SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10/A1
GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
SUN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
New Jersey 52-1382541
- --------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
226 Landis Avenue, Vineland, New Jersey 08360
- ----------------------------------------- ---------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (609) 691-7700
--------------
Securities to be registered pursuant to Section 12(b) of the Act:
None
----------------
(Title of Class)
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
<PAGE>
Item 1. Business
General
Sun Bancorp, Inc. (the "Company"), a New Jersey corporation, is a bank
holding company headquartered in Vineland, New Jersey and was incorporated in
January, 1985. In April 1995, the Company changed its name from Citizens
Investments, Inc. to its present name. The Company has one subsidiary, Sun
National Bank (the "Bank"), a national bank chartered in 1985. At March 31,
1996, the Company had total assets of $377.2 million, total deposits of $351.1
million and total stockholders' equity of $23.8 million. The Bank's deposits are
federally insured by the Bank Insurance Fund ("BIF"), which is administered by
the Federal Deposit Insurance Corporation ("FDIC"). The Company's principal
business is to serve as a holding company for the Bank.
At March 31, 1996, the Bank provided community banking activities
through seventeen branches located in southern New Jersey. The Bank offers
commercial and industrial loans, home equity loans, mortgage loans and
installment loans. The Bank considers its primary market area to be the New
Jersey counties of Atlantic, Burlington, Cape May, Cumberland, Mercer and Ocean.
The Bank's market area contains a diverse base of customers, including
agricultural, manufacturing, transportation and retail consumer businesses.
The Bank has one subsidiary, Med-Vine, Inc., a Delaware corporation
that holds a residential mortgage loan portfolio and an investment securities
portfolio.
In June 1994, The First National Bank of Tuckahoe was merged into the
Bank ("Tuckahoe Merger") and, in July 1994, Southern Ocean State Bank was merged
into the Bank ("Ocean Merger"). The Tuckahoe Merger and Ocean Merger were
purchase transactions that, in the aggregate, required approximately $14 million
in cash. The excess of cost over fair value of assets acquired resulting from
the Tuckahoe Merger and the Ocean Merger amounted to approximately $612,000 and
$920,000, respectively, and are being amortized over fifteen years using the
straight-line method.
On July 14, 1995, the Bank purchased four branches from NatWest Bank.
The Bank acquired approximately $52.3 million of deposit liabilities plus
$479,000 of accrued interest, $1.8 million of real estate and equipment,
$588,000 of loans plus related accrued interest and $610,000 in cash. The Bank
paid a premium of approximately $2.1 million, which is being amortized over
seven years.
On November 24, 1995, the Bank purchased four branches from New Jersey
National Bank. The Bank acquired approximately $70.2 million of deposit
liabilities plus $492,000 of accrued interest, $3.7 million of real estate and
equipment, $48,000 of loans plus related accrued interest and $1.0 million in
cash. The Bank paid a premium of approximately $2.4 million which is being
amortized over seven years.
The executive office of the Company is located at 226 Landis Avenue,
Vineland, New Jersey 08360 and its telephone number is (609) 691-7700.
Lending Activities
General. The principal lending activity of the Company is the
origination of commercial business and industrial loans, home equity loans,
mortgage loans and to a much lesser extent, installment loans. Home equity,
mortgage and installment loans are originated in the Company's primary market
area. Commercial business loans are originated for the purpose of financing
small- and medium-sized businesses located in the Company's primary market area.
2
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Company's loan portfolio by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------- -----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------------- ------------------- ---------------- ------------------ -------------------- --------------
$ % $ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --- --- --
(Dollars in thousands)
Type of Loan:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $137,625 68.35% $118,874 64.73 % $69,249 51.35% $41,642 49.94% $34,475 42.00 % $29,304 37.65%
Home equity 24,409 12.13 25,129 13.68 26,799 19.87 23,510 28.19 22,257 27.12 22,807 29.30
Residential
real
estate 28,953 14.38 29,287 15.95 29,633 21.97 19,151 22.97 26,213 31.94 26,434 33.96
Installment 12,319 6.12 12,409 6.76 10,787 8.00 151 0.18 219 0.27 384 0.49
Less:
Allowance
for loan
losses 1,960 0.97 2,065 1.12 1,607 1.19 1,067 1.28 1,084 1.32 1,095 1.41
-------- ------ -------- ------ -------- ------ ------ ------ ------- ------ ------- ------
Net loans $201,346 100.00% $183,634 100.00 % $134,861 100.00% $83,387 100.00% $82,080 100.00 % $77,834 100.00%
======= ====== ======= ====== ======= ====== ====== ====== ====== ====== ====== ======
Type of
Security:
Residential
real estate:
1-4 family $ 69,596 34.57% $68,904 37.52 % $72,466 53.73% $49,777 59.69% $52,532 64.00 % $53,576 68.83%
Other 7,935 3.94 6,295 3.43 839 0.62 757 0.91 372 0.45 259 0.33
Commercial
real
estate 100,481 49.90 85,239 46.42 48,845 36.22 28,682 34.40 23,930 29.15 19,796 25.43
Commercial
business
loans 14,496 7.20 13,822 7.53 6,621 4.91 5,031 6.03 6,099 7.43 4,105 5.27
Consumer 10,767 5.34 11,214 6.11 6,511 4.83 151 0.18 219 0.27 384 0.49
Other 31 0.02 225 0.11 1,186 0.88 56 0.07 12 0.01 809 1.04
Less:
Allowance
for loan
losses 1,960 0.97 2,065 1.12 1,607 1.19 1,067 1.28 1,084 1.32 1,095 1.41
------- ----- ------ ----- ------- ------- ------ ------- ------ ------- ------ ------
Net loans $201,346 100.00 $183,634 100.00 % $134,861 100.00% $83,387 100.00% $82,080 100.00 % $77,834 100.00%
======= ======= ======= ======= ======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
3
<PAGE>
Loan Maturity. The following table sets forth the maturity of the
Company's loan portfolio at December 31, 1995.
<TABLE>
<CAPTION>
Commercial Home Residential Unassigned
and Industrial Equity Real Estate Installment Reserves Total
-------------- ------ ----------- ----------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans $ 1,721 $ 295 $ 607 $ 35 $ - $ 2,658
Amounts due:
One year and less 29,009 - 673 717 - 30,399
After 1 year through 5 years 55,633 - 2,061 3,924 - 61,618
After 5 years 32,511 24,834 25,946 7,733 - 91,024
------- ------ ------ ------ ------ -------
Total amount due 118,874 25,129 29,287 12,409 - 185,699
Less:
Allowance for loan losses 1,094 319 403 54 195 2,065
-------- ------- ------- -------- ---- --------
Loans receivable, net $117,780 $24,810 $28,884 $12,355 $(195) $183,634
======= ====== ====== ====== ==== =======
</TABLE>
Loans maturing after December 31, 1996
<TABLE>
<CAPTION>
Commercial Home Residential
and Industrial Equity Real Estate Installment Total
-------------- ------ ----------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Pre-determined interest rates $ 8,496 $ 469 $20,848 $11,657 $ 41,470
Adjustable interest rates 79,648 24,365 7,159 - 111,172
------ ------ ------ -------- -------
$88,144 $24,834 $28,007 $11,657 $152,642
====== ====== ====== ====== =======
</TABLE>
Commercial and Industrial Loans. The Company originates several types
of commercial and industrial loans. Included as commercial loans are short- and
long-term business loans, lines of credit, non-residential mortgage loans and
real estate construction loans. The primary focus of the Company is on the
origination of commercial loans secured by real estate. The majority of the
Company's customers for these loans are small- to medium-sized businesses
located in the southern part of New Jersey. The Company expects to continue
emphasizing the origination of commercial and industrial loans in the future. At
March 31, 1996, commercial and industrial loans totaled $137.6 million, or 67.7%
of the total loan portfolio.
Loans secured by commercial properties or by tangible goods generally
involve a greater degree of risk than residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the mobility of collateral, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans
4
<PAGE>
secured by commercial real estate or by tangible goods is typically dependent
upon the successful operation of the related real estate or commercial project.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan may be impaired.
Home Equity Loans. The Company originates home equity loans, secured by
first or second mortgages owned or being purchased by the loan applicant. Home
equity loans are consumer revolving lines of credit. The interest rate charged
on such loans is usually a floating rate related to the prime lending rate. Home
equity loans may provide for interest only payments for the first two years with
principal payments to begin in the third year. A loan is typically originated as
a twenty year note that allows the borrower to draw upon the approved line of
credit during the same period as the note. The Company generally requires a loan
to value ratio in the range of 70% to 80% of the appraised value, less any
outstanding mortgage. At March 31, 1996, home equity loans totaled $24.4
million, or 12.0% of the total loan portfolio. The home equity loan portfolio
has increased in recent years while the residential mortgage loan portfolio has
decreased as a result of market conditions and the Company's management of
interest rate risk.
Residential Real Estate Loans. The Company originates residential
mortgage loans secured by property located in the Company's primary market area.
The majority of the Company's residential mortgage loans consist of loans
secured by owner-occupied, single-family residences. At March 31, 1996, the
Company had $29.0 million, or 14.2% of the total loan portfolio invested in
residential mortgage loans.
The Company primarily originates loans secured by first mortgages. The
Company's mortgage loan portfolio consists of both fixed-rate and
adjustable-rate loans secured by various types of collateral as discussed below.
Management generally originates residential mortgage loans in conformity with
Federal National Mortgage Association ("FNMA") standards so that the loans will
be eligible for sale in the secondary market. Management expects to continue
offering mortgage loans at market interest rates, with substantially the same
terms and conditions as it currently offers. As part of its monitoring of
interest rate risk, the Company has reduced its residential mortgage loan
portfolio in recent years by selling loans in the secondary market.
The Company originates 15 to 30 year adjustable-rate and fixed-rate
mortgage loans intended primarily for sale in the secondary market. From time to
time the Company originates these loans for retention in its portfolio.
The Company's residential mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Company the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the real property serving as
security for the loan. Due-on-sale clauses are an important means of adjusting
the rates on the Company's fixed-rate mortgage portfolio. The Company usually
exercises its rights under these clauses.
Installment Loans. As of March 31, 1996, installment loans totaled
$12.3 million, or 6.1% of the total loan portfolio. The Company originates
installment, or consumer loans secured by a variety of collateral, such as new
and used automobiles. The Company makes a very limited number of unsecured
installment loans. Through its Ocean Merger, the Company acquired a credit card
portfolio which it intends to eliminate once current customers have paid off
their lines of credit. No new advances or charges are being accepted.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as loan officers, customers, borrowers and referrals from
real estate brokers, accountants and attorneys.
5
<PAGE>
Upon receipt of a loan application, a credit report is ordered and
reviewed to verify specific information relating to the loan applicant's credit
worthiness. For mortgage loans, written verifications of employment and deposit
balances are requested by the Company. The Company requires that an appraisal of
the real estate intended to secure the proposed loan is undertaken by a
certified independent appraiser approved by the Company. After all of the
required information is obtained, the Company then makes its credit decision.
Depending on the type, collateral and amount of the credit request, various
levels of approval may be necessary. In general, loans of $100,000 or more must
be presented at an Officers' Loan Committee which has the authority to approve
unsecured loans to $750,000 and secured loans to $1.5 million. The Officers'
Loan Committee is comprised of the Bank's CEO, senior lending officer and
regional lending officers. Credit requests in excess of the Officers' Loan
Committee must also be presented to the Bank's Board of Directors for approval.
Loans under $100,000 are generally approved by various levels of Company
management.
Title insurance policies are required on all first mortgage loans.
Hazard insurance coverage is required on all properties securing loans made by
the Company.
Loan applicants are notified of the credit decision by letter. If the
loan is approved, the loan commitment specifies the terms and conditions of the
proposed loan including the amount, interest rate, amortization term, a brief
description of the required collateral, and the required insurance coverage. The
borrower must provide proof of fire, flood (if applicable) and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. Generally, title insurance endorsed
to the Bank is required on all first mortgage loans.
Loan Originations. The Company has dramatically increased its
origination of commercial and industrial loans in the past year from $24.3
million during the year ended December 31, 1994 to $96.7 million during the year
ended December 31, 1995. This increase is the result of the Company hiring
additional lending officers, review and support staff. In addition, the Company
has focused on lending to established businesses with strong cash flows in the
Company's market area. Most of the Company's commercial loans have adjustable
rate features that change in response to changes in the prime lending rate. The
Company expects its level of originations of commercial and industrial loans
will increase from the balances shown at March 31, 1996.
Loan Commitments. When a commercial loan is approved, the Company
issues a written commitment to the loan applicant. The commitment indicates the
loan amount, term and interest rate and is valid for approximately 45 days.
Approximately 90% of the Company's commitments are accepted or rejected by the
customer before the expiration of the commitment. At March 31, 1996, the Company
had approximately $28.4 million in commercial loan commitments outstanding.
