) years serving in various capacities including Treasurer and General Manager and left that company in 1985. He has served on the Boards of the Corporation and Sun Bank since 1987 and his term as a director expires in 2002. He serves on the Audit Committee. LOUIS A. EATON, age 78, was a Sales Engineer since 1981 for Dorsey Trailers, Inc., a manufacturer and distributor of truck trailers and retired on December 31, 1986. He has served in various capacities with Dorsey Trailers, Inc. (formerly Trailco Manufacturing and Sales Co., Inc.) since 1947. He has served on Sun Bank's Board since 1979 and the Corporation's Board since 1982 and his term as a director expires in 2002. He serves on the Audit and Nominating Committees. DR. ROBERT E. FUNK, age 69, a practicing dentist in Watsontown having started his general dentistry office in 1957. He was elected to the Corporation's Board in 1993 and served on Sun Bank's Board since 1977 and his term as a director expires in 2002. He serves on the Audit and Nominating Committees. GEORGE F. KELLER, age 66, Chairman of the Corporation, Chief Executive Officer and member of the Board of Keller Marine Service, Inc., a wholesale distributor of marine products. He is a past President of the National Marine Distributors Association and past President of the Warehouse Distributor Association in the RV Industry. In 1996, Mr. Keller received the Jim Barker Memorial Award, a life time achievement award, "in grateful recognition for his contribution of leadership and service to the RV After Market Industry." Mr. Keller serves as a director of the Salvation Army, the Susquehanna Economic Development Association - - Council of Governments (SEDA-COG) and a past Regional Vice President and Director of the Central Susquehanna Valley Chamber of Commerce. He has served on Sun Bank's Board since 1967 and the Corporation's Board since 1982, was appointed Chairman of Sun Bank's and the Corporation's Board in 1997 and his term as a director expires in 2002. He serves on the Executive/ALCO, Long Range Planning/M & A and Personnel and Retirement Committees. DENNIS J. VAN, age 53, is President and owner of The Colonial Furniture Company, a manufacturer of quality home furniture located in Freeburg, PA. Mr. Van is a past director and past president of the Susquehanna Valley Country Club. He has served on Sun Bank's Board since 1990 and the Corporation's Board since 1994, and his term as a director expires in 2002. He serves on the Personnel and Retirement Committee. 8 * Footnote Information Concerning Directors (1) References to service on the Board of Directors refers to Snyder County or Watsontown only prior to 1982 and to Snyder County, Watsontown and Corporation since 1982, unless specifically otherwise stated. The Board of Directors of Snyder County and Watsontown were consolidated under a common charter with the title of Sun Bank, which has a 13 member Board. All ages of the directors are as of March 10, 2000, the record date for the Annual Meeting. (2) The Corporation is not aware of any arrangement or understanding between a nominee or director pursuant to which he or any other person or persons were to be selected as a director or nominee. Information Concerning Executive Officers of the Corporation* Name Title and Position Age ---- ------------------ --- Fred W. Kelly, Jr. President and Chief Executive Officer 55 of the Corporation and Sun Bank Mr. Kelly has served as President of Snyder County, incorporated as Sun Bank, since July 1975, having advanced from Vice President, and was appointed Chief Executive Officer of Snyder County in 1981. Mr. Kelly has served as President and Chief Executive Officer of the Corporation since its establishment in 1982. Name Title and Position Age ---- ------------------ --- Jeffrey E. Hoyt Executive Vice President, Chief Operating 44 Officer and Secretary of the Corporation and Sun Bank Mr. Hoyt has served as Vice President and Chief Financial Officer of Snyder County, now Sun Bank, since October 1988 and was appointed Senior Vice President and Chief Financial Officer on October 26, 1995. Mr. Hoyt has also served as Chief Financial Officer of the Corporation since that date and was appointed as Vice President and Chief Financial Officer in 1993. On December 27, 1996, he was appointed to his position of Executive Vice President, Chief Operating Officer and Secretary. Prior to joining Snyder County, now Sun Bank, and the Corporation, Mr. Hoyt, a CPA and CFP, was employed in public accounting, and from 1981 until October 1988, was employed at the Williamsport National Bank, initially as its auditor and later as its controller. * Footnote Information Concerning Executive Officers (1) Each executive officer of the Corporation serves at the pleasure of the Board of Directors. All ages of the executive officers are as of March 10, 2000, the record date for the Annual Meeting. (2) The Corporation is not aware of any arrangement or understanding between any executive officer and any other person or persons pursuant to which any executive officer was or is to be selected as an officer of the Corporation. (3) None of the above executive officers has any family relationship with any other executive officer or with any director of the Corporation. 