UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934

For the quarterly period ended  September 30, 2002

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934

For the transition period from               to

Commission File Number:  0-14745

 

SUN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

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.    Yes  ý      No  o

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes   o      No   o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 

 

 

SUN BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

 

CONTENTS

 

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
	Consolidated Balance Sheet as of September 30, 2002 (Unaudited) and December 31, 2001
	Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2002 and September 30, 2001 (Unaudited)
	Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2002 and September 30, 2001 (Unaudited)
	Notes to the Consolidated Financial Statements (Unaudited)
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES

 

2

 

SUN BANCORP, INC.

FORM 10-Q

PART I

 

Item 1.  Financial Statements

 

SUN BANCORP, INC.

CONSOLIDATED BALANCE SHEET

 

(In Thousands, Except Share Data)		September 30, 2002			December 31, 2001
		(Unaudited)
ASSETS
Cash and due from banks		$	23,794		$	24,125
Interest-bearing deposits in banks		36,673			20,858
Total cash and cash equivalents		60,467			44,983
Investment securities		228,802			305,612
Loans, net of allowance for loan and lease losses of $7,178 in 2002 and $6,204 in 2001		579,233			515,520
Bank premises and equipment, net		14,723			14,462
Goodwill and core deposit intangibles		22,071			22,773
Accrued interest		4,020			5,063
Bank owned life insurance		15,473			—
Other assets		23,801			12,442
Total assets		$	948,590		$	920,855
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing		$	60,402		$	57,990
Interest-bearing		541,441			515,887
Total deposits		601,843			573,877
Short-term borrowings		23,338			22,138
Other borrowed funds		220,000			222,000
Subordinated debentures		19,655			20,444
Accrued interest and other liabilities		2,350			4,885
Total liabilities		867,186			843,344
Shareholders’ equity
Common stock, no par value per share; Authorized 20,000,000 shares: issued  7,276,276 shares in 2002 and 7,236,251 shares in 2001		84,173			83,565
Retained earnings (deficit)		(5,668		)	(6,961		)
Accumulated other comprehensive income		4,374			2,069
Less:  Treasury stock, at cost, 111,217 shares in 2002 and 93,417 shares in 2001		(1,475		)	(1,162		)
Total shareholders’ equity		81,404			77,511
Total liabilities and shareholders’ equity		$	948,590		$	920,855

 

The accompanying notes are an integral part of these financial statements.

 

3

 

SUN BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(In Thousands, Except for Per Share Data)		2002			2001			2002			2001
Interest and dividend income:
Interest and fees on loans		$	10,364		$	10,545		$	30,262		$	28,447
Income from investment securities:
Taxable		2,907			4,521			9,955			13,045
Tax exempt		250			307			768			823
Dividends		112			411			358			1,211
Interest on deposits in banks		94			414			269			1,087
Total interest and dividend income		13,727			16,198			41,612			44,613
Interest expense:
Interest on deposits		3,605			5,778			11,289			16,238
Interest on short-term borrowings		93			121			236			353
Interest on other borrowed funds		3,181			3,223			9,514			9,564
Interest on subordinated debentures		472			471			1,428			1,098
Total interest expense		7,351			9,593			22,467			27,253
Net interest income		6,376			6,605			19,145			17,360
Provision for loan and lease losses		450			325			1,260			925
Net interest income, after provision For loan and lease losses		$	5,926		$	6,280		$	17,885		$	16,435
Other operating income:
Service charges on deposit accounts		$	880		$	551		$	2,108		$	1,317
Trust income		222			226			563			726
Net security gains		3			62			143			898
Income from investment product sales		90			132			350			155
Bank owned life insurance		187			—			393			—
Income from insurance subsidiary		14			65			63			156
Other income		234			261			706			584
Total other operating income		1,630			1,297			4,326			3,836
Other operating expense:
Salaries and employee benefits		2,991			2,738			8,624			7,024
Net occupancy expenses		282			268			807			704
Furniture and equipment expenses		451			416			1,266			1,189
Amortization of intangibles		235			515			703			1,053
Expenses of insurance subsidiary		22			59			83			159
Other expenses		1,905			1,417			5,199			4,213
Total other operating expenses		5,886			5,413			16,682			14,342
Income before income tax provision		1,670			2,164			5,529			5,929
Income tax provision		130			613			805			1,511
Net income		$	1,540		$	1,551		$	4,724		$	4,418
PER SHARE DATA
Net income per share – Basic		$	0.21		$	0.22		$	0.66		$	0.64
Weighted average number of shares outstanding – Basic		7,164,910			7,151.474			7,149,568			6,873,596
Net income per share – Diluted		$	0.21		$	0.22		$	0.66		$	0.64
Weighted average number of shares outstanding – Diluted		7,247,982			7,161,758			7,188,113			6,876,076
Dividends paid		$	0.165		$	0.15		$	0.495		$	0.45

 

The accompanying notes are an integral part of these financial statements.

 

4

 

SUN BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

(In Thousands)		For the Nine Months Ended September 30,
		2002			2001
Cash flows from operating activities:
Net income		$	4,724		$	4,418
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan and lease losses		1,260			925
Provision for depreciation		769			721
Amortization of intangibles		702			1,053
Amortization and accretion of securities, net		807			259
Net security gains		(143		)	(898		)
Increase in accrued interest and other assets		(11,156		)	(7,227		)
Gain on sale of bank premises and equipment		(6		)	(71		)
Decrease in accrued interest and other liabilities		(2,535		)	(957		)
Net cash used in operating activities		(5,578		)	(1,777		)
Cash flows from investing activities:
Proceeds from sales of investment securities		1,081			42,584
Proceeds from maturities of investment securities		89,867			68,896
Purchase of bank owned life insurance		(15,473		)	—
Cash acquired from branch acquisitions		—			64,863
Cash acquired from Guaranty Bank acquisition, net of $2,544 cash paid		—			27,988
Purchases of investment securities		(11,309		)	(135,463		)
Net increase in loans		(65,321		)	(49,809		)
Purchases of investments in limited partnerships		—			(1,171		)
Proceeds from sales of bank premises and equipment		6			222
Capital expenditures		(1,030		)	(1,044		)
Net cash (used in) provided by investing activities		(2,179		)	17,066
Cash flows from financing activities:`
Net increase in deposits		27,966			11,212
Net increase in short-term borrowings		1,200			3,153
Repayment of other borrowed funds		(2,000		)	—
Proceeds from issuance of subordinated debentures		—			16,500
Repayment of subordinated debt		(789		)	—
Cash dividends paid		(3,431		)	(3,063		)
Proceeds from sale of stock for employee benefits program		608			111
Purchase of treasury stock		(313		)	(1,071		)
Net cash provided by financing activities		23,241			26,842
Net increase (decrease) in cash and cash equivalents		15,484			42,131
Cash and cash equivalents at beginning of period		44,983			15,277
Cash and cash equivalents at end of period		$	60,467		$	57,408
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	23,415		$	26,163
Income taxes		$	1,950		$	1,850

 

Loans with an estimated value of  $348,000 and $573,000 were reclassified to foreclosed assets held for sale during the nine-month periods ended September 30, 2002 and 2001, respectively.