Loans to One Borrower. Federal regulations limit unsecured loans to one
borrower in an amount equal to 15% of unimpaired capital and unimpaired surplus.
If the loan is secured by readily marketable collateral (generally financial
instruments and bullion, but not real estate), the limit is 25% of unimpaired
capital and unimpaired surplus. At March 31, 1996, the Company's loan to one
borrower limit was approximately $3.1 million. At March 31, 1996, the Company's
largest loan to one borrower was $2.85 million secured by a first lien on
commercial real estate. All loans to the Company's fifteen largest borrowers
were current as of March 31, 1996.
Non-Performing and Problem Assets
Loan Delinquencies. The Company's collection procedures provide that
after a commercial loan is ten days past due, or a residential mortgage loan is
fifteen days past due, a late charge is added. The borrower is contacted by mail
or telephone and payment is requested. If the delinquency continues,
6
<PAGE>
subsequent efforts are made to contact the borrower. If the loan continues to be
delinquent for ninety days or more, the Company usually initiates foreclosure
proceedings unless other repayment arrangements are made. Each delinquent loan
is reviewed on a case by case basis in accordance with the Company's lending
policy.
Loans are regularly reviewed and are placed on a non-accrual status
when they become ninety days delinquent, and, in the opinion of management, the
collection of additional interest is doubtful. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate ability to collect the loan.
Non-Performing Assets. The following table sets forth information
regarding loans that are delinquent ninety days or more. Management of the
Company believes that all loans accruing interest are adequately secured and in
the process of collection. At the dates shown, the Company had no restructured
loans within the definition of SFAS No. 15.
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------- ----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $1,056 $1,721 $1,178 $1,074 $428 $ 509
Home equity 404 295 341 204 33 -
Residential real estate 400 607 342 265 199 264
Installment 10 35 40 - - -
------ ------ ------ ------- ----- -----
Total $1,870 $2,658 $1,901 $1,543 $660 $ 773
===== ===== ===== ===== === ======
Accruing loans that are contractually past
due 90 days or more:
Commercial and industrial $135 $135 $525 $ - $ - $ 49
Home equity 91 279 30 - - -
Residential real estate 369 64 20 2 183 -
Installment 141 67 7 - - -
--- --- ---- ------- ---- ------
Total $736 $545 $582 $ 2 $183 $ 49
=== === === ======= === =====
Total non-accrual and 90-day past due loans $2,606 $3,203 $2,483 $1,545 $843 $ 822
Real estate owned 802 876 1,033 359 144 256
------ ------ ----- ------ --- -----
Total non-performing assets $3,408 $4,079 $3,516 $1,904 $987 $1,078
===== ===== ===== ===== === =====
Total non-accrual and 90-day past due loans
to net loans 1.29% 1.74% 1.84% 1.85% 1.03% 1.06%
Total non-accrual and 90-day past due loans
to total assets 0.69 0.87 1.14 1.38 0.81 0.73
Total non-performing assets to total assets 0.90 1.10 1.62 1.70 0.95 0.95
</TABLE>
Interest income that would have been recorded on loans on non-accrual
status, under the original terms of such loans, would have totaled $45,698 and
$276,955 for the three months ended March 31, 1996 and the year ended December
31, 1995, respectively.
7
<PAGE>
Classified Assets. Federal regulations provide for a classification
system for problem assets of insured institutions, including assets previously
treated as "scheduled items." Under this classification system, problem assets
of insured institutions are classified as "substandard," "doubtful" or "loss."
An asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection of principal in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
classified "special mention" are assets included on the Company's internal watch
list.
When an insured institution classifies problem assets as either
"substandard" or "doubtful," it may establish allowances for loan losses in an
amount deemed prudent by management. When an insured institution classifies
problem assets as "loss," it is required either to establish an allowance for
losses equal to 100% of that portion of the assets so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its allowances is subject to review by the Office of
the Comptroller of the Currency ("OCC"), which may order the establishment of
additional loss allowances.
At March 31, 1996, the Company had a total of $2.3 million of the loan
portfolio classified as "substandard." It had no amounts outstanding for loans
classified as "doubtful" or "loss."
Foreclosed Real Estate. Real estate acquired by the Company as a result
of foreclosure or by deed in lieu of foreclosure is classified as Real Estate
Owned until such time as it is sold. When Real Estate Owned is acquired, it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair value less disposal costs. Any write-down of Real Estate Owned is charged
to operations. At March 31, 1996, the Company had approximately $802,000
classified as Real Estate Owned.
Allowance for Losses on Loans and Real Estate Owned. It is the policy
of management to provide for losses on unidentified loans in its portfolio in
addition to classified loans. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Management also periodically performs
valuations of Real Estate Owned and establishes allowances to reduce book values
of the properties to their net realizable values when necessary.
The methodology employed by the Company to compute the Allowance for
Losses on Loans is based primarily on the Community Bank Allowance for Loan and
Lease Loss Initiative developed by the OCC. The concepts utilized are consistent
with other appropriate OCC banking directives. On a quarterly basis, the
adequacy of the Allowance is measured using the approved methodology and
presented to the Board of Directors for review and approval. The review examines
trends in portfolio mix, various concentrations in the portfolio such as type of
borrower, loan purpose and nature of collateral. Also considered are economic
factors which influence the adequacy of the Allowance. At least annually, the
Board of Directors evaluates the validity of the methodology being used to
compute the Allowance and makes any necessary changes to ensure the future
adequacy of the reserve.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary. Although management has increased the amount of the
Provision for Loan Losses, there can be no assurance that the allowance for loan
losses will be adequate to cover losses which may be realized in the future. In
addition, there can be
8
<PAGE>
no assurance that additional provisions for losses on loans and Real Estate
Owned will not be required.
Analysis of the Allowance for Losses on Loans. The following table sets
forth information with respect to the Company's allowance for losses on loans at
the dates indicated:
<TABLE>
<CAPTION>
At March 31, At December 31,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding $203,306 $185,698 $136,469 $83,990 $82,651 $78,367
======= ======= ======= ====== ====== ======
Average loans outstanding $191,292 $155,139 $108,265 $82,078 $76,164 $54,434
======= ======= ======= ====== ====== ======
Allowance for losses on loans,
beginning of period $2,065 $1,607 $1,067 $1,084 $1,095 $ 410
Charge-offs:
Commercial and industrial 301 286 312 - 132 -
Mortgage 9 73 1 25 - -
Installment 25 67 37 - - 13
------ ------ ------ ------- ------- ------
Total charge-offs 335 426 350 25 132 13
------ ------ ------ ------ ------ ------
Recoveries:
Commercial and industrial 1 33 22 3 - -
Mortgage 2 28 - - 20 -
Installment 2 15 13 3 5 5
------- ------ ------ ------- ------ ------
Total recoveries 5 76 35 6 25 5
------- ------ ------ ------- ------ ------
Net charge-offs 330 350 315 19 107 8
Provision for loan losses 225 808 383 2 96 300
Allowance on acquired loans - - 472 - - 393
------- ------- ------ ------- ------- -----
Allowance for losses on loans,
end of period $1,960 $2,065 $1,607 $1,067 $1,084 $1,095
===== ===== ===== ===== ===== =====
Allowance for losses on loans
as a percent of total loans
outstanding 0.96% 1.11% 1.18% 1.27% 1.31% 1.40%
Net loans charged off as a
percent of average loans
outstanding 0.17 0.23 0.29 0.02 0.14 0.01
</TABLE>
9
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Company's allowance for loan losses by loan category and
the percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category since the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------------- -----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Percent of Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of
period applicable to:
Commercial and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
industrial $1,047 67.69% $1,094 64.01% $ 847 50.60% $ 561 50.72% $ 487 49.28% $ 415 37.13%
Residential
real estate 126 14.24 403 15.96 231 21.94 91 23.85 267 23.59 137 34.81
Home equity 409 12.01 319 13.34 155 19.58 122 17.53 111 26.95 118 27.58
Installment 53 6.06 54 6.68 47 7.88 1 7.90 2 0.18 4 0.49
Unallocated 325 195 327 292 217 421
------ -------- ------ ------- ----- -------- ----- ------- ----- -------- ----- ------
Total
allowance $1,960 100.00% $2,065 100.00% $1,607 100.00% $1,067 100.00% $1,084 100.00% $1,095 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
10
<PAGE>
Investment Securities Activities
General. The investment policy of the Company is established by senior
management and approved by the Board of Directors. It is based on asset and
liability management goals and is designed to provide a portfolio of high
quality investments that optimize interest income and provides acceptable limits
of safety and liquidity. Prior to the fourth quarter of 1995, the investment
securities were purchased with the intent to hold them to maturity. During the
fourth quarter of 1995, in accordance with the implementation of the SFAS No.
115 Guide, the Company reclassified its entire portfolio of investment
securities as available for sale. As a result, the investment securities are
carried at their approximate market value.
The Company's investment goal is to invest available funds in
instruments that meet specific requirements of the Company's asset and liability
management goals. The investment activities of the Company consist primarily of
investments in federal funds, securities issued or guaranteed by the United
States Government or its agencies, states and political subdivisions and
corporate bonds.
Composition of Investment Securities Portfolio. The Company invests in
securities that are rated as investment grade. The investment portfolio
predominantly consists of securities issued or guaranteed by the United States
Government, its agencies, states and political subdivisions, and to a lesser
extent, corporate bonds. At March 31, 1996, the Company held an investment
portfolio with an amortized cost of approximately $131.5 million and an
estimated fair market value of $129.8 million, or 34.4% of total assets. See
Note 4 of Notes to Consolidated Financial Statements.
11
<PAGE>
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(In thousands)
Investment securities held to maturity:
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - $ - $20,034 $3,115
Government agency and
mortgage-backed securities - - 19,335 194
State and political subdivision securities - - 13,550 2,842
Other securities - - 7,406 137
---------- ---------- ------ ------
Total investment securities
held to maturity - - 60,325 6,288
---------- ---------- ------ -----
Investment securities available for sale:
U.S. Treasury securities 69,476 41,904 - -
Government agency and
mortgage-backed securities 18,302 41,998 - -
State and political subdivision securities 29,141 (1) 16,742 - -
Other securities 12,837 46,365 313 264
------- ------- ------- ------
Total investment securities
available for sale 129,756 147,009 313 264
------- ------- ------- ------
Total investment securities $129,756 $147,009 $60,638 $6,552
======= ======= ====== =====
</TABLE>
- ------------------
(1) At March 31, 1996, the Company owned $2,955,000 City of Vineland
Bond Anticipation Notes maturing August 15, 1996.
12
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Company's investment portfolio as of March 31, 1996:
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S.
Government
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations $5,254 6.28% $64,222 5.44% $ - -% $ - -% $69,476 5.51% $69,476
Government
Agency and
mortgage-
backed
securities 1,844 6.31 13,443 6.33 2,963 6.63 52 8.50 18,302 6.39 18,302
Municipal
Obligations 6,256 4.09 1,634 4.81 9,000 4.70 12,251 4.78 29,141 4.61 29,141
Other
Securities 5,405 5.15 5,534 5.90 119 7.13 1,779 6.13 12,837 5.63 12,837
------ ---- ------ ---- ------- ---- ------ ---- ------- ---- -------
Total $18,759 5.23% $84,833 5.60% $12,082 5.21% $14,082 4.97% $129,756 5.44% $129,756
====== ==== ====== ==== ====== ==== ====== ==== ======= ==== =======
</TABLE>
13
<PAGE>
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from the amortization, prepayment or sale of loans, maturities of
investment securities and operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate accounts and individual retirement accounts.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Company regularly evaluates the internal cost of funds, surveys
rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Company does not obtain funds through brokers, nor does it
solicit funds outside the State of New Jersey.
Deposit Portfolio. Average deposits were represented by various
types of demand and time deposits listed below.
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31, For the Years Ended December 31,
------------------- ------------------------------------------------------------------------
1996 Avg. Yield 1995 Avg. Yield 1994 Avg. Yield 1993 Avg. Yield
---- ---------- ---- ---------- ---- ---------- ---- ----------
(Dollars in thousands)
Non-interest bearing
<S> <C> <C> <C> <C> <C> <C> <C> <C>
demand deposits $60,967 -% $45,562 -% $26,949 -% $14,779 -%
Interest bearing demand
deposits 64,098 1.78 48,609 2.19 29,186 2.43 21,095 2.65
Savings deposits 65,579 2.00 57,470 2.28 44,968 3.10 23,104 3.18
Time deposits 142,264 5.46 96,256 5.48 45,611 3.95 39,717 4.20
-------- ---- ------- ---- ------- ---- ------ ----
Total $332,908 3.07% $247,897 3.09% $146,714 2.66% $98,695 3.00%
======= ==== ======= ==== ======= ==== ====== ====
</TABLE>
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining at March 31, 1996.
(In thousands)
Remaining maturity:
Three months or less $6,498
Over three through six months 6,278
Over six through twelve months 6,279
Over twelve months 2,005
------
$21,060
=======
14
<PAGE>
Borrowings. Deposits are the primary source of funds for the Company's
lending and investment activities as well as for general business purposes.