9 Security Ownership of Nominees, Directors and Executive Officers of the Corporation The following table sets forth, as of March 10, 2000, and from data supplied by the respective individual, information concerning the amount and percentage of Common Stock beneficially owned by each director, by each nominee for the Board of Directors and by all directors and executive officers as a group. Unless otherwise indicated in a footnote, each director and officer has sole voting and investment power over the shares listed as beneficially owned. Amount and Nature Percentage of of Beneficial Outstanding Ownership of Corporation Common Stock as Common Stock Name of March 10, 2000(1) Owned - ---- -------------------- ------------- NOMINEES FOR ELECTION AS DIRECTORS FOR 3 YEAR TERMS EXPIRING IN 2003 Thomas B. Hebble . . . . . . . . . . . 265 Jeffrey E. Hoyt (2) . . . . . . . . . 23,199 .34 Paul R. John (3) . . . . . . . . . . 175,889 2.59 Fred W. Kelly, Jr. (4) . . . . . . . 41,846 .62 DIRECTORS WHOSE TERMS EXPIRE IN 2002 David R. Dieck (5) . . . . . . . . . . 14,462 .21 Louis A. Eaton (6) . . . . . . . . . 17,633 .26 Dr. Robert E. Funk (7) . . . . . . . . 8,176 .12 George F. Keller (8) . . . . . . . . 202,228 2.98 Dennis J. Van (9) . . . . . . . . . . 35,346 .52 DIRECTORS WHOSE TERMS EXPIRE IN 2001 Max E. Bingaman (10) . . . . . . . . 24,198 .36 Stephen J. Gurgovits . . . . . . . . 267 Robert A. Hormell (11) . . . . . . . . 5,872 .08 Lehman B. Mengel (12) . . . . . . . . 94,560 1.39 Howard H. Schnure (13) . . . . . . . . 33,742 .50 Marlin T. Sierer (14) . . . . . . . . 31,444 .47 All directors and executive officers as a group (23 persons) . . . . . . 732,649 10.79% Footnote Information Concerning Security Ownership of Directors and Executive Officers (1) Securities "beneficially owned" by an individual are determined in accordance with the definitions of "beneficial ownership" set forth in the General Rules and Regulations of the Securities and Exchange Commission ("SEC") and may include securities owned by or for the individual's spouse and minor children and any other relative who has the same home, as well as securities to which the individual has or shares voting or investment power or has the right to acquire beneficial ownership within 60 days after March 10, 2000. Individuals may disclaim beneficial ownership as to certain of the securities reported. 10 (2) Includes 3,650 shares jointly held by Mr. Hoyt and Kathy J. Hoyt, his wife. (3) Includes 175,889 shares jointly held by Mr. John and Mildred D. John, his wife. (4) Includes 28,378 shares held by Donnell W. Kelly, his wife. (5) Includes 7,231 shares held by Annetta M. Dieck, his wife. (6) Includes 17,628 shares jointly held by Mr. Eaton and Dorothy L. Eaton, his wife. (7) Includes 1,221 shares jointly held by Dr. Funk and Marvene Funk, his wife. (8) Includes 49,744 shares jointly held by Mr. Keller and Margaret E. Keller, his wife; 15,537 shares held by Margaret E. Keller, his wife; and 115,796 shares held by Keller Marine Service, Inc. (9) Includes 15,819 shares jointly held by Mr. Van and Judy A. Van, his wife; 5,735 shares in an Individual Retirement Account for Judy A. Van, his wife and 7,644 shares held by Colonial Furniture Company. (10) Includes 16,719 jointly held by Mr. Bingaman and Martha Bingaman, his wife and 3,558 shares held by Mr. Bingaman in a 401(k) account through Bingaman & Son Lumber, Inc. (11) Includes 3,697 shares jointly held by Mr. Hormell and Jean L. Hormell, his wife. (12) Includes 94,560 shares held by the L & R Mengel Company. (13) Includes 5,679 shares jointly held by Mr. Schnure and his son, James Purdy Schnure, and 4,758 shares jointly held by Mr. Schnure and his daughter, Sarah J. Lindsay. (14) Includes 17,363 shares held by H. Arlene Sierer, his wife. 11 Executive Compensation and Other Information COMPENSATION COMMITTEE REPORT The Board of Directors has designated a Compensation Committee ("Committee"), a subcommittee of the Personnel and