 

The accompanying notes are an integral part of these financial statements.

 

5

 

SUN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Forward Looking Statements (FLSs)

 

This report contains FLSs that reflect Sun Bancorp, Inc’s (Sun) current views regarding future events and financial performance for Sun and its subsidiaries.  FLSs may generally, but not always, be identified by words such as “estimate,” “believe,” “forecast” and other indications of future events and trends.  FLSs are subject to considerable uncertainties and risks, including factors beyond Sun’s control that could cause actual results to differ materially from historical or anticipated results.  Such factors include, but are not limited to (1) customer and deposit attrition or revenue loss following announced mergers may be greater than expected; (2) financial industry competition may increase significantly; (3) changing economic, interest rate, and regulatory environments; (4) announced mergers do not consummate as anticipated; (5) other factors that may not be identifiable at this time.  Further, Sun’s historical performance does not guarantee and may not indicate future results.

 

The list of important factors is not complete or exclusive.   Additional information regarding factors that may cause actual results to differ materially from those considered by the FLSs is included in Sun’s current and subsequent filings with the Securities and Exchange Commission (SEC).  Sun does not update any FLS that may be made from time to time by or on behalf of Sun.

 

Note 1 — Basis of Interim Presentation

 

The consolidated financial statements include the accounts of Sun Bancorp, Inc., the parent company, and its wholly-owned subsidiaries:  SunBank, SUBI Investment Company, Beacon Life Insurance Company, and Sun Bancorp Statutory Trust I.  Sun also holds thirty percent ownership in Sun Abstract and Settlement Services.  The transactions of Beacon Life Insurance Company and Sun Abstract and Settlement Services are not material to the consolidated financial statements.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements for the interim periods do not include all of the information and footnotes required by generally accepted accounting principles.  However, in the opinion of management, all adjustments necessary for a fair presentation of the results of the interim period have been included.  Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

 

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 18 and 19 of the 2001 Annual Report to Shareholders.

 

6

 

Note 2 – Net Income Per Share

 

Net income per share is computed based on the weighted average number of shares of stock outstanding for each period presented.  Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” requires presentation of two amounts, basic and diluted net income per share.  Basic earnings per share calculates net income divided by the average number of shares outstanding for the period.  Diluted earnings per share calculates net income divided by the sum of the average number of shares outstanding and the effect that, if all were exercised, the granted stock options would have on the number of shares outstanding for the period.

 

The following data shows the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options for the periods ended September 30, 2002 and 2001:

 

		For the Three Months Ended September 30,
		Income Numerator			Common Shares Denominator		Net Income Per Share
2002
Net income per share – Basic		$	1,540,000		7,164,910		$	0.21
Dilutive effect of stock options					83,072
Net income per share – Diluted		$	1,540,000		7,247,982		$	0.21
2001
Net income per share – Basic		$	1,551,000		7,151,474		$	0.22
Dilutive effect of stock options					10,284
Net income per share – Diluted		$	1,551,000		7,161,758		$	0.22

 

 

		For the Nine Months Ended September 30,
		Income Numerator			Common Shares Denominator		Net Income Per Share
2002
Net income per share – Basic		$	4,724,000		7,149,568		$	0.66
Dilutive effect of stock options					38,545
Net income per share – Diluted		$	4,724,000		7,188,113		$	0.66
2001
Net income per share – Basic		$	4,418,000		6,873,596		$	0.64
Dilutive effect of stock options					2,480
Net income per share – Diluted		$	4,418,000		6,876,076		$	0.64

 

7

 

Note 3 – Consolidated Statement of Comprehensive Income

 

The purpose of reporting comprehensive income is to report a measure of all changes in Sun Bancorp, Inc.’s equity resulting from economic events other than transactions with shareholders in their capacity as shareholders.  For Sun Bancorp, Inc., “comprehensive income” includes traditional income statement amounts as well as unrealized gains and losses on certain investments in debt and equity securities (i.e. available-for-sale securities).  Unrealized gains and losses are part of comprehensive income, therefore comprehensive income may vary substantially between reporting periods due to fluctuations in the market prices of securities held.

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(In Thousands)		2002			2001			2002			2001
Net income		$	1,540		$	1,551		$	4,724		$	4,418
Other comprehensive income:
Unrealized holding gains on available for sale securities:
Gains arising during the period		1,170			6,068			3,635			9,184
Reclassification adjustment – realized gains included in net income		(3		)	(62		)	(143		)	(898		)
Other comprehensive income before income taxes		1,167			6,006			3,492			8,286
Income tax expense related to Other comprehensive income		(397		)	(2,042		)	(1,187		)	(2,817		)
Other comprehensive income		770			3,964			2,305			5,469
Comprehensive income		$	2,310		$	5,515		$	7,029		$	9,887

 

8

 

Note 4 – Investment Securities

 

The amortized cost and fair value of investment securities at September 30, 2002 and December 31, 2001 were as follows:

 

		September 30, 2002
(In Thousands)		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Debt securities:
Obligations of U.S. government agencies		$	179,953		$	5,965		$	(161	)	$	185,757
Obligations of states and political subdivisions		20,173			1,110			(25		)	21,258
Other corporate		7,246			555			(202		)	7,599
Total debt securities		$	207,372		$	7,630		(388		)	$	214,614
Equity securities:
Marketable equity securities		$	3,208		$	65		$	(678	)	$	2,595
Restricted equity securities		11,593			—			—			11,593
Total equity securities		14,801			65			(678		)	14,188
Total		$	222,173		$	7,695		$	(1,066	)	$	228,802

 