Should the need arise, the Company may access up to $5 million from a line of
credit from the Federal Reserve Bank of Philadelphia to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. It may also borrow
from the Federal Home Loan Bank of New York as well as three correspondent
banks. At March 31, 1996, there were no amounts borrowed under any line of
credit.
Market Area
The Company's primary market area consists of the New Jersey counties
of Atlantic, Burlington, Cape May, Cumberland, Mercer and Ocean. The primary
lending concentration is in the Company's market area, mainly Cumberland County
with a population of approximately of 138,000. Historically, the economy in the
Company's market area has been dependent on agriculture, transportation,
manufacturing and tourism. The deposit and loan activity of the Company is
significantly affected by economic conditions in its market area.
Competition
The Company encounters strong competition in both the attraction of
deposits and in the origination of loans. Competition for deposits and loans
primarily comes from commercial banks and thrift institutions located in its
market area. The Company competes with other institutions through its emphasis
on superior customer service, comprehensive product lines, competitive rates and
customer loyalty.
The Company is smaller in asset size compared to most of the
competitors in its market area. A recent trend has been that some competitors
have been purchased by larger financial institutions not locally headquartered.
Management believes that the Company can strengthen its position as a community
bank with an emphasis on serving all of the financial needs of the individuals
and businesses located within its primary market area.
Subsidiary Activity
The Company's sole subsidiary is the Bank. A national bank is
authorized to invest in the capital stock, securities or obligations of bank
service corporations and operating subsidiaries subject to certain conditions
and limitations. A bank service corporation is any corporation, wholly-owned by
an FDIC- insured bank, that provides services to depository institutions and
others. These services include activities such as check sorting and customer
account statement preparation and distribution. Service corporations are also
authorized to engage in non-banking activities that the Federal Reserve has
approved by regulation to be permissible for bank holding companies as so
closely related to banking as to be a proper incident thereto. The aggregate
investment in any one bank service corporation is limited to ten percent of the
bank's paid-in and unimpaired capital and surplus, and is limited to five
percent of its total assets for all service corporations. An operating
subsidiary is a corporation whose voting stock is at least eighty percent owned
by the national bank. An operating subsidiary may perform any activity that is
part of or incidental to the business of banking, other than accepting deposits.
There is no prescribed statutory or regulatory investment limitation on
investments in an operating subsidiary. The Bank has one operating subsidiary,
Med-Vine, Inc., a Delaware corporation that holds a residential mortgage loan
portfolio and an investment securities portfolio.
15
<PAGE>
Personnel
At March 31, 1996, the Company had 157 full-time and 45 part-time
employees, all of whom were on the payroll of the Bank. None of the Company's
employees are represented by a collective bargaining group. The Company believes
that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
General. The Company is a bank holding company subject to supervision
and regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") pursuant to the Bank Holding Company Act ("BHCA"), and files
with the Federal Reserve Board an annual report and such additional reports as
the Federal Reserve Board may require. As a bank holding company, the Company's
activities and those of its banking and non-banking subsidiaries are limited to
the business of banking and activities closely related or incidental to banking.
The Company may not directly or indirectly acquire the ownership or control of
more than five percent of any class of voting shares or substantially all of the
assets of any company, including a bank, without the prior approval of the
Federal Reserve Board. The Company is also subject to certain anti-fraud
provisions of federal securities law and a limited number of other regulations
of the Securities and Exchange Commission (the "SEC").
The Company's wholly-owned subsidiary bank is subject to supervision
and examination by various regulatory authorities. The OCC is the primary
regulatory supervisor of the Bank. The deposits of the Bank are insured by, and
therefore the Bank is subject to the regulations of, the FDIC. The Bank is also
subject to requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operation of the Bank.
Holding Company Liability. Federal Reserve Board policy requires bank
holding companies to serve as a source of financial strength to their subsidiary
banks by standing ready to use available resources to provide adequate capital
funds to subsidiary banks during periods of financial stress or adversity. A
bank holding company also could be liable under federal banking law for the
capital deficiencies of an undercapitalized bank subsidiary. In the event of a
bank holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Federal law (12 U.S.C.ss.55) permits the OCC to order the pro-rata
assessment of stockholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in such national
bank's capital stock. This statute also provides for the enforcement of any such
pro-rata assessment of stockholders of such national bank to cover such
impairment of capital stock by sale, to the extent necessary, of the capital
stock of any assessed stockholder failing to pay the assessment. Similarly, the
laws of certain states provide for such assessment and sale with respect to
banks chartered by such states. The Company, as the sole stockholder of its
subsidiary bank, is subject to such provisions.
16
<PAGE>
Transactions with Affiliates. The Bank is subject to restrictions under
federal law which limit certain transactions by the Bank with the Company and
the Bank's non-banking subsidiary including loans, other extensions of credit,
investments or asset purchases. Such transactions by any subsidiary bank with
any one affiliate are limited in amount to ten percent of such subsidiary bank's
capital and surplus and with all affiliates to twenty percent of such subsidiary
bank's capital and surplus. Furthermore, such loans and extensions of credit, as
well as certain other transactions, are required to be secured in accordance
with specific statutory requirements. The purchase of low quality assets from
affiliates is generally prohibited. Federal law also provides that certain
transactions with affiliates including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same, or at least as favorable to the institution as those
prevailing at the time for comparable transactions involving other non-qualified
companies or, in the absence of comparable transactions, on terms and
circumstances, including credit standards, that in good faith would be offered
to, or would apply to, non affiliated companies.
Capital Requirements. Certain regulations require the maintenance of
minimum risk-based capital ratios. These ratios are calculated with reference to
risk-weighted assets, which include on- and off-balance sheet exposures. The
Federal Reserve Board and the OCC have established similar guidelines for the
Company and its national bank subsidiary. The Federal Reserve Board and the OCC
have also adopted minimum leverage ratios for bank holding companies and
national banks. At March 31, 1996, capital requirements for "well capitalized"
institutions imposed a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6.0% and a leverage ratio of 5%. "Adequately
capitalized" institutions must possess a total risk-based capital ratio of 8%, a
Tier 1 risk-based capital ratio of 4% and a leverage ratio of 4%.
The following table sets forth the Bank's regulatory capital position
at March 31, 1996, as compared to the minimum capital requirements imposed on
the Bank by the OCC at that date:
Percentage
Amount of Assets (1)
------ -------------
(Dollars in thousands)
Common Shareholder's Equity $24,724 6.55%
Tier 1 Capital:
Actual 18,739 8.28
Required 18,101 8.00
------ ----
Excess $ 638 0.28%
======= ====
Tier 1 and Tier 2 Capital:
Actual $20,699 9.15%
Required 9,051 4.00
------- ----
Excess $11,648 5.15%
====== ====
Leverage:
Actual $24,724 5.24%
Required 18,873 4.00
------ ----
Excess $ 5,851 1.24%
====== ====
- ------------------------------------
(1) Generally accepted accounting principles ("GAAP") or risk- weighted
assets as appropriate.
17
<PAGE>
Prompt Corrective Action. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") established a system of prompt corrective
action to resolve the problems of undercapitalized institutions. Under this
system, the banking regulators are required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the final rules implementing the
prompt corrective action provisions, an institution shall be deemed to be (i)
"well capitalized" if it has a total risk-based capital ratio of 10.0% or more,
has a Tier 1 risk-based capital ratio (core or leverage capital to risk-weighted
assets) of 6.0% or more, has a leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized",
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. In addition, under certain
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized). At March 31, 1996, the Company was classified by its
regulators as "adequately capitalized." There are no conditions or events since
March 31, 1996 that management believes have changed the Company's category.
Brokered Deposits. FDIC regulations adopted under FDICIA prohibit a
bank from accepting brokered deposits (which term is defined to include any
deposit obtained, directly or indirectly, from any person engaged in the
business of placing deposits with, or selling interests in deposits of, an
insured depository institution) unless (i) it is well capitalized, or (ii) it is
adequately capitalized and receives a waiver from the FDIC. For purposes of this
regulation, a bank is defined to be well capitalized if it maintains a leverage
ratio of at least five percent, a risk-adjusted Tier 1 capital ratio of at least
six percent and a risk-adjusted total capital ratio of at least ten percent and
is not otherwise in a "troubled condition" as specified by its appropriate
federal regulatory agency. A bank that is adequately capitalized and that
accepts brokered deposits under a waiver from the FDIC may not pay an interest
rate on any deposit in excess of seventy-five basis points over certain
prevailing market rates. There are no such restrictions on a bank that is well
capitalized. The Company has no current plan to use brokered deposits, and
therefore does not believe that the brokered deposits regulation will have a
material effect on its funding or liquidity.
Regulatory Restrictions on Dividends. It is the policy of the Federal
Reserve Board that bank holding companies should pay cash dividends on common
stock only out of income available over the past year and only if prospective
earnings retention is consistent with the organization's expected future needs.
The policy further provides that bank holding companies should not maintain a
level of cash dividends that undermines the bank holding company's ability to
serve as a source of strength to its subsidiary banks. Principal sources of
revenue available to the Company are dividends received from the Bank and
interest earned on funds held by the Company. Federal law imposes limitations on
the payment of dividends by the Bank to the Company. Two different calculations
are performed to measure the amount of dividends that may be paid: a recent
earnings test and an undivided profits test. Under the recent earnings test, a
dividend may not be paid if the total of all dividends declared by a national
bank in any calendar year is in excess of the current year's net profits
combined with the retained net profits of the two preceding years unless the
bank obtains the approval of the OCC. Under the undivided profits test,
dividends may not be paid in excess of a bank's undivided profits then on hand,
after deducting bad debts in excess of the reserve for loan losses. Under the
recent earnings test, which is the more restrictive of the two tests, at March
31, 1996, the Bank could pay up to $5.3 million in dividends to the Company.
18
<PAGE>
In addition, the Federal regulatory agencies are authorized to prohibit
a banking organization from engaging in an unsafe or unsound banking practice.
Depending upon the circumstances, the agencies could take the position that
paying a dividend would constitute an unsafe or unsound banking practice.
FDIC Insurance Assessments. The deposits of the Bank are insured
by BIF of the FDIC and are subject to FDIC deposit insurance assessments.
The FDIC has adopted a risk-based assessment system under which the
assessment rate for an insured depository institution varies according to the
level of risk involved in its activities. An institution's risk category is
based partly upon whether the institution is well capitalized, adequately
capitalized, or less than adequately capitalized. Each insured depository
institution is assigned to one of the following "supervisory subgroups": "A,"
"B" or "C." Group "A" institutions are financial sound institutions with only a
few minor weaknesses. Group "B" institutions are institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration.
Group "C" institutions are institutions for which there is substantial
probability that the FDIC will suffer a loss in connection with the institution
unless effective action is taken to correct the areas of weakness. Based on its
capital and supervisory subgroups, each BIF member institution is assigned an
annual FDIC assessment rate varying between zero and 0.31 percent of deposits.
It remains possible that assessments will be raised to higher levels in the
future. The FDIC is also authorized to impose special additional assessments.
Conservatorship and Receivership Powers of Federal Banking Agencies.
FDICIA significantly expanded the authority of the federal banking regulators to
place depository institutions into conservatorship or receivership to include,
among other things, appointment of the FDIC as conservator or receiver of an
undercapitalized institution under certain circumstances. In the event a bank is
placed into conservatorship or receivership, the FDIC is required, subject to
certain exceptions, to choose the method for resolving the institution that is
least costly to the BIF, such as liquidation. In any event, if the Bank were
placed into conservatorship or receivership, because of the cross-guarantee
provisions of the Federal Deposit Insurance Act, the Company, as the sole
shareholder of the Bank, would likely lose its investment in the Bank.
The FDIC may provide federal assistance to a "troubled institution"
without placing the institution into conservatorship or receivership. In such
case, pre-existing debt holders and stockholders may be required to make
substantial concessions and, insofar as practical, the FDIC will succeed to
their interests in proportion to the amount of federal assistance provided.
Legislation, including proposals to overhaul the banking regulatory
system and to limit the investments that a depository institution may make with
insured funds is introduced in Congress from time to time. The Company cannot
determine the ultimate effect that subsequently adopted regulations, or any
other potential legislation, if enacted, would have upon its financial condition
or results of operations.
Restrictions on the Acquisition of the Company. Federal and state
statutes require prior approval by or notice to the appropriate banking
regulatory authority before any person would be permitted to acquire control of
the Company or a specific percentage of its common stock. Under the BHCA, any
company (other than an existing bank holding company) is required to obtain
prior approval from the Federal Reserve Board before it may obtain control of
the Company. Control generally is defined to mean (i) directly or indirectly
owning, controlling or having the power to vote twenty-five percent or more of
any class of voting securities of the Company, (ii) controlling the election of
a majority of the Company's directors, or (iii) directly or indirectly
exercising a controlling influence over the Company's management or policies.