Retirement Committee, which consists of three (3) outside Directors. To accomplish the strategic goals and objectives of the Corporation, SUN and Sun Bank engage competent persons who undertake to accomplish these objectives with integrity and in a cost-effective manner. The fundamental philosophy of SUN's and Sun Bank's compensation program is to offer competitive compensation opportunities based on individual contribution and personal performance. The objectives of the Committee are to establish a fair compensation policy to govern executive salaries and incentive plans to attract and motivate competent, dedicated and ambitious executives whose efforts will enhance the products and services of SUN and its subsidiaries, the results of which should be improved profitability, increased dividends to our shareholders and subsequent appreciation in the market value of SUN's shares. The Compensation Committee does not deem Section 162(m) of the Internal Revenue Code (the "IRC") to be applicable to the Corporation at this time. The Compensation Committee intends to monitor the future application of Section 162(m) of the IRC to the compensation paid to its executive officers and in the event that this section becomes applicable, it is the intent of the Compensation Committee to amend the Corporation's compensation plans to preserve the deductibility of the compensation payable to executive officers under such plans. The compensation of SUN's Chief Executive Officer ("CEO") and Chief Operating Officer ("COO") is determined by the Committee and is reviewed and approved annually by the Board of Directors. As a guideline for review in determining the CEO's and COO's base salary, the Committee uses information found in various surveys based on asset size within Pennsylvania and SUN's market region. Pennsylvania peer group banks are utilized because of common industry issues and competition for the same Executive talent. SUN's performance accomplishments using return on average assets ("ROA") and return on average equity ("ROE") are reviewed; however, there is no direct correlation between the CEO's and COO's compensation or the CEO's and COO's increase in compensation and any of the noted criteria nor is there any weight given by the Committee to any specific individual criteria. Increases in the CEO's and COO's compensation are based on the Committee's subjective determination after review of all information, including the above, that it deems relevant. Members of the Compensation Committee George F. Keller, Chairman Max E. Bingaman Robert A. Hormell COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee was an officer, former officer or employee of SUN or any of its subsidiaries. 12 SUMMARY COMPENSATION TABLE The remuneration table contains information with respect to annual compensation for services in all capacities to the Corporation for fiscal years ending December 31, 1999, 1998 and 1997 of those persons who were, at December 31, 1999, (i) the Chief Executive Officer and (ii) the four (4) other most highly compensated executive officers of the Corporation to the extent such person's total annual salary and bonus exceeded $100,000:
Annual Compensation 1/ Long-Term Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Annual Restricted All Other Name and Salary Bonus Compensa- Stock Options/ LTIP Comensa- Principal tion 2/ Award(s) SARs Payouts tion Position Year ($) ($) ($) ($) (#) 3/ ($) ($) 4/5 -------- ---- --- --- --- --- ------ --- ------- Fred W. Kelly, Jr. 1999 160,000 16,168 2,597 0 15,000 0 24,375 ---- President & CEO 1998 152,776 19,079 2,592 0 15,000 0 23,875 ---- 1997 146,604 30,117 2,635 0 13,387 0 23,539 ---- Jeffrey E. Hoyt 1999 145,000 14,500 7,411 0 15,000 0 14,901 ---- Exec. VP & COO 1998 125,008 15,626 4,633 0 15,000 0 13,200 ---- 1997 110,399 21,510 4,257 0 12,600 0 12,358 ----
1/ Compensation deferred at election of executive includable in category and year earned. 2/ Includes perquisites and other personal benefits (No Director or Officer received in the aggregate more than $10,000 of personal benefits). 3/ Options granted pursuant to SUN's 1994 and 1998 Stock Incentive Plan. 4/ Residual category for Mr. Kelly includes: (a) employer contributions to defined contribution plan ($8,000); employer contributions to a 401(k) plan ($4,800); and (c) employer contributions to a non-qualified supplemental retirement plan ($11,575). The respective amounts disclosed for 1998 were (a) $8,000; (b) $4,800; and (c) $11,075 and for 1997 were (a) $8,000; (b) $4,800; and (c) $10,739. 5/ Residual category for Mr. Hoyt includes: (a) employer contributions to defined contribution plan ($8,000); (b) employer contribution to a 401(k) plan ($4,800); and (c) employer contributions to a non-qualified supplemental retirement plan ($2,101). The respective amounts disclosed for 1998 were (a) $7,055; (b) $4,233; and (c) $1,912 and for 1997 were (a) $6,591; (b) $3,954; and (c) $1,813. Other than the compensation set forth in the above table and under the several plan captions below, the other compensation for services during 1999 aggregated less than the disclosure thresholds established by the Securities and Exchange Commission for other than the named executive officer. 13 OPTION/SAR GRANTS TABLE Option/SAR Grants In Last Fiscal Year