		December 31, 2001
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Debt securities:
Obligations of U.S. government agencies		$	258,234		$	3,982		$	(557	)	$	261,659
Obligations of states and political subdivisions		22,054			312			(161		)	22,205
Other corporate		7,239			253			(40		)	7,452
Total debt securities		287,527			4,547			(758		)	291,316
Equity securities:
Marketable equity securities		3,836			13			(667		)	3,182
Restricted equity securities		11,114			—			—			11,114
Total equity securities		14,950			13			(667		)	14,296
Total		$	302,477		$	4,560		$	(1,425	)	$	305,612

 

9

 

Note 5 – Loans

 

The balances for principal loan categories are as follows:

 

		September 30, 2002			December 31, 2001
Real estate – Mortgage		$	220,657		$	261,310
Real estate – Construction		14,364			6,912
Agricultural		152			503
Commercial and industrial		237,182			151,181
Lease – Auto		27,141			8,489
Lease – Equipment		4,689			2,287
Individual		89,112			92,649
Other		729			1,619
Total		$	594,026		$	524,950
Less:
Unearned income & deferred loan fees		(7,533		)	(3,089		)
Unamortized net discount on purchased loans		(82		)	(137		)
ALLL		(7,178		)	(6,204		)
Net Loans		$	579,233		$	515,520

 

10

 

Note 6 – Change in Accounting

 

Effective January 1, 2002, Sun Bancorp, Inc. adopted the provisions of Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).  As of January 1, 2002, Sun Bancorp, Inc. had $14,018 in unamortized goodwill from previous acquisitions.  SFAS 142 requires a transitional impairment test be performed.  The initial valuation of Sun Bancorp, Inc.’s goodwill pursuant to this pronouncement resulted in no write-downs for impairment.  Additionally, SFAS 142 requires a reconciliation of previously reported net income and earnings per share, adjusted for changes pursuant to this statement.  Following is the pro forma effect of adoption of SFAS 142 on the three and nine-month periods ended September 30, 2002 and 2001:

 

		For the Three Months Ended September 30						For the Nine Months Ended September 30
(In Thousands, Except for Per Share Data)		2002			2001			2002			2001
Net income:
Reported net income		$	1,540		$	1,551		$	4,724		$	4,418
Add back: goodwill amortization		—			276			—			680
Adjusted net income		$	1,540		$	1,827		$	4,724		$	5,098
Basic earnings per share:
Reported net income		$	0.21		$	0.22		$	0.66		$	0.64
Add back: goodwill amortization, net of tax		—			$	.03		$	0.21		$	.10
Adjusted net income		$	0.21		$	0.25		$	0.66		$	0.74
Diluted earnings per share:
Reported net income		$	0.21		$	0.22		$	0.66		$	0.64
Add back: goodwill amortization, net of tax		—			$	.03		$	0.21		$	.10
Adjusted net income		$	0.21		$	0.25		$	0.66		$	0.74

 

11

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

                (in thousands, except per share amounts)

 

The following is management’s discussion and analysis of the significant changes in the results of operations, capital resources, and liquidity presented in its accompanying consolidated financial statements for Sun Bancorp, Inc., a bank holding company, and its wholly-owned subsidiaries, SunBank, Beacon Life Insurance Company, and Sun Bancorp Statutory Trust I.  Sun Bancorp, Inc. also holds thirty percent ownership in Sun Abstract and Settlement Services.  Sun Bancorp, Inc.’s consolidated financial condition and results of operations consist almost entirely of SunBank’s financial condition and results of operations.  This discussion should be read in conjunction with the 2001 Annual Report, which is incorporated herein by reference.  Current performance does not guarantee or assure similar performance in the future, and may not be indicative of future results.

 

Results of Operations – Three Months Ended September 30, 2002 and 2001

 

Sun Bancorp, Inc.’s earnings of $1,540,000 ($0.21 per share basic and diluted) for the three months ended September 30, 2002 were $11,000 ($0.01 per share basic and diluted) lower than the three months ended 2001.

 

Comparative information for the nine months ended September 30, 2002 and 2001 is impacted by the acquisition of Guaranty Bank (six branches) and three Mellon branches during the first nine months of 2001. In addition in December of 2001 two branches were sold.

 

Net interest income decreased 3.5% to $6,376 for the three months ended September 30, 2002 as compared to $6,605 for the same period of 2001.  Total interest and dividend income decreased $2,471 to $13,727 for the three months ended September 30, 2002.  The decrease is due to higher-rate loans prepaying and being replaced by predominately lower rate variable loans.  In addition, higher coupon bonds have been prepaying and SunBank has accumulated the cash as investment alternatives were analyzed.  Interest and fees on loans decreased to $10,364 for the three months ended September 30, 2002 as compared to $10,545 for the three months ended September 30, 2001.  Interest on deposits in banks has decreased 77.3% or $320 to $94 for the three months ended September 30, 2002 as management funds loan growth by using cash on deposit in banks and cash flow from the investment portfolio.  Total interest expense decreased 23.4% or $2,242 to $7,351 for the three months ended September 30, 2002, as compared to 2001.  The decrease is the result of management’s focus on growing low-cost core deposits (non-time deposits) and the rate reductions by the Federal Reserve during the past year.  Interest on deposits decreased 37.6%, or $2,173 as a result of the interest rate decreases when comparing the three months ended September 30, 2002 to 2001.

 

The provision for loan and lease losses increased 38.5% to $450 for the three months ended September 30, 2002.  The increase is the result of continued growth in the loan portfolio of $52,388 since September 30, 2001 and $64,687 since December 31, 2001 and the inherent risks associated with any loan.

 

12

 

Total other operating income increased for the three months ending September 30, 2002 by $333, or 25.7%, when compared to the same period of 2001.  Service charges on deposit accounts increased 59.7% to $880 for the three months ended September 30, 2002.  A majority of the increase is the result of the implementation of a new overdraft honor program.  Income from the sale of investment products decreased by $42, or 31.8% for the three months ended September 30, 2002 as compared to the same period in 2001.  In March of 2002, management made an investment in Bank Owned Life Insurance to offset future increases in employee benefit costs.  The income generated from this investment was $187 for the three months ended September 30, 2002.  Other income decreased by $27, or 10.3%, for the three months ended September 30, 2002 as compared to $261 for the three months ended September 30, 2001.