Prior Federal Reserve Board approval is required before an existing bank holding
company can acquire more than five percent of the Company's common stock. Under
the Federal Reserve Change in Bank Control Act ("CIBCA"), a prior written notice
must be submitted to the Federal Reserve Board if any individual or other
person, or group acting in concert, seeks to acquire ten percent or more of the
shares of the Company's outstanding common stock.
19
<PAGE>
Under the CIBCA, a proposed acquisition may be consummated unless the Federal
Reserve Board disapproves of the acquisition within sixty days after a complete
notice is filed or the Federal Reserve Board extends such sixty day period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking accounts) and
non-personal time deposits. As of March 31, 1996, the Bank met its reserve
requirements.
The Company is subject to examination, regulation and periodic
reporting under the BHCA, as administered by the Federal Reserve Board. The
Federal Reserve Board has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the OCC
for the Bank. The Federal Reserve Board has also adopted similar risk-based
capital requirements with the same ratio requirements as those required by the
OCC for the Bank. The Company is in compliance with these requirements.
The Company is required to obtain prior approval of the Federal Reserve
Board to acquire all, or substantially all, of the assets of any bank or bank
holding company. Prior Federal Reserve Board approval is required for the
Company to acquire direct or indirect ownership or control of any voting
securities of any bank or bank holding company if, after giving effect to such
acquisition, it would, directly or indirectly, own or control more than five
percent of any voting shares of such bank or bank holding company. The BHCA also
prohibits the acquisition by the Company of more than five percent of the voting
shares, or substantially all the assets, of a bank located outside the State of
New Jersey unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. New Jersey banking law permits the
interstate acquisition of banking institutions by bank holding companies on a
regional and reciprocal basis. This provision also applies to savings banks or
holding companies for savings banks. In addition to the approval of the Federal
Reserve Board, before any bank acquisition can be completed, prior approval
thereof may also be required to be obtained from other agencies having
supervisory jurisdiction over the bank to be acquired.
In addition, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities the Federal Reserve Board has determined by
regulation to be so closely related to banking are: (i) making or servicing
loans; (ii) performing certain data processing services; (iii) providing
discount brokerage service; (iv) acting as fiduciary, investment or financial
advisor; (v) leasing personal or real property under certain circumstances; (vi)
making investments in corporations or projects designed primarily to promote
community welfare; and (vii) acquiring a savings and loan association.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extension of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of such holding company or its subsidiaries, and on the
acceptance of such stocks or securities as collateral for loans. Moreover,
subsidiaries of bank holding companies are prohibited from engaging in certain
tie-in arrangements (with the holding company or any of its subsidiaries) in
connection with any extension of credit or lease or sale of property or
furnishing of services.
The Company and the Bank, are affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for the management of the Company to
accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
20
<PAGE>
Item 2. Financial Information
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company for the preceding five fiscal years ended December 31, 1995 and for
the quarters ended March 31, 1996 and 1995. The consolidated income statement
data of the Company for the three month periods ended March 31, 1996 and 1995,
and the consolidated balance sheet data of the Company as of March 31, 1996 are
derived from the Company's unaudited financial statements. The consolidated
income statement data of the Company for each of the three years ended December
31, 1995 and the consolidated balance sheet data of the Company as of December
31, 1995 and December 31, 1994 are derived from the Company's audited
consolidated financial statements which are included elsewhere in this
Registration Statement. The consolidated income statement data of the Company
for each of the two years ended December 31, 1992 and the consolidated balance
sheet data of the Company as of December 31, 1993, 1992 and 1991 are derived
from the Company's audited consolidated financial statements, which are not
included herein. This summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
included in this Registration Statement.
21
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
At or For The Three Months
Ended March 31, At or For the Year Ended December 31,
------------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Unaudited)
(Dollars in thousands, except per share amounts)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Assets $377,279 $238,238 $369,895 $217,351 $112,015 $104,162 $112,950
Cash and cash equivalents 23,085 24,619 17,242 10,171 17,582 12,755 21,841
Investments 129,756 63,077 147,009 60,638 6,552 4,915 3,977
Loans receivable 201,346 139,115 183,634 134,861 83,387 82,080 77,834
Deposits 351,075 215,152 335,248 196,019 99,099 91,837 101,563
Securities sold under agreements
to repurchase 462 - - - - - -
Borrowings 29 - 8,000 - - - 151
Stockholders' equity 23,780 22,046 24,671 20,571 12,306 11,178 10,331
Summary of Operations:
Interest income $ 6,454 $ 4,382 $ 20,850 $ 12,194 $ 8,164 $ 8,629 $6,255
Interest expense 2,597 1,495 7,687 3,938 2,837 3,638 3,360
-------- -------- -------- -------- -------- -------- --------
Net interest income 3,857 2,887 13,163 8,256 5,327 4,991 2,895
Provision for loan losses 225 230 808 383 2 96 300
-------- -------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses 3,632 2,657 12,355 7,873 5,317 4,895 2,595
Other income 502 500 1,651 732 480 770 426
Other expense 3,129 2,294 10,047 5,991 4,198 4,354 2,971
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
extraordinary item and cumulative
effect of an accounting change 1,005 863 3,959 2,614 1,599 1,311 50
Income tax expense 336 232 1,140 775 634 498 72
-------- -------- -------- -------- -------- -------- ---------
Income (loss) before extraordinary
item and cumulative effect of an
accounting change 669 631 2,819 1,839 965 813 (22)
Extraordinary item - - - - - - 72
Cumulative effect of an accounting
change - - - - 163 - -
-------- -------- -------- -------- -------- -------- --------
Net income $ 669 $ 631 $ 2,819 $ 1,839 $ 1,128 $ 813 $ 50
======== ========= ======== ======== ======== ======== =========
Per Share Data:
Earnings per common and
common equivalent share:
Income (loss) before
extraordinary item and
cumulative effect of an
accounting change $ 0.38 $0.38 $ 1.60 $ 1.49 $ 0.92 $ 0.77 $(0.01)
Extraordinary item - - - - - - 0.06
Cumulative effect of an
accounting change - - - - 0.14 - -
----- ----- ----- ----- ----- ----- -----
Net income $ 0.38 $ 0.38 $ 1.60 $ 1.49 $ 1.06 $ 0.77 $ 0.05
===== ===== ===== ===== ===== ===== =====
Period-end per share book value $14.40 $13.37 $14.94 $13.22 $12.09 $11.53 $10.23
===== ===== ===== ===== ===== ===== =====
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
At or For The
Three Months
Ended March 31, At or For the Year Ended December 31,
--------------- --------------------------------------------------------------------------------
Selected Ratios 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Return on average assets
(net income divided by
<S> <C> <C> <C> <C> <C> <C>
average total assets)(1) 0.74 % 1.03 % 1.09 % 1.04 % 0.74 % 0.06 %
Return on average equity
(net income divided by
average equity)(1) 10.92 12.42 11.74 9.61 7.56 0.49
Equity to assets at period end 6.30 6.67 9.46 10.99 10.73 9.15
Net interest rate spread 4.23 4.61 4.79 4.64 3.95 2.99
Net yield on average
interest-earning assets 4.82 5.30 5.39 5.29 4.96 4.16
Non-performing loans to
total loans 0.92 1.43 1.39 1.84 0.80 1.00
Non-performing assets to
total loans and other real
estate owned 1.31 1.89 2.13 2.25 0.97 1.33
Net charge-offs to average
total loans 0.17 0.22 0.29 0.02 0.14 0.01
</TABLE>
- -------------------
(1) Annualized
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The primary activity of the Company is the oversight of the Bank.
Through the Bank, the Company engages in community banking activities by
accepting deposit accounts from the general public and investing such funds in a
variety of loans. These community banking activities primarily include providing
home equity loans, mortgage loans, a variety of commercial business loans and,
to a much lesser extent, installment loans. The Company also maintains an
investment securities portfolio. The Company's lending and investing activities
are funded by retail deposits. The largest component of the Company's net income
is net interest income. Consequently, the Company's earnings are primarily
dependent on its net interest income, which is determined by (i) the difference
between rates of interest earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread"), and (ii) the relative
amounts of interest-earning assets and interest bearing liabilities. The
Company's net income is also affected by its provision for loan losses, as well
as the amount of non-interest income and non-interest expenses, such as salaries
and employee benefits, professional fees and services, deposit insurance
premiums, occupancy and equipment costs and income taxes.
Asset and Liability Management
The Company's exposure to interest rate risk results from the
difference in maturities on interest-bearing liabilities and interest-earning
assets and the volatility of interest rates. Because the Company's assets have a
shorter maturity than its liabilities, the Company's earnings will tend to be
negatively affected during periods of declining interest rates. Conversely, this
mismatch should benefit the Company during periods of rising interest rates.
Management monitors the relationship between the interest rate sensitivity of
the Company's assets and liabilities.
23
<PAGE>
In this regard, the Company emphasizes the origination of short-term commercial
loans and revolving home equity loans and de-emphasizes the origination of
long-term mortgage loans.
Gap Analysis
Banks have become increasingly concerned with the extent to which they
are able to match maturities of interest-earning assets and interest-bearing
liabilities. Such matching is facilitated by examining the extent to which such
assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is
considered to be interest rate sensitive if it will mature or reprice within a
specific time period. The interest rate sensitivity gap is defined as the excess
of interest-earning assets maturing or repricing within a specific time period
over interest-bearing liabilities maturing or repricing within that time period.
On a monthly basis, the Company monitors its gap, primarily its six-month and
one-year maturities and works to maintain its gap within a range that does not
exceed a negative 15% of total assets. The Company attempts to maintain its
ratio of rate sensitive assets to rate sensitive liabilities between 75% to
125%.
Management and the Board of Directors has positioned the Company to a
relatively neutral position with respect to its exposure to interest rate risk.
As described below, sudden changes to interest rates should not have a material
impact to the Company's results of operations. Management monitors its gap
position at monthly meetings. The Asset/Liability Committee of the Bank's Board
of Directors meets quarterly to discuss the Company's interest rate risk. Should
the Company experience a positive or negative mismatch in excess of the approved
range, it has a number of remedial options. It has the ability to reposition its
investment portfolio to include securities with more advantageous repricing
and/or maturity characteristics. It can attract variable or fixed-rate loan
products as appropriate. It can also price deposit products to attract deposits
with maturity characteristics that can lower its exposure to interest rate risk.
At March 31, 1996, total interest-bearing assets maturing or repricing
within one year exceeded total interest-earning liabilities maturing or
repricing during the same time period by $29.9 million, representing a positive
cumulative one-year gap ratio of 8.75%. As a result, the yield on
interest-earning assets of the Company should adjust to changes in interest
rates at a faster rate than the cost of the Company's interest-bearing
liabilities. Consequently, the Company's one-year gap mismatch could have a
negative effect on the Company's net interest margin during periods of declining
market interest rates.
The following table summarizes the maturity and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities as of March 31, 1996. All amounts are categorized by their actual
maturity or repricing date with the exception of savings deposits. The Company's
historical experience with savings deposits reflects an insignificant change in
deposit levels for these core deposits. As a result, the Company allocates 30%
to the 0-3 month category, 10% to the 4-12 month category, 60% to the 1-5 year
category and 0% to the over 5 year category.
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
(Amounts in Thousands)
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Loans receivable ................... $ 111,636 $ 22,464 $ 35,242 $ 33,227 $ 202,569
Investment securities .............. 8,621 10,137 84,733 26,265 129,756
Federal funds sold ................. 8,280 -- -- -- 8,280
--------- --------- --------- --------- ---------
Total interest-earning assets .... 128,537 32,601 119,975 59,492 340,605
--------- --------- --------- --------- ---------
Interest-bearing deposit accounts .. 89,849 75,880 118,567 -- 284,296
Borrowed money ..................... 462 -- -- -- 462
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 90,311 75,880 118,567 -- 284,758
--------- --------- --------- --------- ---------
Periodic Gap ....................... $ 38,226 $ (43,279) $ 1,408 $ 59,492 $ 55,847
========= ========= ========= ========= =========
Cumulative Gap ..................... $ 38,226 $ (5,053) $ (41,871) $ 60,900
========= ========= ========= =========
Cumulative Gap Ratio ............... 11.22% (1.48)% (12.29)% 17.88%
========= ========= ========= =========
</TABLE>
24
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Three Month Period Ended March 31, Year Ended December 31,
------------------------------------- -------------------------------------------------------------
1996(1) 1995 1994
------------------------------------- -------------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(2)........ $191,292 $4,563 9.54% $155,139 $15,101 9.73% $108,265 $9,591 8.86%
Investment securities...... 132,710 1,861 5.61 85,445 5,286 6.19 33,931 2,151 6.34
Federal funds sold......... 2,308 30 5.20 7,756 463 5.97 10,988 452 4.11
------- ------ ---- ------ ------- ---- ------ ------ -----
Total interest-
earning assets.......... 326,310 6,454 7.91 248,340 20,850 8.40 153,184 12,194 7.96
Non-interest-earning
assets.................... 36,216 24,409 15,076
------- ------ -------
Total assets.............. $362,526 $272,749 $168,260
======= ======= =======
Interest-bearing
liabilities:
Interest-bearing
deposit accounts......... $271,941 2,556 3.76 $202,276 7,640 3.78 $122,843 3,845 3.13
Borrowed money............. 2,874 41 5.71 775 47 6.06 1,202 93 7.74
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
bearing liabilities..... 274,815 2,597 3.78 203,051 7,687 3.79 124,045 3,938 3.17
Non-interest bearing
liabilities............... 63,218 47,004 28,551
------- ------- -------
Total liabilities.......... 338,033 250,055 152,596
------- ------- -------
Stockholders' equity 24,493 22,694 15,664
------- ------- -------
Total liabilities
and stockholders'
equity................... $362,526 $272,749 $168,260
======= ======= =======
Net interest income......... $3,857 $13,163 $8,256
===== ====== =====
Interest rate spread(3)..... 4.13% 4.61% 4.79%
==== ==== ====
Net yield on interest-
earning assets(4)......... 4.73% 5.30% 5.39%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities............... 118.74% 122.30% 123.49%
====== ====== ======
</TABLE>
- -------------------
(1) Ratios for three month period is stated on an annualized basis. Such
ratios and results are not necessarily indicative of results that may
be expected for the full year.