Individual Grants (a) (b) (c) (d) (e) (f) (g) Number of % of Total Securities Options/ Underlying SARs Granted Exercise Options/ to Employees or Base Potential Realizable Value of SARs Granted in Fiscal Price Expiration Options at Expiration Date Name (#) 1/ Year ($/Sh) Date ($) 2/ ($) 3/ ---- ------ ---- ------ ---- ------ ------ Fred W. Kelly, Jr. 15,000 18.07% $27.00 5/13/09 $165,000 $502,650 President & CEO Jeffrey E. Hoyt 15,000 18.07% $27.00 5/13/09 $165,000 $502,650 Ex. VP, COO & Secretary
________________________ 1/ Options granted under the SUN BANCORP, INC. 1998 Stock Incentive Plan are not exercisable until November 13, 1999. 2/ Assumed appreciation at a 5% compounded annual rate for 10 years. 3/ Assumed appreciation at a 10% compounded annual rate for 10 years. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(a) (b) (c) (d) (e) Value of Number of Securities Unexercised Underlying Unexercised In-The-Money Options/SARs at Options/SARs at Shares Acquired Value Fiscal Year End Fiscal Year End on Exercise Realized (#) ($) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable ---- --- --- ------------------------- ------------------------- Fred W. Kelly, Jr. 0 $0 85,411/0 $179,284/$0 President & CEO Jeffrey E. Hoyt 4,250 $38,951 61,525/0 $ 32,015/$0 Ex. VP, COO & Secretary
14 Shareholder Return Performance Graph Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Corporation's common stock against the cumulative total return of all NASDAQ stocks and the SNL $500 Million to $1 Billion Bank Index for the period of five fiscal years commencing January 1, 1995 and ending December 31, 1999. The shareholder return shown on the graph below is not necessarily indicative of future performance. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN SUN BANCORP, INC. Common, All NASDAQ Stocks, and the SNL $500 Million to $1 Billion Bank Index [GRAPH] NOTE - GRAPH TO FOLLOW WITH HARD COPY
Period Ending ---------------------------------------------------------- INDEX 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 - ----------------------------------------------------------------------------------------------- Sun Bancorp, Inc. 100.00 137.26 187.28 317.23 267.22 202.22 NASDAQ - Total US 100.00 141.33 173.89 213.07 300.25 542.43 SNL $500M-$1B Bank Asset-Size Index 100.00 132.76 165.97 269.80 265.28 245.56
15 Employment Contracts of SUN Executives On July 14, 1987, Mr. Kelly entered into a written five (5) year employment agreement (the "Agreement") with SUN. The original Agreement automatically renewed for an additional year, unless either SUN or Mr. Kelly deliver notice of an intention to terminate the Agreement, prior to January thirtieth of that year. Mr. Kelly has been notified that his Agreement will not be renewed after January 30, 1998. Mr. Kelly's Agreement was amended on December 19, 1988 and provides that Mr. Kelly will receive (i) a minimum annual base salary of $160,000 in 1999; (ii) a profit sharing pursuant to Sun Bank's Executive Incentive Plan; (iii) benefits under and the right to participate in any future or revised compensation and benefit plan or arrangements offered by SUN or Sun Bank during the term of the Agreement including SUN's Stock Incentive Plan and Employee Stock Purchase Plan; (iv) upon termination of his employment other than for cause, a benefit equal to that which would have been payable to Mr. Kelly pursuant to the defined contribution plan had he been employed for the full term of the Agreement; (v) upon his disability, benefits equal to his then current salary during the disability period until termination of his employment, subject to adjustments for payments made to him under any applicable disability plan; and (vi) his stated salary and profit sharing until the termination of the Agreement should his employment with SUN and/or Sun Bank be terminated for other than "cause" as defined in the Agreement which includes willful violation of the