 

Other operating expenses increased 8.7% to $5,886 for the three months ended September 30, 2002, as compared to $5,413 for the same period of 2001.  The principal reason for the $473 increase in other operating expenses when comparing the quarters ended September 30, 2002 and 2001 is expansion of the branch network.  During the first six months of 2001, Sun Bancorp, Inc., acquired three Mellon branches and Guaranty bank, N.A., which consisted of six branches.  Salaries and employee benefits increased 9.2% to $2,991 for the three months ended September 30, 2002, as management continues to attract new employees to expand SunBank’s market area coverage.  In addition, SunBank has undergone a bank-wide training program related to new systems implementations.  This training has resulted in high levels of overtime pay.  Net occupancy and furniture and equipment expenses increased 5.2% and 8.4%, respectively, as compared to the three months ended September 30, 2001.  Other expenses increased $488 to $1,905 for the three months ended September 30, 2002.  This is the result of increased normal business activities (including the Pennsylvania Shares Tax and FDIC assessment) and the costs associated with SunBank outsourcing its daily processing.  The associated cost savings to this outsourcing will begin to appear during the fourth quarter as parallel systems are phased out.

 

Results of Operations – Nine Months Ended September 30, 2002 and 2001

 

Sun Bancorp, Inc.’s earnings of $4,724 ($0.64 per share basic and diluted) for the nine months ended September 30, 2002 were $306,000 ($0.02 per share basic and diluted) higher than the nine months ended 2001.

 

Comparative information for the nine months ended September 30, 2002 and 2001 is impacted by the acquisition of Guaranty Bank (six branches) and three Mellon branches during the first nine months of 2001. In addition in December of 2001 two branches were sold.

 

The earnings resulted in annualized return on average assets for the nine months ended September 30, 2002 of 0.70% as compared to 0.66% for the nine months ended September 30, 2001.  Annualized return on average equity for the nine months ended September 30, 2002 was 8.17% as compared to 8.72% for the nine months ended September 30, 2001.

 

13

 

Net interest income increased to $19,145 for the nine months ended September 30, 2002, as compared to $17,360 for the same period of 2001.  Total interest and dividend income decreased $3,001 or 6.7% to $41,612 for the nine months ended September 30, 2002, as compared to 2001.  The decrease in interest income is primarily the result of SunBank decreasing the investment portfolio by $76,810 since December 31, 2001. This decrease is the result of higher coupon bonds prepaying and management’s use of the cash flow to fund loan growth.  Accordingly, since December 31, 2001, net loans have increased $63,713 with the funding for the loan growth coming from runoff in the investment portfolio.  This increase in net loan balances resulted in interest and fees on loans increasing $1,815 or 6.4% to $30,262 for the nine months ended September 30, 2002.  Total interest expense decreased $4,786, or 17.6%, for the nine months ended September 30, 2002, as compared to 2001.  The decrease is the result of interest on deposits decreasing $4,949, or 30.5%, to $11,289 for the nine-months ended September 30, 2002.  The significant decrease is the result of SunBank focusing on core deposit growth (non-time deposits) coupled with the Federal Reserve rate cuts over the past year.  The provision for loan and lease losses increased 36.2% to $1,260 for the nine months ended September 30, 2002.  The increase is the result of Sun’s continued growth of the loan portfolio.

 

Excluding security gains, total other operating income increased $1,245, for the nine months ended September 30, 2002, compared to the same period of 2001.  Service charges on deposit accounts increased 60.1% to $2,108 for the nine months ended September 30, 2002.  The increase is primarily the result of the implementation of a new overdraft honor program and increased emphasis on generating fee income.  Trust income decreased $163, or 22.5%, to $563 for the nine months ended September 30, 2002.  This decrease is partially attributable to the decline in the stock market as account fees are related to the market value of each account.  Other income has increased $122, or 20.9%, to $706 for the nine months ended September 30, 2002 as leasing fees have increased $69 for the nine-month period ended September 30, 2002, as compared to the same period in 2001.

 

Other operating expenses increased to $16,682 for the nine months ended September 30, 2002, compared to $14,342 in the same period of 2001.  The main reason for Sun’s $2,340 increase in other operating expenses for the nine months ended September 30, 2002, as compared to September 30, 2001, is expansion as SunBank added nine branches during 2001.  Salaries and employee benefits increased 22.8% to $1,600 for the nine months ended September 30, 2002, as SunBank continues to attract new employees to expand SunBank’s market area coverage.  Net occupancy and furniture and equipment expenses increased 9.5% to $2,073.  The increase is primarily due to internal growth and acquisitions.  Amortization of intangibles decreased $350, or 33.2% to $703 for the nine months ended September 30, 2002.  Effective January 1, 2002 Sun Bancorp, Inc. was no longer required to amortize the goodwill associated with prior bank acquisitions (see Note 6).  Other expenses increased $986, or 23.4%, to $5,199 due to increases in normal business expenses  (PA Shares tax, telephone, and FDIC insurance) associated with the acquisition of Guaranty Bank, N.A. and three Mellon branches during 2001.  In addition, SunBank is now outsourcing its data processing.

 

14

 

The cost reduction of the outsourcing will not be realized until the end of the fourth quarter of 2002 and continuing into the middle of the first quarter of 2003 as SunBank runs duplicate systems until the entire project is completed.

 

Balance Sheet – September 30, 2002 and December 31, 2001

 

Total assets were $948,950 at September 30, 2002, an increase of $27,735 from $920,855 at December 31, 2001.  Cash and cash equivalents increased $15,484, or 34.4% from $44,983 at December 31, 2001.  Management’s efforts to shift funds from the investment portfolio to the higher-yielding loan portfolio is evidenced by a decrease in the investment portfolio of $76,810, or 25.1%, when comparing September 30, 2002 to December 31, 2001 with a corresponding increase of $63,713, or 12.4%, in the net loan portfolio during the same period.  The growth in the loan portfolio has occurred primarily in the commercial/industrial category.  Bank-owned life insurance of $15,473 was added to the balance sheet in March 2002 as a vehicle to offset the future increases in employee benefit costs.

 

Total liabilities increased $23,842 to $867,168 at September 30, 2002.  Total deposits increased $27,966 to $601,843 as core deposits (non-time deposits) increased 9.2% and time deposits remained steady.  Of the increase, $11,467 and $9,165 was from money market and savings growth, respectively.  Since December 31, 2001, non-interest-bearing deposits have increased $2,412 or 4.2%.

 

15

 

Sun Bancorp, Inc.’s total shareholders’ equity increased $3,893 from December 31, 2001 to September 30, 2002.  The increase is the result of several factors.  First, Sun Bancorp, Inc.’s accumulated other comprehensive income (66% of the change in the market value of Sun Bancorp, Inc.’s investment portfolio) increased 111.4%, or $2,305, to $4,374 from $2,069 at December 31, 2001 because of changes in the market value of Sun Bancorp, Inc.’s investment securities.  Second, net income of $4,724 augmented shareholders’ equity.  These increases were offset by an increase in treasury stock of $313 as Sun Bancorp, Inc. purchased 17,800 shares of treasury stock at an average cost of $17.61 per share over the first nine months of 2002.  Sun Bancorp, Inc. also paid $3,431 in dividends to shareholders during the nine months ended September 30, 2002.