(2) Average balances include non-accrual loans.
(3) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as
a percentage of average interest-earning assets.
25
<PAGE>
Average Balance Sheet (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------ ------------------------------ --------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(2)....... $ 82,078 $7,439 9.06% $ 76,164 $7,615 10.00% $54,434 $5,338 9.81%
Investment securities..... 5,774 340 5.89 4,470 314 7.02 3,639 276 7.58
Federal funds sold........ 12,753 385 3.02 19,967 700 3.51 11,576 641 5.54
------ ------ ---- ------- ------ ---- ------ ----- ----
Total interest-
earning assets......... 100,605 8,164 8.11 100,601 8,629 8.58 69,649 6,255 8.98
Non-interest-earning
assets................... 8,272 8,981 8,255
------- ------- -------
Total assets............. $108,877 $109,582 $77,904
======= ======= ======
Interest-bearing
liabilities:
Interest-bearing
deposit accounts........ $81,900 2,837 3.46 $ 78,479 3,618 4.61 $55,948 3,343 5.98
Borrowed money............ - - - 71 20 28.17 163 17 10.43
-------- ------- ------- -------- ------ ----- ------- ------ -----
Total interest-
bearing liabilities.... 81,900 2,837 3.46 78,550 3,638 4.63 56,111 3,360 5.99
Non-interest bearing
liabilities.............. 15,235 20,277 11,505
------- ------- ------
Total liabilities......... 97,123 98,343 67,615
------- ------- ------
Stockholders' equity 11,742 10,755 10,288
------- ------- ------
Total liabilities
and stockholders'
equity.................. $108,877 $109,582 $77,904
======= ======= ======
Net interest income........ $5,327 $4,991 $2,895
===== ===== =====
Interest rate spread(3).... 4.65% 3.95% 2.99%
==== ==== ====
Net yield on interest-
earning assets(4)........ 5.29% 4.96% 4.16%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.............. 122.84% 128.07% 124.13%
====== ====== ======
</TABLE>
- ---------------
(1) Ratios for three month period is stated on an annualized basis. Such
ratios and results are not necessarily indicative of results that may
be expected for the full year.
(2) Average balances include non-accrual loans.
(3) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as
a percentage of average interest-earning assets.
26
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rate
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Rate/Volume Analysis
Year ended December 31,
--------------------------------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
---------------------------------------- ------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- ------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 4,156 $ 945 $ 409 $ 5,510 $ 2,368 $ (164) $ (52) $ 2,152
Investment securities 3,264 (51) (45) 3,135 1,658 26 127 1,811
Federal funds sold (133) 204 (60) 11 (53) 140 (19) 67
------- ------- ------- ------- ------- ------- ------- -------
Total interest-
earning assets 7,287 1,098 271 8,656 3,973 2 55 4,030
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Deposit accounts 2,483 796 515 3,795 1,414 (270) (135) 1,008
Borrowings (33) (20) 7 (46) -- -- 93 93
------- ------- ------- ------- ------- ------- ------- -------
Total interest-
bearing
liabilities 2,450 776 522 3,749 1,414 (270) (42) 1,101
------- ------- ------- ------- ------- ------- ------- -------
Net change in
interest income $ 4,837 $ 322 $ (252) $ 4,907 $ 2,560 $ 272 $ 97 $ 2,929
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Operating Results for the Three Months Ended March 31, 1996 and
1995.
General. Net income for the three months ended March 31, 1996 increased
$38,000, or 6%, from $631,000 for the quarter ended March 31, 1995 to $669,000
during the same period in 1996. The increase was primarily due to internal
growth as well as acquisitions occurring during 1995.
Net Interest Income. Interest Income for the three months ended March
31, 1996 increased $2.1 million from the same period in 1995. Interest and fees
on loans increased $1.4 million due to higher loan volume. Interest income on
investments increased $900,000 due to increased volume in the portfolio.
Interest on Federal Funds Sold declined $134,000 as a result of excess funds
being used to fund loan growth and the purchase of investment securities.
Interest Expense. Interest Expense for the three months ended March 31,
1996 increased $1.1 million from the same period in 1995. The increase was a
result of deposit growth resulting primarily from the Company's branch
acquisitions.
Provision for Loan Losses. Provision for loan losses decreased $5,000
to $225,000 for the first quarter of 1996 compared to $230,000 for the same
period in 1995. The provision for 1995 had been increased to allow for
offsetting charge-offs.
27
<PAGE>
Other Income. As a result of transactions resulting in similar size
gains, other income remained relatively constant for the first three months of
1996 compared to that of the same period in 1995. During 1995, the Company
recorded a gain on sale of loans amounting to approximately $208,000. In 1996,
the Company recorded a gain from the sale of investment securities amounting to
approximately $160,000 and increased service charge income of approximately
$103,000.
Other Expenses For the first three months of 1996, other expenses
increased $915,000 over the same period in 1995. The increases were primarily as
a result of the branch acquisitions that occurred during 1995.
Income Taxes Income tax expense increased $104,000, from $232,000 for
the first three months of 1995 to $336,000 for the first three months of 1996.
The increase was a result of higher pre-tax income.
Comparison of Operating Results for the Years Ended December 31, 1995, 1994 and
1993
General. Net income for the year ended December 31, 1995, increased
$979,000, or 53%, to $2.8 million from $1.8 million for the year ended December
31, 1994 and $1.1 million for the year ended December 31, 1993. The increases
were primarily due to acquisitions which occurred during 1995 and 1994.
Net Interest Income. Net interest income increased $4.9 million, or
59%, from $8.3 million during the year ended December 31, 1994 to $13.2 million
during the year ended December 31,1995. The increase was a result of a 62%
increase in interest-earning assets, offset by a 65% increase in
interest-bearing liabilities and a nine basis point narrowing of the net yield.
Income on interest-earning assets increased $8.7 million as a result of
significant growth in the Company's investment and loan portfolios as well as
higher average yields. Total interest on deposit accounts increased by $3.8
million to $7.7 million in 1995. The increase in interest expense was a result
of a $79 million average growth in deposits augmented by a 65 basis point
increase in the average cost of deposits.
Provision for Loan Losses. The Company recorded a provision of $808,000
in 1995 compared with $383,000 in 1994 and $2,000 in 1993. The provision in 1995
and 1994 was primarily due to an analysis of the existing portfolio and
estimates of the stability of economic conditions within the market areas the
Company services. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance includes reviewing situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions. There can be no assurance
that further additions will not be made to the allowance for loan losses and
that such losses will not exceed the amount provided by the allowance.
Other Income. Other income is derived primarily from service charges on
deposit accounts. In 1995 it was considerably higher as a result of gains on
sales of fixed assets, loans and investment securities. Other income increased
$919,000, or 125%, from $732,000 for the year ended December 31, 1994 to $1.7
million for the year ended December 31, 1994. During 1994, other income
increased $260,000 from 1993, an increase of 55%. The increase was largely as a
result of an increase in service charges on deposit accounts.
28
<PAGE>
Other Expenses. Other expenses increased by $4.0 million from $6.0
million for the year ended December 31, 1994 to $10.0 million for the year ended
December 31, 1995. The increase was as a result of increased expenses due to the
acquisitions during 1994 and 1995. Salaries and employee benefits increased $2.1
million to $4.7 million during 1995. Data processing fees increased $316,000 and
miscellaneous expenses increased $893,000. The increase for the year ended
December 31, 1994 over 1993 amounted to $1.8 million. Salaries and employee
benefits increased by $766,000, occupancy expense increased by $365,000 and
miscellaneous expense increased by $461,000.
Income Tax Expense. Income taxes increased $365,000 or 47%, from
$775,000 for the year ended December 31, 1994 to $1.1 million for the year ended
December 31, 1995. The primary reason for this increase was an increase in
pre-tax income. Income taxes in 1994 increased $141,000 from the year ended
December 31, 1993 for the same reasons.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of investment securities and funds provided from
operations. While scheduled loan repayments are a relatively predictable source
of funds, deposit flows and loan prepayments are greatly influenced by market
interest rates, economic conditions and competition.
If a need for additional funds arises, the Company has significant
other sources of liquidity, such as investment securities, cash and amounts due
from other banks. Secondary sources of liquidity include borrowing from the
Federal Reserve Bank discount window, a line of credit with the Federal Home
Loan Bank, selling securities under agreements to repurchase and various federal
funds purchased lines of credit at correspondent banks.
The Company's liquidity, represented in part by cash and cash
equivalents, is a product of its operating, investing and financing activities.
Proceeds from repayment of loans, maturities of investment securities and net
income are the primary sources of liquidity for the Company.
Liquidity management is a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as the sale of federal funds to other financial institutions.
The Company has experienced a significant increase in commercial loan
demand and expects such demand to continue for the remainder of the current
fiscal year and into 1997. Management has demonstrated the ability to meet this
increased need for funds by attracting higher levels of time deposits and
utilizing lines of credit. It also has the ability to liquidate portions of its
investment portfolio, the entire balance of which was reclassified as available
for sale.
The increase of commercial loans has also had the effect of lowering
the Company's risk-based capital ratios. In general, commercial loans are
categorized as having a 100% risk-weighting using the calculations required by
the Company's regulators. The rate at which commercial loans have grown has
outpaced the growth rate of the Company's capital.
It is the Company's intent to maintain risk-based capital levels that
are acceptable to its regulators. Management monitors capital levels and, when
appropriate, will recommend a capital raising effort to the Company's board of
directors.
29
<PAGE>
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which requires the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Nearly all the assets and liabilities of the Company are monetary.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
Impact from Recent Acquisitions
During 1994 and 1995, the Company completed four acquisitions that have
had a material impact on the growth of the Company. In 1994, the Company
acquired two commercial banks with combined assets of approximately $119
million. In 1995, the Company acquired eight branches from two banks that had
combined deposits of approximately $123 million. Please refer to footnote 3 of
the Notes to Consolidated Financial Statements contained herein.
Since primarily liabilities were assumed as a result of the branch
acquisitions, the Company received cash from the sellers. The cash was invested
in the Company's investment portfolio and is intended to provide a consistent
source of liquidity and earnings, while also providing a source of funds for the
Company's continued commercial loan growth. In addition, each of the two
commercial bank acquisitions had investment portfolios that were integrated into
that of the Company.
At March 31, 1996, there were approximately $130 million in the
Company's investment portfolio. This compares to approximately $7 million at
March 31, 1994. The bank acquisitions originally increased investments by about
$59 million. The branch acquisitions resulted in cash being converted to
investments of approximately $115 million. Since the acquisitions, the Company
has liquidated portions of the investment portfolio to fund its loan growth.
Net loans at March 31, 1996 amounted to about $201 million compared to
$83 million at March 31, 1994. The bank acquisitions increased loans by about
$50 million, the branch acquisitions added approximately $600,000.
Total deposits at March 31, 1996 were approximately $351 million
compared to total deposits of about $99 million at March 31, 1994. Bank
acquisitions increased deposits by about $100 million and branch acquisitions
added approximately $102 million. Because of certain branch consolidations it is
difficult to measure deposit growth excluding acquired branches. Branch deposits
for locations that had been operated by the Company prior to the recent
acquisitions are estimated to amount to $115 million at March 31, 1996 an
increase of 16% over deposit totals at March 31, 1994.
As a result of significant increases of volume, the Company's earnings
have increased substantially. Earnings for the first quarter 1994 amounted to
$155,000 compared to the $669,000 reported for the same quarter of 1996. As a
result of the acquisitions, the Company had almost $6 million of intangible
assets at March 31, 1996 compared with about $700,000 at March 31, 1994. The
amortization of the intangible assets has created an additional expense to the
Company of approximately $184,000 for the first three months of 1996, or an
annual incremental amortization expense of $736,000.