Agreement. If Mr. Kelly's employment was terminated by SUN, without cause, on December 31, 1999, Mr. Kelly would have received an aggregate amount of $333,333 for his services through January of 2002. On May 6, 1994, Mr. Hoyt entered into a written five (5) year employment agreement (the "Agreement") with SUN. The original Agreement automatically renewed for an additional year, unless either SUN or Mr. Hoyt deliver notice of an intention to terminate the Agreement, prior to September thirtieth of that year. Mr. Hoyt has been notified that his Agreement will not be renewed after September 30, 1998. Mr. Hoyt's Agreement provides that he will receive (i) a minimum annual base salary of $145,000 in 1999; (ii) a profit sharing pursuant to Sun Bank's Executive Incentive Plan; (iii) benefits under and the right to participate in any future or revised compensation and benefit plan or arrangements offered by SUN or Sun Bank during the term of the Agreement including SUN's Stock Incentive Plan and Employee Stock Purchase Plan; (iv) upon termination of his employment other than for cause, a benefit equal to that which would have been payable to Mr. Hoyt pursuant to the defined contribution plan had he been employed for the full term of the Agreement; (v) upon his disability, benefits equal to his then current salary during the disability period until termination of his employment, subject to adjustments for payments made to him under any applicable disability plan; and (vi) his stated salary and profit sharing until the termination of the Agreement should his employment with SUN and/or Sun Bank be terminated for other than "cause" as defined in the Agreement which includes willful violation of the Agreement. If Mr. Hoyt's employment was terminated by SUN, without cause, on December 31, 1999, Mr. Hoyt would have received an aggregate amount of $398,750 for his services through September of 2002. Future Remuneration The officers included in the remuneration table on page 13, as named individuals, may in the future receive benefits under one or more of the following ongoing plans. 16 SUN Defined Contribution Plan On August 6, 1990, SUN's Board adopted a Defined Contribution Plan (the "Contribution Plan") and made it available to all eligible employees of Sun Bank. Under the Contribution Plan, a minimum of five percent (5%) of the employee's wages will be paid by Sun Bank and deposited in the Contribution Plan for the eligible employee at the end of each calendar year. No contribution on the part of the employee is required or permitted. The employee may choose to invest SUN's contribution in any of the investment options available under SUN's 401(k) Plan discussed below. After completion of five (5) years of active service, the employee will be vested in SUN's contributions made to the Contribution Plan on his/her behalf. To be eligible to participate in the Contribution Plan, an employee must be twenty-one (21) years of age and must work one (1) continuous year in which the employee has worked one thousand (1,000) hours. After completing the eligibility requirements, the employee will enter the Contribution Plan on January 1, or July 1, whichever date comes first. Non-employee directors, of SUN and its subsidiaries, are not eligible to participate in the Defined Contribution Plan. Normal retirement is age sixty-five (65) but early retirement may be elected by an employee who has reached age fifty-five (55) and has completed five (5) years of service. After becoming vested, the employee may choose to take a lump sum distribution or an annuity at retirement, disability, termination or death. Payment of benefits upon termination will be made after the year-end valuation which follows the employee's termination date. No loans or withdrawals are permitted from the Contribution Plan. Each employee's benefit is solely determined by the number of years that the employer has contributed to the Contribution Plan and the results of the employee's investment choices. For the executive officers named in the cash remuneration table reported on page 13, the estimated annual pension benefit upon retirement at age sixty-five (65) pursuant to the benefits from the Contribution Plan is $91,775 for Mr. Kelly and $117,836 for Mr. Hoyt. This estimated benefit does not take into consideration any future increases in the officer's base compensation rate, or the return on the employee's investment in the Contribution Plan, and is a life income ten (10) year certain benefit and would be actuarially reduced for a fifty percent (50%) joint and survivor annuity to the officer and his spouse. SUN 