 

Allowance for Loan and Lease Losses

 

SunBank’s allowance for loan and lease losses is increased through periodic provisions for loan and lease losses, and that provision is reported as an expense in current income.  Loan losses are charged against the allowance for loan and lease losses in the period in which they are determined to be uncollectible.  Recoveries of previously charged off loans are credited to the allowance as they are received.  Management maintains the allowance for loan and lease losses at a level it believes will be adequate to absorb probable credit losses in the existing loan portfolio.  Management believes the allowance for loan and lease losses is adequate at September 30, 2002.

 

Management’s analysis incorporates many factors, including current and anticipated economic conditions, loss experience, loan portfolio composition, anticipated losses, and unfunded commitments.  For significant real estate properties, management obtains independent value appraisals.  SunBank also retains consultants to conduct independent, periodic loan quality reviews, which management incorporates into its allowance for loan and lease losses analysis.

 

Management determines its allowance for loan and lease losses based on criteria and analysis developed to evaluate credit risk within each loan category.  Each loan category’s unique risk characteristics guide management’s analysis and determination of an adequate specific reserve for that category.  For real estate loans, management considers factors that include historical loss rates, past due levels, collateral values, and anticipated economic conditions.  For commercial and industrial loans, management evaluates several factors including historical loss experience, current loan grades, expected future cash flows, individual loan reviews, internal and external analysis, and anticipated economic conditions.  For individual (consumer) loans, management evaluates factors such as historical and projected loss rates, past due levels, collateral values, and anticipated economic conditions.

 

16

 

SunBank’s allowance for loan and lease losses components is based on loss rates by loan grade, economic trends, and other risk factors.  Management determines estimated loss rates by loan grade based on current loan grade, remaining term, loan type, periodic quantification of actual losses over a period of time, and other factors.  Management believes its methodology reasonably measures the credit risk not captured in specific allocations and provides for an adequate aggregate allowance for loan and lease losses.

 

As management continues to closely monitor the allowance for loan and lease losses, the provision for these losses was increased to $1,260 for the first nine months of 2002, as compared to $925 for the same period of 2001.  This increase was due to loan growth of $64,687, since December 31, 2001 and the risks associated with any loan.  The 36.2% increase, coupled with increased recoveries, resulted in an allowance for loan and lease losses of 1.22% of total loans at September 30, 2002.

 

Management continues to enhance its methodology for analyzing the allowance for loan and leases losses and for assigning reserves.  However, the allowance for loan and lease losses still only represents management’s estimate of an amount adequate to absorb probable loan losses due to credit quality.  Management cannot precisely quantify that amount due to many uncertainties, including future global, national, and local economic conditions and other factors.  As a result, unforeseen developments may require management to increase the allowance for loan and lease losses.  Such developments could include changing economic conditions or negative developments with borrowers.  In addition, bank regulators periodically assess Sun Bancorp, Inc.’s allowance for loan and lease losses and may, consistent with examination guidelines and current information, require an increased allowance for loan and lease losses.  As a result, any number of factors may materially change management’s analysis in the future.

 

17

 

Deposits

 

Sun Bancorp, Inc.’s total deposits decreased $27,966 or 4.9%, to $601,843 at September 30, 2002, as compared to $573,877 at December 31, 2001.  This decrease is the result of Sun focusing on growing low cost core deposits (all deposits excluding time deposits).  This focus has resulted in core deposits increasing 9.2% or $27,080, to $319,890 at September 30, 2002, as compared to $292,810 at December 31, 2001.  A majority of the growth is the result of NOW accounts increasing $11,467 or 7.8% and savings deposits increasing $9,165 or 13.0% since December 31, 2001.  Over the same time frame, demand deposit accounts have grown $2,412, or 4.2%, to $60,402 at September 30, 2002, as Sun continues focusing on attracting non-interest bearing deposit accounts.

 

		September 30, 2002					December 31, 2001					Change
		Amount			% Total		Amount			% Total		Amount			%
Demand deposits		$	60,402		10.0	%	$	57,990		10.1	%	$	2,412		4.2	%
NOW accounts		157,806			26.2	%	146,339			25.5	%	11,467			7.8	%
Insured MMDA		22,094			3.7	%	18,058			3.1	%	4,036			22.4	%
Savings deposits		79,588			13.2	%	70,423			12.3	%	9,165			13.0	%
Time deposits		281,953			46.9	%	281,067			49.0	%	886			0.3	%
Total deposits		601,843			100.00	%	$	573,877		100.0	%	27,966			4.9	%
Core deposits*		319,890			53.2	%	$	292,810		51.0	%	$	27,880		9.2	%

 

* Core deposits are defined as total deposits less time deposits

 

Other Funding:

 

Sun continued using borrowed funds to supplement deposits during 2001 and 2002.  At September 30,  2002,  Sun had $220,000 in variable Federal Home Loan Bank (FHLB) borrowings, which represented a decrease of $2,000 in total FHLB borrowings from December 31, 2001.  These variable rate advances have maturities between 2008 and 2010.

 

Other funding sources of short-term monies include deposit customers’ cash management accounts (classified as securities sold under agreements to repurchase) and the Treasury Tax and Loan Note Option.  Sun continually monitors its borrowed funds positions and market conditions in order to maintain an effective funding structure.  When appropriate, Sun may take future action to modify its borrowed funds structure.

 

18

 

Net Interest Income and Net Interest Margin

 

Net interest income, the difference between interest income and interest expense, is the largest component of Sun’s earnings.  Net interest margin (NIM) measures the difference between the interest earning assets yield and the aggregate funding cost.  The NIM is calculated as taxable equivalent net interest income divided by average interest earning assets.

 

NIM increased by 3 basis points to 3.16% for the nine months ending September 30, 2002, as compared to 3.13% for the same period of 2001.  This increase resulted principally due to acquiring low-costing deposits through the acquisition of Guaranty Bank, N.A. and several Mellon Bank branches during 2001.  These deposits, coupled with management’s decision to shift funds from the investment portfolio to the higher-yielding loan portfolio and the decline in interest rates during the last 12 months, resulted in the higher NIM during 2002.