30
<PAGE>
Impact of New Accounting Standards
In March, 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The statement, which is effective for
fiscal years beginning after December 31, 1995, establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. It requires that such
assets be periodically reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Measurement of an impairment should be based on the fair value of
the asset and that such assets ordinarily be reported at the lower of carrying
amount or fair value less cost to sell. Management of the Company has determined
that the adoption of this statement had no effect on its results of operations
or financial position.
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. The Statement, which is effective for fiscal years beginning
after December 31, 1995, requires an institution which services mortgage loans
for others in return for servicing fees to recognize these servicing rights as
assets, regardless if such assets are acquired or originated. Additionally, such
institutions are required to assess the fair value of these assets at each
reporting date to determine any potential impairment. Management of the Company
has determined that this pronouncement has no effect on its results of
operations or financial position.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-based Compensation. This Statement, which is effective for fiscal years
beginning after December 31, 1995, defines a fair value- based method of
accounting for stock-based employee compensation plans, and encourages all
entities to adopt this method of accounting for all employee stock compensation
plans. Under the fair value-based method, compensation expense would be measured
at the grant date based on the value of the award, and would be recognized over
the vesting period. However, SFAS No. 123 also permits entities to continue to
measure compensation expense for their stock-based plans as prescribed in APB
Opinion No. 25, Accounting for Stock Issued to Employees. Under the provisions
of APB Opinion No. 25, compensation expense is measured as the excess, if any,
of the market price of the stock underlying the award on the grant date over the
exercise price. Under the Company's Plans, awards do not result in compensation
expense on the date of grant as the exercise price equals the estimated market
price.
Item 3. Properties
At March 31, 1996, the Company operated from its main office and
seventeen branch offices located in New Jersey. The total net book value of the
Company's investment in premises and equipment at March 31, 1996, was
approximately $11.4 million. The main offices of the Company and of the Bank are
leased as are two of the Bank's branch offices.
31
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1996, the shares of
common stock beneficially owned by each person who was a beneficial owner of
more than five percent of the outstanding shares of common stock and by
directors and executive officers.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Common
Beneficial Owner Beneficial Ownership (1) Stock Beneficially Owned
- ---------------- ------------------------ ------------------------
Directors and Executive Officers
<S> <C> <C>
Bernard A. Brown 668,263 33.79 %
Adolph F. Calovi 109,767 5.55
Sidney R. Brown 41,428 2.09
Peter Galetto, Jr 16,318 0.83
Philip W. Koebig, III 70,918 3.59
Anne E. Koons 36,584 1.85
All Directors and Officers as a group 1,006,797 50.91
</TABLE>
- -------------------------
(1) Unless otherwise indicated, includes shares held directly by the
individual as well as by such individual's spouse, shares held in trust
and in other forms of indirect ownership over which shares the
individual effectively exercises sole voting and investment power and
shares which the named individual has a right to acquire within sixty
days of March 31, 1996, pursuant to the exercise of stock options.
Item 5. Directors and Executive Officers
The Board of Directors of the Company is currently composed of six
members, each of whom serves for a term of one year. Executive officers are
elected annually by the Board of Directors and serve at the Board's discretion.
32
<PAGE>
The following table sets forth information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Current
Director Term
Director/Executive Officer Age (1) Position Since Expires
- -------------------------- ------- -------- ----- -------
<S> <C> <C> <C> <C>
Bernard A. Brown (2) 71 Chairman of the Board 1985 1997
Sidney R. Brown (2) 38 Director, Treasurer 1990 1997
Adolph F. Calovi 73 Director, President and
Chief Executive Officer 1985 1997
Peter Galetto, Jr. 42 Director, Secretary 1990 1997
Philip W. Koebig, III 53 Director,
Executive Vice President 1995 1997
Anne E. Koons (2) 43 Director 1990 1997
</TABLE>
- ----------------------
(1) At March 31, 1996
(2) Bernard A. Brown is the father of Sidney R. Brown and Anne E. Koons.
Sidney R. Brown is the brother of Anne E. Koons.
Biographical Information
The principal occupation of each director and executive officer of the
Company is set forth below. All directors and executive officers have held their
present positions for five years unless otherwise stated.
All of the directors reside in the State of New Jersey.
Bernard A. Brown has been the Chairman of the Board of Directors of the
Company since its inception in January, 1985. Mr. Brown is also the Chairman of
the Board of Directors of the Bank. For many years, Mr. Brown has been the
Chairman of the Board of Directors and President of NFI Industries, Inc., a
trucking conglomerate headquartered in Vineland, New Jersey.
Sidney R. Brown has been the Treasurer and a director of the Company
since April, 1990. Mr. Brown is an officer and director of NFI Industries, Inc.,
and one of the general partners of The Four B's, a partnership which has
extensive real estate holdings in the Eastern United States. Its primary
objective is investing in and consequent development of commercial real estate,
leasing and/or sale. Mr. Brown is currently an officer and director of several
other corporations and partnerships in the transportation, equipment leasing,
insurance, warehousing and real estate industries.
Adolph F. Calovi has been the President, Chief Executive Officer and a
director of the Company since its inception in January, 1985. Mr. Calovi is a
director of Sun National Bank and from 1985 to 1994 was its President and Chief
Executive Officer.
Peter Galetto, Jr. has been the Secretary and a director of the
Company since April 1990. Mr. Galetto is the President/Sales for Stanker &
Galetto, Inc., located in Vineland, New Jersey. He is also the President of the
Cumberland Technology Enterprise Center. For the past five years, Mr. Galetto
has been the Secretary/Treasurer of Trimark Building Contractors. He is also an
officer and director of several other corporations and organizations.
33
<PAGE>
Philip W. Koebig, III has been the Executive Vice President of the
Company since 1994. He has been a director of the Company since 1995. Mr. Koebig
is also a director, President and Chief Executive Officer of Sun National Bank
since January, 1995. From 1990 to 1994, Mr. Koebig had been President and Chief
Executive Officer of Covenant Bank for Savings, Haddonfield, New Jersey. He also
serves on the Board of Directors of numerous charitable organizations and
corporations.
Anne E. Koons has been a director of the Company since April, 1990. For
the past five years, Ms. Koons has been a real estate agent with Fox & Lazo, and
a travel agent for Leisure Time Travel. Ms. Koons is also a Commissioner of the
Camden County Improvement Authority and a member of the Cooper Medical Center's
Foundation Board.
Item 6. Executive Compensation
The Company has no full time employees, relying upon employees of the
Bank for the limited services required by the Company. All compensation paid to
officers and employees is paid by the Bank.
Summary Compensation Table. The following table sets forth compensation
awarded to the Chief Executive Officer and Executive Vice President of the
Company who, for the year ended December 31, 1995, received total salary and
bonus payments from the Bank in excess of $100,000. Except as set forth below,
no executive officer of the Company had a salary and bonus during the year ended
December 31, 1995 that exceeded $100,000 for services rendered in all capacities
to the Company.
<TABLE>
<CAPTION>
Annual Compensation Long Term
------------------- Compensation
------------
Awards
------
Securities
Name and Underlying All Other
Principal Position Year Salary Options(#) Compensation
------------------ ---- ------ ---------- ------------
<S> <C> <C> <C> <C>
Adolph F. Calovi 1995 $131,000 -- $ --
President and Chief 1994 130,500 -- 2,743
Executive Officer 1993 124,800 -- 376
Philip W. Koebig, III 1995 150,000 50,000 10,383
Executive Vice President 1994 25,965 -- 240
1993 -- -- --
</TABLE>
Stock Option Plan. The Company has adopted the 1985 Stock Option Plan
and the 1995 Stock Option Plan (the "Option Plans"). Officers, directors and
employees are eligible to receive, at no cost to them, options under the Option
Plans. Options granted under the Option Plans may be either incentive stock
options (options that afford favorable tax treatment to recipients upon
compliance with certain restrictions pursuant to Section 422 of the Internal
Revenue Code and that do not normally result in tax deductions to the Company)
or options that do not so qualify. The option price may not be less than 100% of
the fair market value of the shares on the date of the grant. Option shares may
be paid in cash, shares of the common stock, or a combination of both.
34
<PAGE>
Options granted under the 1985 Stock Option Plan are exercisable at the
fair market value of the common stock at the time of the grant and until the
year 2001. Options granted under the 1995 Stock Option Plan are exercisable at
the fair market value of the common stock at the time of the grant and for ten
years thereafter. During 1995, there were 88,472 options granted to executive
officers under the 1995 Stock Option Plan. Also during 1995, there were 74,741
shares exercised under the 1985 Stock Option Plan, 70,013 of which were
exercised by an executive officer.
The following table sets forth additional information concerning
options granted under the Option Plans.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable
Individual Grants Value at Assumed
- ------------------------------------------------------------------------------------------- Annual Rates of Stock
Price Appreciation for
Percent of Total Option Term
Number of Options Granted Exercise -----------
Options to Employees Price Expiration
Name Granted in Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ------- -------------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Bernard A. Brown 75,000 60.00% $13.00 4/18/05 $487,500 $975,000
Philip W. Koebig, III 13,472 10.78 13.00 4/18/05 87,568 175,136
Philip W. Koebig, III 36,528 29.22 13.00 3/21/05 237,432 474,864
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
-----------------------------------------------
Value of
Number of Unexercized
Unexercized In-the-money
Shares Acquired Value Options at Options at
Name on Exercise (#) Realized Fiscal Year-End Fiscal Year-End
- ---- --------------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Adolph F. Calovi 70,013 $ 340,473 101,346 $769,730
</TABLE>
Directors' Compensation. Each member of the Board of Directors, except
for the Chairman and employees, received a fee of $300 for each meeting attended
for the year ended December 31, 1995. For the year ended December 31, 1995,
director fees totaled $8,100.
Employment Agreements. The Company does not have employment agreements
for any of its officers or employees.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee of the Company during the year ended December 31, 1995
consisted of Anne E. Koons, Sidney R. Brown and Philip W. Koebig, III. All are
members of the Board of Directors of the Company. Mr. Koebig is also a Director
and Officer of the Bank and did not participate in matters involving his
personal compensation.
35
<PAGE>
Item 7. Certain Relationships and Related Transactions
Bernard A. Brown, the Chairman of the Board of Directors of the Company
and of the Bank, is, with his wife, the owner of Vineland Construction Company.
The Company and the Bank lease office space in Vineland, New Jersey from
Vineland Construction Company. The Company believes that the transactions with
Vineland Construction Company are on terms substantially the same, or at least
as favorable to the Bank, as those that would be provided by a non-affiliate.
The Company paid $351,723 to Vineland Construction during the year ended
December 31, 1995.
The Bank has a policy of offering various types of loans to officers,
directors and employees of the Bank and of the Company. These loans have been
made in the ordinary course of business and on substantially the same terms and
conditions (including interest rates and collateral requirements) as, and
following credit underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions by the Bank with its other
unaffiliated customers and do not involve more than the normal risk of
collectibility, nor present other unfavorable features.
Item 8. Legal Proceedings
Periodically, the Company is involved in various claims and lawsuits,
such as claims to enforce liens, condemnation proceedings on properties in which
the Company holds security interests, claims involving the making and servicing
of real property loans and other issues incident to the Company's business. None
of such claims and lawsuits are expected to result in a material adverse effect
on the business, financial condition or results of operations of the Company.
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.
At March 31, 1996, there were 281 holders of Common Stock. The
Company's Common Stock is not listed or quoted on any exchange or quotation
service and there is no established public trading market for the Common Stock.
To the knowledge of the Company, trading to date has been irregular and
extremely limited. As of March 31, 1996, there 337,983 shares underlying
outstanding options.
The Company has filed an application with the Nasdaq National Market to
have its Common Stock listed. In order to be approved for listing on the Nasdaq
National Market certain criteria must be satisfied including a requirement that
at least two firms establish and make a market in the Common Stock. The Company
will seek to encourage at least two market makers for the Common Stock, NASD
rules provide that the Common Stock would not be "authorized" for Nasdaq
reporting and Nasdaq would not provide any quotations. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements.
The development of a public market having the desirable characteristics
of depth, liquidity and orderliness depends upon the presence in the marketplace
of a sufficient number of willing buyers and sellers at any given time, over
which neither the Company nor any market maker has any control. Accordingly,
there can be no assurance that an active and liquid trading market for the
Common Stock will develop, or if a market develops, that it will continue.
36
<PAGE>
The Board of Directors may consider paying dividends in the future and
will periodically review its policy regarding dividends. Declaration of
dividends, if any, by the Board of Directors will depend upon a number of
factors, including investment opportunities available to the Company or the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
results of operations and financial condition, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be declared, what amount the dividends will be, or whether such dividends,
once commenced, will continue to be paid. The Company may pay stock dividends in
lieu of, or in addition to, cash dividends.