401(k) Plan Effective January 1, 1990, SUN adopted and made available to eligible employees of Sun Bank, a profit sharing-savings plan (the "401(k) Plan") for which Sun Bank is the trustee. The 401(k) Plan is intended to comply with the requirements of Section 401(k) of the Internal Revenue Code and is subject to the Employee Retirement Income Security Act of 1974, as amended, ("ERISA"). Employees of SUN's subsidiary, Sun Bank, become eligible to participate in the 401(k) Plan on January 1st following their employment and eighteenth (18th) birthday. The participating employees (the "participants") may elect to have from two percent (2%) to fifteen percent (15%) of their compensation, as defined in the 401(k) Plan, contributed to the 401(k) Plan. SUN's Board will make a determination at the end of each year, subject to profitability, if a match will be approved. Under the Tax Reform Act, the maximum amount of elective contributions that could be made by a participant, during 1999, was ten thousand 17 dollars ($10,000.00) and the amount that can be contributed in 2000 is ten thousand five hundred dollars ($10,500.00). All officers and employees of Sun Bank, including the officers named in the Summary Compensation Table set forth herein, are eligible to participate in the 401(k) Plan. Non-employee directors, of SUN and its subsidiaries, are not eligible to participate in the 401(k) Plan. All elective contributions are immediately one hundred percent (100%) vested, however, matching contributions by the participant's employer are vested only after the employee has completed five (5) years of active service for the employer. Participants may direct the investment of elective contribution in a choice of several types of funds, including a money market fund, bond fund, growth fund, growth and income fund, as well as the purchase of SUN common stock. All benefits payable under the 401(k) Plan may be paid in a lump sum or an annuity upon a participant's retirement, disability, termination of employment or death. A participant may also elect to receive benefits at the age of fifty-five (55) upon early retirement and withdrawal from the 401(k) Plan is permitted in case of immediate financial hardship. Supplemental Income Plan In December 1992, SUN's Board approved a non-qualified Supplemental Income Plan retroactive to January 1, 1990. It was designed for the purpose of retaining talented executives and to promote in these executives a strong interest in the long term, successful operation of the Corporation. Seven (7) executives from Sun Bank participate in this plan. Each annual contribution is carried on Sun Bank's records in the participant's name and credited on December 31st of each calendar year. Interest is based on the prior year's average rate received on federal funds sold. No contribution on the part of the employee is required or permitted. Contributions cease at termination, death, retirement or disability. The Plan is an unfunded plan and is subject to the general creditors of the Corporation. Normal retirement is age sixty-five (65) but early retirement may be elected by an employee who has reached age fifty-five (55) and completed five (5) years of service. At retirement, termination, disability or death, the participant will receive an annual benefit for ten (10) years. Any portion of the year will be pro-rated. The Corporation reserves the right to accelerate the payment. The future estimated benefit does not take compensation into consideration and the amount credited to Mr. Kelly and Mr. Hoyt in 1999 is included in the "All Other Compensation" column of the Summary Compensation Table. Incentive Plan of Sun Bank In 1998, the Board of Directors of Sun Bank modified the incentive profit sharing plan basing it on Sun Bank's profitability. The plan is maintained for all employees of Sun Bank to promote a superior level of performance relating to Sun Bank's financial goals. The Personnel and Retirement Committee, with the approval of the Board of Directors, has established payment criteria based on achieving a stated dollar level of profitability. Payments aggregating $425,512 were awarded under the previously disclosed profit sharing plan in 1999. During 1999, Mr. Kelly and Mr. Hoyt received payment under the profit sharing plan, and the amount is included in the "Bonus" column of the Summary Compensation Table. 