 

19

 

The following table sets forth comparative yields and rates paid for interest bearing assets and liabilities:

 

Nine Months Ended			September 30, 2002								September 30, 2001
(Dollars in thousands)			AVERAGE BALANCE			INTEREST			RATE		AVERAGE BALANCE			INTEREST			RATE
ASSETS
Interest-earning assets:
Interest-bearing deposits			$	16,520		$	269		2.18	%	$	34,749		1,087			4.18	%
Loans (net of unearned income)			563,050			30,673			7.28	%	467,764			29,902			8.55	%
Investments:	Taxable		242,838			10,313			5.66	%	295,823			14,257			6.43	%
	Tax-exempt		21,102			1,163			7.35	%	22,470			1,248			7.41	%
Total interest-earning assets			843,510			42,418			6.72	%	820,807			46,494			7.57	%
Noninterest-earning assets:
Cash and due from banks			19,229								14,721
Bank premises & equipment			14,472								13,006
Accrued interest and other assets			57,375								68,613
Less:  Allowance for loan losses			(6,714		)						(5,645		)
Unamortized loan fees			102								210
Total assets			$	927,974							$	911,712
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW Accounts			150,513			1,501			1.33	%	142,169			2,496			2.35	%
Insured Money Market Accounts			21,649			307			1.90	%	22,283			460			2.76	%
Savings deposits			76,960			945			1.64	%	69,585			961			1.85	%
Time deposits			275,004			8,536			4.15	%	260,663			12,321			6.32	%
Short-term borrowings			21,956			236			1.44	%	15,465			353			3.05	%
Subordinated debentures			20,112			1,428			9.47	%	14,898			1,098			9.83	%
Other borrowed funds			221,136			9,514			5.75	%	222,000			9,564			5.76	%
Total interest-bearing liabilities			787,330			22,467			3.82	%	747,064			27,253			4.88	%
Noninterest-bearing liabilities and shareholders’ equity:
Demand deposits			57,266								53,494
Accrued interest and other liabilities			3,682								43,391
Shareholders’ equity			79,696								67,762
Total liabilities and shareholders’ equity			$	927,974							$	911,712
Interest rate spread									2.90	%							2.69	%
Net interest income/margin						$	19,951		3.16	%				$	19,241		3.13	%

 

* Average loan balances include non-accrual loans and interest income includes fees on loans

* Yields on tax exempt loans and investments have been adjusted to a fully taxable equivalent basis using a 34% federal income tax rate

 

20

 

Other Operating Income

 

Other operating income, excluding security gains, increased $1,245 or 42.4% to $4,183 for the nine months ended September 30, 2002 as compared to 2001.  Increased service charges on deposits accounted for $791 of the increase.  The increase in service charges was primarily the result of a newly implemented program involving overdraft protection.  In addition, the first nine months of 2002 included the full impact of Sun purchasing three former Mellon branches and Guaranty Bank; in December 2001 two branches were sold, N.A. (6 branches) during the first nine months of 2001.  The sale of investment products contributed an additional $195 of the increase.  This program was initiated during the second quarter of 2001.  An investment in bank owned life insurance was made during 2002 to fund future increases in employee benefit expenses, which accounted for $393 of the increase from the nine months ended September 30, 2001.  Offsetting the increase was a decrease of $163 in trust fees from $726 for the nine months ended September 30, 2001.

 

Nine Months Ended		September 30, 2002					September 30, 2001					Change
		Amount			% Total		Amount			% Total		Amount			%
Service charge on deposit accounts		$	2,108		48.7	%	$	1,317		34.3	%	$	791		60.1	%
Trust income		563			13.0	%	726			18.9	%	(163		)	(22.5	)%
Net security gains		143			3.3	%	898			23.4	%	(755		)	(84.1	)%
Income from investment product sales		350			8.1	%	155			4.0	%	195			125.8	%
Bank owned life insurance		393			9.1	%	—			0.0	%	393			100.0	%
Income from insurance subsidiary		63			1.5	%	156			4.1	%	(93		)	(59.6	)%
Other income		706			16.3	%	584			15.3	%	122			20.9	%
Total other income		$	4,326		100.0	%	$	3,836		100.0	%	$	490		12.8	%

 

Excluding security gains, other operating income increased $392 or 31.7% to $1,627 for the three months ended September 30, 2002 as compared to 2001.  The significant increase is a result of the new overdraft program.

 

Three Months Ended		September 30, 2002					September 30, 2001					Change
		Amount			% Total		Amount			% Total		Amount			%
Service charge on deposit accounts		$	880		54.0	%	$	551		42.5	%	$	329		59.7	%
Trust income		222			13.6	%	226			17.4	%	(4		)	(1.8	)%
Net security gains		3			0.2	%	62			4.8	%	(59		)	(95.2	)%
Income from investment product sales		90			5.5	%	132			10.2	%	(42		)	(31.8	)%
Bank owned life insurance		187			11.5	%	—			0.0	%	187			100.0	%
Income from insurance subsidiary		14			0.9	%	65			5.0	%	(51		)	(78.5	)%
Other income		234			14.3	%	261			20.1	%	(27		)	(10.3	)%
Total other income		$	1,630		100.0	%	$	1,297		100.0	%	$	333		25.7	%

 

21

 

Other Operating Expenses

 

Other operating expenses increased $2,340 or 16.3% to $16,682 for the nine months ended September 30, 2002 as compared to 2001.  A majority of the increase, $1,600, is due to a 22.8% increase in salaries and employee benefits expenses.  This increase is the result of programs and acquisitions that took place during the first nine months of 2001 (three former Mellon branches, Guaranty Bank N.A., in addition to the sale of 2 branches in December 2001).  Net occupancy expense and furniture and equipment expenses remained stable from period to period as Sun continues its focus on cost control.  Other expenses increased 23.4% or $986 due to increases in normal business expenses associated with the growth in branches.  These expenses include: FDIC insurance, PA shares tax, advertising, and telephone.

 

Nine Months Ended		September 30, 2002					September 30, 2001					Change
		Amount			% Total		Amount			% Total		Amount			%
Salaries and employee benefits		$	8,624		51.7	%	$	7,024		49.0	%	$	1,600		22.8	%
Net occupancy expense		807			4.8	%	704			4.9	%	103			14.6	%
Furniture and equipment expenses		1,266			7.6	%	1,189			8.3	%	77			6.5	%
Amortization of intangibles		703			4.2	%	1,053			7.3	%	(350		)	(33.2	)%
Expenses of insurance subsidiary		83			.5	%	159			1.1	%	(76		)	(47.8	)%
Other expenses		5,199			31.2	%	4,213			29.4	%	986			23.4	%
Total other expenses		$	16,682		100.0	%	$	14,342		100.0	%	$	2,340		16.3	%

 

Other operating expenses increased $473 or 8.7% to $5,886 for the three months ended September 30, 2002 as compared to 2001.  The increase is a result of the new programs and acquisitions mentioned above in the nine-month analysis.