Item 10. Recent Sales of Unregistered Securities
Set forth below is certain information concerning all sales of
securities by the Company during the past three years that were not registered
under the Securities Act of 1933.
On September 30, 1994, the Company issued 538,462 shares of common
stock to private and institutional investors for consideration of $13.00 per
share and an aggregate consideration of $7 million less $245,000 of commissions
paid to M.A. Schapiro & Co., Inc., the principal underwriter.
On March 24, 1995 the Company issued 20,000 shares of common stock to
Philip W. Koebig, III, for consideration of $13.00 per share and an aggregate
consideration of $260,000.
The above-described issuances of common stock were exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section 4(2)
as each such issuance did not involve a public offering.
Item 11. Description of Registrant's Securities to be Registered
The Company is authorized to issue ten million shares of Common Stock,
$1.00 par value per share, and one million shares of serial preferred stock,
$1.00 par value per share. There were 1,651,175 shares of Common Stock
outstanding on March 31, 1996. The capital stock of the Company represents
non-withdrawable capital and is not insured by the FDIC.
Common Stock
Voting Rights. Each share of Common Stock has the same relative rights
and is identical in all respects with every other share of Common Stock. The
holders of Common Stock possess exclusive voting rights in the Company, except
to the extent that shares of serial preferred stock issued in the future may
have voting rights, if any. Each holder of Common Stock is entitled to only one
vote for each share held of record on all matters submitted to a vote of holders
of Common Stock and is not permitted to cumulate votes in the election of the
Company's directors.
Other Characteristics. Holders of Common Stock will not have preemptive
rights with respect to any additional shares of Common Stock which may be
issued. Therefore, the Board of Directors may sell shares of capital stock of
the Company without first offering such shares to existing stockholders of the
Company. The Common Stock is not subject to call for redemption, and the
outstanding shares of Common Stock are fully paid and non-assessable.
37
<PAGE>
Serial Preferred Stock
The Board of Directors of the Company is authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the Common Stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The Board of Directors, without
stockholder approval, can issue serial preferred stock with voting and
acquisition rights which could adversely affect the voting power of the holders
of Common Stock.
Item 12. Indemnification of Directors and Officers
Section 14A:3-5 of the New Jersey Business Corporation Law ("BCL")
provides that an officer, director, employee or agent may be indemnified by the
Company from and against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with threatened, pending
or contemplated "proceedings" (including civil, criminal, administrative,
arbitrative action or investigative proceedings) in which such person is
involved by reason of such person's position with the Company, provided that a
determination has been made (by a majority vote of a quorum consisting of
directors who were not parties to such proceeding, or if such a quorum is not
obtainable, by independent legal counsel in a written opinion, or by the
stockholders) that such person acted in good faith and in a manner that such
person reasonably believes to be in, or not opposed to, the best interests of
the Company. Such person may not be indemnified if the person has been adjudged
liable for negligence or misconduct in the performance of such person's duty to
the Company unless the court otherwise determines.
Provisions regarding indemnification of directors, officers, employees
or agents of the Company are contained in Article Eighth of the Company's
Certificate of Incorporation.
Under a directors' and officers' liability insurance policy, directors
and officers of the Company are insured against certain liabilities, including
certain liabilities under the Securities Act of 1933.
38
<PAGE>
Item 13. Financial Statements and Supplementary Data
Independent Auditors' Report
----------------------------
To the Shareholders and Board of Directors of
Sun Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company'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, such consolidated financial statements present fairly, in all
material respects, the financial position of Sun Bancorp, Inc. and subsidiaries
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards. No. 109.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 2, 1996
39
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------------------------------
1996 1995 1994
---- ---- ----
(Unaudited)
ASSETS
<S> <C> <C> <C>
Cash and due from banks................................................... $ 14,805,480 $ 17,242,366 $ 7,684,697
Federal funds sold........................................................ 8,280,000 - 2,486,000
------------ ----------- -----------
Cash and cash equivalents............................................... 23,085,480 17,242,366 10,170,697
Investment securities held to maturity
(approximate market value $58,985,196) - - 60,324,735
Investment securities available for sale (amortized cost - $131,489,744;
1996, $146,379,244; 1995, and $313,250; 1994) 129,756,416 147,008,896 313,250
Loans receivable (net of allowance for loan losses - $1,960,172; 1996,
$2,064,640; 1995 and $1,607,375; 1994).................................. 201,346,025 183,633,631 134,861,257
Bank properties and equipment............................................. 11,357,782 11,419,175 5,692,769
Real estate owned, net.................................................... 802,378 876,302 1,032,880
Accrued interest receivable............................................... 3,040,834 2,564,921 1,781,542
Excess of cost over fair value of assets acquired......................... 5,985,244 6,191,919 2,084,336
Deferred taxes............................................................ 935,664 205,169 391,851
Other assets.............................................................. 892,217 752,257 697,390
----------- ------------- -----------
TOTAL..................................................................... $377,202,040 $369,894,636 $217,350,707
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits.................................................................. $351,074,577 $335,247,796 $196,018,820
Advances from the Federal Home Loan Bank.................................. - 8,000,000 -
Securities sold under agreements to repurchase............................ 462,305 - -
Other liabilities......................................................... 1,885,372 1,976,044 760,701
----------- ------------ -----------
Total liabilities....................................................... 353,422,254 345,223,840 196,779,521
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, none issued.............................................. - - -
Common stock, $1 par value, 10,000,000 shares authorized, issued and
outstanding: 1,651,175 in 1996 and 1995; 1,556,434 in 1994.............. 1,651,175 1,651,175 1,556,434
Surplus................................................................... 17,197,275 17,197,275 16,426,648
Retained earnings......................................................... 6,075,334 5,406,774 2,588,104
Unrealized (loss) gain on securities available
for sale, net of income taxes........................................... (1,143,998) 415,572 -
---------- ------------- ---------------
Total shareholders' equity.............................................. 23,779,786 24,670,796 20,571,186
------------ ------------ -----------
TOTAL..................................................................... $377,202,040 $369,894,636 $217,350,707
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
40
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months For the Years Ended
Ended March 31, December 31,
----------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
INTEREST INCOME:
<S> <C> <C> <C> <C> <C>
Interest and fees on loans................... $4,562,619 $3,257,182 $15,100,885 $ 9,590,994 $7,438,446
Interest on investment securities............ 1,860,781 960,390 5,285,877 2,151,351 340,039
Interest on federal funds sold............... 30,313 164,361 463,001 452,117 385,214
---------- --------- ----------- ----------- ----------
Total interest income...................... 6,453,713 4,381,933 20,849,763 12,194,462 8,163,699
--------- --------- ---------- ---------- ---------
INTEREST EXPENSE:
Interest on deposits ........................ 2,555,989 1,494,173 7,639,933 3,844,753 2,836,575
Interest on borrowed funds................... 40,978 1,211 47,158 93,796 -
---------- ---------- ----------- ----------- -------------
Total interest expense..................... 2,596,967 1,495,384 7,687,091 3,938,549 2,836,575
--------- --------- ---------- ---------- ----------
Net interest income........................ 3,856,746 2,886,549 13,162,672 8,255,913 5,327,124
PROVISION FOR LOAN LOSSES...................... 225,000 230,000 807,660 382,671 2,373
---------- --------- ----------- ----------- -----------
Net interest income after provision for
loan losses.............................. 3,631,746 2,656,549 12,355,012 7,873,242 5,324,751
--------- --------- ---------- ---------- ---------
OTHER INCOME:
Service charges on deposit accounts.......... 240,767 142,013 659,811 419,363 215,008
Other service charges........................ 18,004 13,565 28,068 17,224 8,129
Gain on sale of fixed assets................. 11,529 - 46,487 21,164 -
Gain on sale of loans........................ - 207,984 207,984 - 147,197
Gain on sale of investment securities........ 159,804 - 377,126 - -
Other........................................ 72,210 136,492 331,513 274,533 101,680
---------- --------- ----------- ---------- ----------
Total other income......................... 502,314 500,054 1,650,989 732,284 472,014
---------- --------- ----------- --------- ----------
OTHER EXPENSES:
Salaries and employee benefits............... 1,496,645 1,078,713 4,689,269 2,626,679 1,861,096
Occupancy expense............................ 395,005 293,558 1,269,514 1,090,833 725,423
Equipment expense............................ 170,456 89,336 459,460 249,951 205,100
Provision for losses on real estate owned.... - 27,660 78,000 120,000 195,558
Professional fees and services............... 74,897 71,359 249,760 164,770 305,070
Data processing expense...................... 251,136 114,267 634,753 318,552 202,241
Amortization of excess cost over fair value of
assets acquired 206,675 47,607 342,562 134,435 97,514
Postage and supplies......................... 131,479 67,423 335,055 173,823 97,665
Insurance.................................... 32,714 153,510 382,554 397,961 254,828
Other........................................ 370,493 350,086 1,606,404 713,733 253,024
---------- --------- ---------- ----------- ----------
Total other expenses ...................... 3,129,500 2,293,519 10,047,331 5,990,737 4,197,519
--------- --------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING METHOD............... 1,004,560 863,084 3,958,670 2,614,789 1,599,246
INCOME TAXES................................... 336,000 232,000 1,140,000 775,134 633,838
---------- --------- ---------- ----------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD............................ 668,560 631,084 2,818,670 1,839,655 965,408
CUMULATIVE EFFECT OF ADOPTING SFAS NO. 109..... - - - - 162,880
------------- ------------- ------------- ------------- ----------
NET INCOME................................. $ 668,560 $ 631,084 $ 2,818,670 $ 1,839,655 $1,128,288
========== ========= ========== ========== =========
Earnings per common and common equivalent share
Income before change in accounting method.... $ 0.38 $ 0.38 $ 1.60 $ 1.49 $ 0.92
Cumulative effect of adopting SFAS No. 109... - - - - 0.14
----------- ----------- ----------- ----------- ---------
Net income................................. $ 0.38 $ 0.38 $ 1.60 $ 1.49 $ 1.06
========= ========= ========= ========= =========
Earnings per common share - assuming full dilution
Income before change in accounting method.... $ 0.38 $ 0.38 $ 1.60 $ 1.49 $ 0.92
Cumulative effect of adopting SFAS No. 109... - - - - 0.14
------------- ------------- ------------- ------------- -----------
Net income................................. $ 0.38 $ 0.38 $ 1.60 $ 1.49 $ 1.06
=========== =========== =========== =========== ===========
Weighted average shares ....................... 1,651,175 1,614,409 1,638,376 1,143,336 1,017,522
========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
41
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Retained Available
Stock Surplus Earnings For Sale Total
----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993............... $ 969,203 $10,008,781 $ 199,989 $ - $11,177,973
Stock dividend....................... 48,319 531,509 (579,828) - -
Net income........................... - - 1,128,288 - 1,128,288
------------- -------------- --------- --------------- ----------
BALANCE, DECEMBER 31, 1993............. 1,017,522 10,540,290 748,449 - 12,306,261
Exercise of stock options............ 450 2,943 - - 3,393
Sale of common stock................. 538,462 5,883,415 - - 6,421,877
Net income........................... - - 1,839,655 - 1,839,655
------------- -------------- --------- --------------- ----------
BALANCE, DECEMBER 31, 1994............. 1,556,434 16,426,648 2,588,104 - 20,571,186
Exercise of stock options............ 74,741 530,627 - - 605,368
Sale of common stock................. 20,000 240,000 - - 260,000
Unrealized gain on securities
available for sale,
net of income taxes................ - - 415,572 -
Net income........................... - - 2,818,670 - 2,818,670
------------- -------------- --------- --------------- ----------
BALANCE, DECEMBER 31, 1995............. 1,651,175 17,197,275 5,406,774 415,572 24,670,796
Change in unrealized loss on
securities available for sale,
net of income taxes (unaudited).... - - - (1,559,570) (1,559,570)
Net income (unaudited)............... - - 668,560 - 668,560
------------- -------------- ---------- --------------- -----------
BALANCE, MARCH 31, 1996 (unaudited).... $1,651,175 $17,197,275 $6,075,334 $(1,143,998) $23,779,786
========= ========== ========= ========== ==========
</TABLE>
See notes to consolidated financial statements
42
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months For the Years Ended
Ended March 31, December 31,
------------------------------ ----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income ...................................... $ 668,560 $ 631,084 $ 2,818,670 $ 1,839,655 $ 1,128,288
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan losses ..................... 225,000 230,000 807,660 382,671 2,373
Provision for loss on real estate owned ....... -- 27,660 78,000 120,000 195,558
Depreciation and amortization ................. 114,405 67,816 325,913 215,381 195,494
Amortization of excess cost over fair value
of assets acquired .......................... 206,675 47,607 342,562 134,435 90,830
Gain on sale of loans ......................... -- (207,984) (207,984) -- (147,197)
Gain on sale of investment securities
available for sale .......................... (159,804) -- (246,129) -- --
Gain on sale of mortgage-backed securities
available for sale .......................... -- -- (130,997) -- --
Gain on sale of bank properties and equipment . (11,529) -- (46,487) (21,164) --
Deferred income taxes ......................... 72,915 (4,527) (27,398) (193,836) (198,015)
Change in assets and liabilities which provided
(used) cash:
Accrued interest and other assets ........... (615,873) 43,355 (838,246) 196,972 143,812