18 Compensation of Directors The Chairman and all other directors, who are not officers of the Corporation or any subsidiary, were paid a fee of $450 per quarterly or special meeting attended plus an annual retainer of $1,000, paid on a quarterly basis. A $50 fee is paid for telephone conference calls and payment is made in the quarter in which the call occurred. Attendance is required for payment of the Board fee but not for the annual retainer. The Chairman and all other directors, who are not officers of the Corporation or any subsidiary, are paid for attending the Corporation's Committee meetings. Each outside director and the Chairman of the Corporation were paid $200 for each Executive/Asset & Liability Committee meeting attended. Each outside director and the Chairman of the Corporation was paid a fee of $100 for all other Committee meetings of the Board attended in 1999. TRANSACTIONS WITH MANAGEMENT There have been no material transactions, proposed or consummated, among the Corporation, or Sun Bank and any director, executive officer of those entities, or any associate of the foregoing persons. The Corporation and Sun Bank have had and intend to continue to have banking and financial transactions in the ordinary course of business with their directors and officers and their associates on comparable terms and with similar interest rates as those prevailing from time to time for other customers. Total loans outstanding from the Corporation and Sun Bank at December 31, 1999, to the Corporation's and the Banks' officers and directors as a group and members of their immediate families and companies in which they had an ownership interest of 10% or more, was $5,673,164 or approximately 10.13% of the total equity capital of the Corporation. Loans to such persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features. SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation's Officers and Directors, and persons who own more than ten percent (10%) of the registered class of the Corporation's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and greater than ten percent (10%) shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. Based on its review of the copies of such forms received by it, and/or written statements received from the respective individuals, the Corporation believes that during the period January 1, 1999 through December 31, 1999, its Officers and Directors were in compliance with all filing requirements applicable to them. 19 PROPOSAL 1 ELECTION OF DIRECTORS (Item 1 on the Proxy) Nominees for Directors The following directors, whose terms expire at the 2000 Annual Meeting, have been nominated by the Corporation's Board of Directors for election: To serve for a three (3) year term of office which expires at the 2003 Annual Meeting: Thomas B. Hebble Jeffrey E. Hoyt Paul R. John Fred W. Kelly, Jr. If one or more of the nominees should at the time of the Annual Meeting be unavailable or unable to serve as a director, proxies may vote in favor of a substitute nominee as the Board of Directors determines or the number of nominees to be elected will be reduced accordingly and shares represented by the proxies will be voted to elect the remaining nominees. The Board of Directors knows of no reason why any of the nominees will be unavailable or unable to serve as directors. ____________________ Assuming the presence of a quorum, the four (4) nominees for director receiving the highest number of votes cast by shareholders entitled to vote for the election of directors shall be elected. Proxies solicited by the Board of Directors will be voted for nominees listed above unless the shareholders specify a contrary choice in their proxies. The Board of Directors recommends a vote FOR the nominees listed above. PROPOSAL 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (Item 2 on the Proxy) The Board of Directors has selected the firm of Parente Randolph, PC, Certified Public Accountants, as its independent certified public accountants to audit the books, records and accounts of the Corporation for the year 2000. This firm served as the Corporation's independent auditors for the 1999 fiscal year. The Board is herewith presenting the appointment to the Corporation's shareholders for ratification at the Annual Meeting. This firm has an outstanding reputation in the accounting profession and is considered to be well qualified. The Corporation has been advised by Parente Randolph, PC, that none of its members has any financial interest in the Corporation. If the shareholders do not ratify this selection, the Board of Directors may consider the appointment of another firm. A representative of Parente Randolph, PC, will be at the Annual Meeting to answer any questions and will have an opportunity to make a statement if he so desires. 