 

Three Months Ended		September 30, 2002					September 30, 2001					Change
		Amount			% Total		Amount			% Total		Amount			%
Salaries and employee benefits		$	2,991		50.8	%	$	2,738		50.6	%	$	253		9.2	%
Net occupancy expense		282			4.8	%	268			4.9	%	14			5.2	%
Furniture and equipment expenses		451			7.6	%	416			7.7	%	35			8.4	%
Amortization of intangibles		235			4.0	%	515			9.5	%	(280		)	54.4	%
Expenses of insurance subsidiary		22			0.4	%	59			1.1	%	(37		)	62.7	%
Other expenses		1,905			32.4	%	1,417			26.2	%	488			34.4	%
Total other expenses		$	5,886		100.0	%	$	5,413		100.0	%	$	473		8.7	%

 

 

22

 

Equity Securities Risk

 

Sun Bancorp, Inc.’s equity securities consist of marketable equities and restricted stock.  Marketable equities consist entirely of common stock, primarily of bank and bank and financial holding companies.  Restricted stock consists almost entirely of Federal Home Loan Bank stock.  Because FHLB stock is redeemable at par, SunBank carries it at cost and periodically evaluates the stock for impairment.  Possible impairment factors include potential dramatic changes to the housing and residential mortgage industry or the related regulatory environment.  Management currently does not believe any factors exist to suggest potential impairment.

 

Bank and bank and financial holding company stocks are subject to general industry risks, including competition from non-bank entities, credit risk, interest rate risk, and other factors.  Individual stocks could suffer price decreases due to circumstances at specific banks.  In addition, Sun Bancorp, Inc.’s bank stock investments are concentrated in Pennsylvania entities, so these investments could decline in value if there were a downturn in the state’s economy.  Other marketable stocks are comprised of non-bank, exchange-traded stocks that are subject to typical equity risks.

 

Sun Bancorp, Inc. continually monitors its risk associated with equity securities.   Sun Bancorp, Inc.’s other marketable equities and equities of banks outside Pennsylvania were acquired as part of a prior investment strategy.  In 2000, management began a long-term program to gradually reduce the equity investments and risk exposure to a nominal amount.  Management has successfully reduced Sun Bancorp, Inc.’s marketable equity price risk exposure, as shown below.

 

		September 30, 2002
		Cost			Fair Value			Unrealized Losses
Banks and bank and financial holding companies		$	3,121		$	2,534		$	(587	)
FHLB stock		11,593			11,593			—
Non-bank companies		87			61			(26		)
Total		$	14,801		$	14,188		$	(613	)
		December 31, 2001
		Cost			Fair Value			Unrealized Losses
Banks and bank and financial holding companies		$	3,749		$	3,102		$	(647	)
FHLB stock		11,114			11,114			—
Non-bank companies		87			80			(7		)
Total		$	14,950		$	14,296		$	(654	)

 

23

 

Capital Adequacy

 

Sun Bancorp, Inc. and SunBank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements could prompt regulatory action that, if undertaken, might materially affect Sun Bancorp, Inc.’s financial statements.  Under regulatory capital adequacy guidelines, Sun Bancorp, Inc. and SunBank must meet specific capital requirements involving quantitative measures of assets, liabilities, and certain off-balance sheet items (calculated using regulatory accounting practices).  All related factors are subject to qualitative judgments by the regulators.

 

Sun Bancorp, Inc. is currently, and has been in the past, designated a well-capitalized institution.  Shareholders’ equity increased $3,893 to $81,404 at September 30, 2002, from $77,511 at December 31, 2001.  Unrealized gains or losses, net of taxes on investment securities, are reported as accumulated other comprehensive income within shareholders’ equity.

 

Management is not aware of any events or regulatory restrictions that would have a material effect on Sun Bancorp, Inc.’s capital adequacy.

 

Sun Bancorp, Inc.’s strong capital position is evidenced by the following capital ratios, which are well above the regulatory minimum levels.

 

(Dollars in thousands)

 

		Actual					For Capital Adequacy Purposes		For Well Capitalized Purposes
		Amount			Ratio		Ratio		Ratio
As of September 30, 2002:
Total Capital (to Risk Weighted Assets)		$	81,383		13.4	%	8.0	%	10.0	%
Tier I Capital (to Risk Weighted Assets)		$	71,050		11.7	%	4.0	%	6.0	%
Tier I Capital (to Average Assets)		$	71,050		7.8	%	4.0	%	5.0	%
As of December 31, 2001:
Total Capital (to Risk Weighted Assets)		$	78,730		14.9	%	8.0	%	10.0	%
Tier I Capital (to Risk Weighted Assets)		$	68,582		13.0	%	4.0	%	6.0	%
Tier I Capital (to Average Assets)		$	68,582		7.1	%	4.0	%	6.0	%

 

24

 

Regulatory and Industry Merger Activity

 

From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of Sun Bancorp, Inc. and SunBank.  It cannot be predicted whether such legislation will be adopted or, if adopted, how such legislation would affect the business of Sun Bancorp, Inc. and SunBank.  As a consequence of the extensive regulation of commercial banking activities in the United States, Sun Bancorp, Inc.’s and SunBank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.  Except as specifically described above, management believes the effect of the provisions of legislation on the liquidity, capital resources, and results of operations of Sun Bancorp, Inc. will be immaterial. Future recommendations by regulatory authorities or proposed legislation, which if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on Sun Bancorp, Inc.’s results of operations.

 

Further, the business of Sun Bancorp, Inc. 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 SunBank and its competitors.  Management believes such consolidations and mergers, and diversification of products and services may enhance its competitive position as a community bank.