20 The resolution being voted upon is as follows: RESOLVED, that the shareholders of the Corporation ratify and confirm the appointment of Parente Randolph, PC, as the Corporation's, independent certified public accountants for the year 2000. The ratification of the selection of the independent certified public accountants requires the affirmative vote of at least a majority of the shares of common stock present in person or by proxy and entitled to vote at the meeting. Proxies solicited by the Board of Directors will be voted for the foregoing resolution unless shareholders specify a contrary choice in their proxies. The Board of Directors recommends a vote FOR the resolution ratifying the appointment of Parente Randolph, PC, Certified Public Accountants, as the Corporation's independent certified public accountants for the year 2000. PROPOSAL 3 OTHER BUSINESS (Item 3 on the Proxy) Management does not know at this time of any other matters which will be presented for action at the Annual Meeting. If any unanticipated business is properly brought before the meeting, the proxies will vote in accordance with the best judgment of the person acting by authorization of the proxies. SHAREHOLDER PROPOSALS FOR 2001 The Corporation's Annual Meeting of Shareholders will be held on or about April 26, 2001. Any shareholder desiring to submit a proposal to the Corporation for inclusion in the proxy and proxy statement relating to that meeting must submit such proposal or proposals in writing to the President of SUN BANCORP, INC. at its principal executive offices at 2-16 South Market Street, P.O. Box 57, Selinsgrove, Pennsylvania 17870, not later than Monday, December 8, 2000. ADDITIONAL INFORMATION A copy of the Annual Report of the Corporation and its subsidiaries, Sun Bank and Pennsylvania Sun Life Insurance Company, for the fiscal year ended December 31, 1999, containing, among other things, consolidated financial statements certified by its independent public accountants, was mailed with this Proxy Statement on or about March 30, 2000 to the shareholders of record as of the close of business on March 10, 2000. 21 AVAILABILITY OF FORM 10-K UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1999 INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES THERETO REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 13A-1 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, MAY BE OBTAINED WITHOUT CHARGE FROM THE CORPORATION'S EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND SECRETARY, MR. JEFFREY E. HOYT, AT 2-16 SOUTH MARKET STREET, P.O. BOX 57, SELINSGROVE, PENNSYLVANIA 17870. By Order of the Board of Directors of SUN BANCORP, INC. /s/ Jeffrey E. Hoyt -------------------------------- Jeffrey E. Hoyt Executive Vice President, Chief Operating Officer and Secretary 22 SHAREHOLDER LUNCH REPLY CARD I/We plan to attend the luncheon following the SUN BANCORP, INC. 2000 Annual Shareholders' Meeting to be held at the Susquehanna Valley Country Club, Mill Road, Hummels Wharf, Pennsylvania, on Thursday, April 27, 2000 at 10:30 a.m., prevailing time. Number Attending Meeting _____ Number Attending Luncheon _____ The luncheon should begin no later than 12:00 Noon and will be completed by approximately 12:45 p.m. Signature ______________________ Print Name ______________________ Signature ______________________ Print Name ______________________ R.S.V.P. by April 14, 2000 To: SUN BANCORP, INC. 2-16 South Market St. Selinsgrove, PA 17870 If you have any questions that you would like addressed at the Annual Meeting, please record them on the reverse side. EX-21 4 Subsidiaries of SUN BANCORP, INC. --------------------------------- The following table sets forth the subsidiaries of the Registrant at December 31, 1999. Each subsidiary is wholly-owned by the Registrant. Name Organized Under the Laws of ---- --------------------------- Sun Bank The State of Pennsylvania Selinsgrove, PA SUN Life Insurance Company The State of Arizona Phoenix, AZ EX-23 5 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in this annual report on Form 10-K of Sun Bancorp, Inc. for the year ended December 31, 1999 of our report dated February 11, 2000 which appears on page 24 of the annual report to shareholders for the year ended December 31, 1999. /s/ Parente Randolph, PC Williamsport, Pennsylvania March 28, 2000 EX-27 6
9 1,000 YEAR DEC-31-1999 DEC-31-1999 15079 980 0 0 0 298777 282616 381342 3857 710921 400121 35966 4821 214000 81520 0 0 (25507) 710921 29841 17457 156 47454 14880 26230 21224 1925 1962 12079 12180 12180 0 0 8755 1.28 1.28 3.57 1965 1015 320 2517 3327 1606 211 3857 3857 0 0
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