 

25

The following tables set forth Selected Financial Data for each of the past five quarters:

 

Quarter Ended

 

(dollars in thousands, except per share data)		9/30/2002			6/30/2002			3/31/2002			12/31/2001			9/30/2001
Financial Condition Data:
General
Total assets		$	948,590		$	923,322		$	922,473		$	920,855		$	992,475
Loans, net		579,233			575,616			547,080			515,520			527,925
Goodwill & Core Deposit Intangible		22,071			22,305			22,539			22,773			23,439
Total deposits		601,843			571,371			576,754			573,877			648,153
Non interest bearing		60,402			58,981			57,866			57,990			71,118
Savings		79,588			79,375			75,726			70,423			79,703
NOW		157,806			143,144			145,694			146,339			157,945
Money Market		22,094			23,056			21,735			18,058			21,634
Time Deposits		281,953			266,815			275,733			281,067			317,753
Total interest bearing deposits		541,441			512,390			518,888			515,887			577,035
Core deposits*		319,890			304,556			301,021			292,810			330,400
Trust preferred securities & subordinated debt		19,655			19,655			20,444			20,444			20,444
Stocholders’ equity		81,404			80,099			76,992			77,511			76,589
Trust assets under management		152,434			147,682			136,899			136,859			147,924
Asset Quality
Non-performing assets		$	4,852		$	4,461		$	5,017		$	4,853		$	4,755
Non-performing assets to total assets		0.51		%	0.48		%	0.54		%	0.53		%	0.48		%
Allowance for loan losses		7,178			6,790			6,537			6,204			6,098
Allowance for loan losses to total loans		1.22		%	1.17		%	1.18		%	1.20		%	1.14		%
Allowance for loan losses to non-performing loans		170.70		%	184.81		%	172.80		%	180.14		%	179.88		%
Non-performing loans to total loans		0.72		%	0.63		%	0.68		%	0.66		%	0.63		%
Capitalization – Bancorp
Shareholders’ equity to total assets		8.58		%	8.68		%	8.35		%	8.42		%	7.72		%
Operating Data
Cash earnings		$	1,864		$	2,109		$	1,722		$	4,360		$	1,983
Net income/(loss)		1,540			1,786			1,398			3,932			1,551
Net interest income		6,376			6,733			6,036			6,375			6,605
Provision for loan losses		450			405			405			575			325
Other operating income		1,630			1,576			1,120			5,672			1,297
Other operating expense		5,886			5,662			5,134			5,707			5,413
Performance Statistics
Net interest margin		3.12		%	3.35		%	3.01		%	3.09		%	3.13		%
Return on average assets		0.66		%	0.77		%	0.61		%	1.72		%	0.61		%
Return on average equity		7.58		%	8.97		%	7.17		%	22.80		%	8.20		%
Cash return on average assets		0.80		%	0.90		%	0.75		%	1.86		%	0.76		%
Cash return on average equity		9.18		%	10.59		%	8.83		%	25.25		%	10.49		%
Annualized net loan charge-offs to avg loans		0.04		%	0.11		%	0.05		%	0.35		%	0.16		%
Net charge-offs		62			152			72			469			214
Efficiency ratio		70.6			65.7			69.4			72.0			62.5
Per Share Data
Cash earnings per share		$	0.26		$	0.30		$	0.24		$	0.61		$	0.28
Basic earnings per share		0.21			0.25			0.20			0.55			0.22
Diluted earnings per share		0.21			0.25			0.20			0.55			0.22
Dividend declared per share		0.165			0.165			0.150			0.150			0.150
Book value		11.36			11.20			10.79			10.85			10.71
Common stock price:
High		23.98			24.49			18.05			17.50			17.50
Low		21.85			17.65			16.28			15.50			14.65
Close		22.48			24.49			17.70			17.11			17.50
Weighted average common shares:
Basic		7,165			7,141			7,143			7,148			7,151
Fully Diluted		7,248			7,164			7,164			7,162			7,162
End-of-period common shares:
Issued		7,276			7,266			7,237			7,236			7,235
Treasury		111			111			99			93			84

 

* Core deposits are defined as total deposits less time deposits

** Cash earnings take into account depreciation and amortization at a tax rate of 34%

26

 

PART II

 

Items 1, 2, 3, and 4 — Omitted pursuant to instructions to Part II

 

Item 4 — Controls and Procedures

 

Management maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. Management evaluated the effectiveness of the design and operation of management’s disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, Sun Bancorp, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that management’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in Sun Bancorp, Inc.’s periodic Securities and Exchange Commission filings. No significant changes were made to Sun Bancorp, Inc.’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

Item 5 — Other information

 

On October 24, 2002, the Board of Directors approved a quarterly dividend payment of $0.165 per share for shareholders of record November 29, 2002, payable on December 13, 2002.

 

On October 28, 2002, SunBank identified an apparent fraudulent $2 million commercial loan and began a full investigation of the situation as well as an exhaustive review of SunBank’s internal policies and controls.  After conducting the review, management is convinced that this is an isolated situation and that the situation is contained.   In addition, after reviewing the loan policies, controls, and underwriting, management is confident that they are fundamentally sound.  Management expects minimal or no impact to future earnings as assets of the alleged perpetrator have been frozen, the alleged perpetrator’s accounts at SunBank have been offset, and SunBank is making a claim under it’s insurance policy and evaluating its legal recourse options.  Management has also placed the loan on nonaccrual status and allocated a reserve of 100% of the principal.

 

Item 6 — Exhibits and Reports on Form 8-K

 

a.  No reports on Form 8-K were filed for the quarter ended September 30, 2002.

 

b.  Exhibits

99.1                     Certification of principal executive officer or principal financial officer pursuant to 18U.S.C. Section 1350.

 

99.2                     Certification of principal executive officer or principal financial officer pursuant to 18U.S.C. Section 1350.

 

27

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Sun Bancorp, Inc.
Date   November 14, 2002	/s/  Robert J. McCormack.
	Robert J. McCormack
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/  Wilmer D. Leinbach
	Wilmer D. Leinbach
	Chief Financial Officer
	(Principal Financial Officer)

 

28

 

CERTIFICATION

 

I, Robert J. McCormack, President and Chief Executive Officer, certify, that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Sun Bancorp, Inc.

 

2.             Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the period covered by this quarterly report.

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)           evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)           presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

 

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a)           all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

 

6.                                       The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

7.	Date:   November 14, 2002		By:	/s/ Robert J. McCormack
				President & Chief Executive Officer

 

 

CERTIFICATION

 

I, Wilmer D. Leinbach, Executive Vice President and Chief Financial Officer, certify, that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Sun Bancorp, Inc.

 

2.             Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances  under which such statements were made, not misleading with respect to the period covered by this quarterly report.

 

3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b)                                 evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)                                  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

 

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a)                                  all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b)                                 any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

 

8.                                       The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

9.	Date:   November 14, 2002		By:	/s/ Wilmer D. Leinbach
				Executive Vice President and Chief Financial Officer