Accounts payable and accrued expenses ....... (90,672) 279,156 1,215,343 (1,145,147) (536,353)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating activities . 409,677 1,114,167 4,090,907 1,528,967 874,790
------------- ------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of investment securities
held to maturity .............................. -- (14,511,958) (30,094,922) (6,056,403) (2,588,789)
Purchases of investment securities
available for sale ............................ (99,464,583) -- (27,823,745) -- --
Purchases of mortgage-backed securities
held to maturity .............................. -- -- (45,544,706) (778,160) --
Purchases of mortgage-backed securities
available for sale ............................ -- -- (4,074,088) -- --
Increase in investment securities
resulting from branch acquisitions ............ -- -- (97,600,000) -- --
Proceeds from maturities of investment
securities held to maturity ................... -- 11,959,831 65,280,038 8,141,545 951,978
Proceeds from maturities of investment
securities available for sale ................. 41,671,494 -- 10,344,666 -- --
Proceeds from maturities of mortgage-backed
securities held to maturity ................... -- 113,512 19,908,185 176,542 --
Proceeds from sale of investment securities
available for sale ............................ 21,992,393 -- 16,880,505 -- --
Proceeds from sale of mortgage-backed
securities available for sale ................. 50,850,000 -- 7,359,934 -- --
Proceeds from sale of loans ..................... -- 1,870,608 1,870,608 -- 5,349,679
Net increase in loans ........................... (18,062,272) (6,191,765) (50,605,944) (2,845,797) (6,560,204)
Increase in loans resulting from branch
acquisitions .................................. -- -- (636,714) -- --
Purchase of bank properties and equipment ....... (53,012) (68,997) (825,912) (481,895) (51,259)
Increase in bank properties resulting
from branch acquisitions ...................... -- -- (5,430,744) -- --
Proceeds from sale of bank properties
and equipment ................................. 11,529 -- 250,824 21,164 --
Excess of cost of fair value of branch
assets acquired ............................... -- -- (4,450,145) -- --
Decrease (increase) in real estate
owned, net .................................... 198,802 186,480 78,578 (244,249) (410,112)
Purchase price of acquisitions,
net of cash received .......................... -- -- -- (5,410,572) --
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities ......... (2,855,649) (6,642,289) (145,113,582) (7,477,825) (3,308,707)
------------- ------------- ------------- ------------- -------------
</TABLE>
43
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
<TABLE>
<CAPTION>
For the Three Months For the Years Ended
Ended March 31, December 31,
----------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
FINANCING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in deposits ............ 15,826,781 19,132,895 16,685,101 (6,638,004) 7,261,462
Increase in deposits resulting from branch
acquisitions.................................. -- -- 122,543,875 -- --
Net borrowings ................................. 462,305 -- 8,000,000 4,500,000 --
Principal payments on borrowed funds ........... (8,000,000) -- -- (5,750,000) --
Proceeds from exercise of stock options ........ -- 583,741 605,368 3,393 --
Proceeds from issuance of common stock ......... -- 260,000 260,000 6,421,877 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities........................ 8,289,086 19,976,636 148,094,344 (1,462,734) 7,261,462
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................... 5,843,114 14,448,514 7,071,669 (7,411,592) 4,827,545
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 17,242,366 10,170,697 10,170,697 17,582,289 12,754,744
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 23,085,480 $ 24,619,211 $ 17,242,366 $ 10,170,697 $ 17,582,289
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid .................................. $ 2,135,888 $ 1,159,765 $ 6,100,954 $ 3,827,301 $ 2,850,000
============ ============ ============ ============ ============
Income taxes paid .............................. $ 470,739 $ 338,925 $ 994,516 $ 1,115,000 $ 1,054,339
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans to real estate owned ......... $ 124,878 $ 44,939 $ 196,181 $ 449,478 $ 298,631
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
44
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. NATURE OF OPERATIONS
Sun Bancorp, Inc. (formerly Citizens Investments, Inc.)(the "Company")
is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Sun
National Bank (the "Bank"), and the Bank's wholly owned subsidiary,
Med-Vine, Inc. All significant inter-company balances and transactions
have been eliminated.
The Company and the Bank have their administrative offices in Vineland,
New Jersey. The Bank has seventeen financial service centers located
throughout central and southern New Jersey. The Company's principal
business is to serve as a holding company for the Bank. The Bank is in
the business of attracting customer deposits and using these funds to
originate loans, primarily commercial real estate and non-real estate
loans. Med-Vine, Inc. is a Delaware holding company which holds the
majority of the Bank's investment portfolio and a small portion of
mortgage loans. The principal business of Med-Vine, Inc. is investing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. The significant estimates
include: Allowance for loan losses, Real estate owned and Excess of
cost over fair value of net assets acquired. Actual results could
differ from those estimates.
Interim Financial Statements - In the opinion of management, the
financial information, which is unaudited, reflects all adjustments
(consisting solely of normal recurring adjustments) necessary for a
fair presentation of the financial information as of and for the three
months ended March 31, 1996 and 1995. The unaudited financial
information is not indicative of the results from operations for the
full year.
Investment Securities - The Bank adopted the requirements of SFAS No.
115 and accounts for debt, equity and mortgage-backed securities as
follows:
Held to Maturity - Debt securities, including mortgage-backed
securities, that management has the positive intent and
ability to hold until maturity are classified as held to
maturity and carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts.
Premiums are amortized and discounts are accreted using the
interest method over the estimated remaining term of the
underlying security.
Available for Sale - Debt and equity securities, including
mortgage-backed securities, that will be held for indefinite
periods of time, including securities that may be sold in
response to changes to market interest or prepayment rates,
needs for liquidity, and changes in the availability of and
the yield of alternative investments, are classified as
available for sale. These assets are carried at fair value.
Fair value is determined using published quotes as of the
close of business. Unrealized gains and losses are excluded
from earnings and are reported net of tax as a separate
component of shareholders' equity until realized.
45
<PAGE>
Trading - Debt securities, including mortgage-backed
securities, may be categorized as trading. As such, they would
be carried at market value. Gains and losses, both realized
and unrealized would be included in the Company's statement of
income.
Loans Purchased - The discounts and premiums resulting from the
purchase of loans are amortized to income using the interest method
over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Interest Income on Loans - Interest on commercial, real estate and
installment loans is credited to operations based upon the principal
amount outstanding. Interest accruals are generally discontinued when a
loan becomes 90 days past due or when principal or interest is
considered doubtful of collection. When interest accruals are
discontinued, interest credited to income in the current year is
reversed, and interest accrued in the prior year is charged to the
allowance for loan losses.
Allowance for Loan Losses - The allowance for loan losses is determined
by management based upon past experience, an evaluation of potential
loss in the loan portfolio, current economic conditions and other
pertinent factors. The allowance for loan losses is maintained at a
level that management considers adequate to provide for potential
losses based upon an evaluation of known and inherent risk in the loan
portfolio.
Allowances for loan losses are based on estimated net
realizable value unless it is probable that loans will be foreclosed,
in which case allowances for loan losses are based on fair value.
Management's periodic evaluation is based upon evaluation of the
portfolio, past loss experience, current economic conditions and other
relevant factors. While management uses the best information available
to make such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluations.
In May, 1993, the FASB issued SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and in October, 1994, the FASB
issued SFAS No. 118, Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures, which address the accounting and
reporting by creditors for impairment of certain loans. The Bank
adopted the requirements of both SFAS Nos. 114 and 118, effective
January 1, 1995. SFAS 114 requires that certain impaired loans be
measured based either on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the
loan is collateral dependent. There was no effect on financial
statements as previously reported and on current earnings of initially
applying the new standards.
Bank Properties and Equipment - Bank properties and equipment are
stated at cost, less allowances for depreciation. The provision for
depreciation is computed by the straight-line method based on the
estimated useful lives of the assets.
In March, 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
statement, which is effective for fiscal years beginning after December
31, 1995, establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. It requires
that such assets be periodically reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Measurement of an impairment should
be based on the fair value of the asset and that such assets ordinarily
be reported at the lower of carrying amount or fair value less cost to
sell. Management of the Company has determined that the adoption of
this statement had no effect on its results of operations or financial
position.
46
<PAGE>
Deferred Loan Fees - Loan fees net of certain direct loan origination
costs are deferred and the balance is recognized into income as a yield
adjustment over the life of the loan using the interest method.
Real Estate Owned - Real estate owned is comprised of property acquired
through foreclosure and is carried at the lower of the related loan
balance or fair value of the acquired property based on an annual
appraisal less estimated cost to dispose. Losses arising from
foreclosure transactions are charged against the allowance for loan
losses. Losses subsequent to foreclosure are charged against
operations.
Excess of Cost Over Fair Value of Net Assets Acquired - The excess of
cost over fair value of assets acquired is net of accumulated
amortization of $1,417,840, $1,211,165 and $868,603 at March 31, 1996,
December 31, 1995 and 1994, respectively, and is amortized by the
straight-line method over 15 years for bank acquisitions and over 7
years for branch acquisitions.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash
and cash equivalents include amounts due from banks and overnight
federal funds sold.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under this method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. Also,
under SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Earnings Per Share - Earnings per common and common equivalent share is
computed using the weighted average common shares and common share
equivalents outstanding during the period
Stock dividend - On February 26, 1993, the Company's Board of Directors
declared a special 5% stock dividend which was paid on May 15, 1993 to
stockholders of record on April 30, 1993.
Recently Adopted Accounting Standards - In May 1995, the FASB issued
SFAS No. 122, Accounting for Mortgage Servicing Rights. The statement
which is effective for fiscal years beginning after December 15, 1995,
requires an institution which services mortgage loans for others in
return for servicing fees to recognize these servicing rights as
assets, if such assets are acquired or originated. Additionally, such
institutions are required to assess the fair value of these assets at
each reporting date to determine any potential impairment. Management
of the Bank has determined that the adoption of this statement has no
effect on its results of operations or financial position.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. This Statement, which is effective for fiscal
years beginning after December 31, 1995, defines a fair value- based
method of accounting for stock-based employee compensation plans, and
encourages all entities to adopt this method of accounting for all
employee stock compensation plans. Under the fair value-based method,
compensation expense would be measured at the grant date based on the
value of the award, and would be recognized over the vesting period.
However, SFAS No. 123 also permits entities to continue to measure
compensation expense for their stock-based plans as prescribed in APB
Opinion No.25, Accounting for Stock Issued to Employees. Under the
provisions of APB Opinion No. 25, compensation expense is measured as
the excess, if any, of the market price of the stock underlying the
award on the grant date over the exercise price. Under the Company's
Plans, awards do not result in compensation expense on the date of
grant as the exercise price equals the market price.
Reclassifications - Certain reclassifications have been made in the
1994 and 1993 consolidated financial statements to conform to those
classifications used in 1995.
47
<PAGE>
3. ACQUISITIONS
On July 14, 1995, the Bank purchased four branches from NatWest Bank.
The Bank acquired approximately $52,317,000 of deposit liabilities plus
$479,000 of accrued interest, $1,755,000 of real estate and equipment,
$588,000 of loans plus related accrued interest and $610,000 in cash.
The Bank paid a premium of approximately $2,082,000, which is being
amortized over seven years.
On November 24, 1995, the Bank purchased four branches from New Jersey
National Bank. The Bank acquired approximately $70,227,000 of deposit
liabilities plus $492,000 of accrued interest, $3,675,000 of real
estate and equipment, $48,000 of loans plus related accrued interest
and $1,009,000 in cash. The Bank paid a premium of approximately
$2,368,000, which is being amortized over seven years.
On June 29, 1994, the Company acquired 100% of the outstanding shares
of The First National Bank of Tuckahoe ("Tuckahoe") for approximately
$7,070,000. The purchase method of accounting was used to record the
acquisition. Under the purchase method of accounting, all assets and
liabilities acquired were adjusted to fair value as of the acquisition
date, and the resultant premiums and discounts are amortized to income
over the expected economic lives of the related assets and liabilities.
Excess cost over fair value of assets acquired resulting from this
acquisition amounted to approximately $612,000 and is being amortized
over 15 years using the straight-line method.
A summary statement of the cash used to purchase Tuckahoe is set forth
below:
Fair value of assets purchase $50,782,529
Liabilities assumed 43,073,874
----------
Cash paid 7,708,655
Cash acquired 7,270,791
----------
Net cash used for purchase $ 437,864
==========
On July 29, 1994, the Bank acquired 100% of the outstanding capital
stock of Southern Ocean State Bank ("Ocean") from BMJ Financial Corp.,
the parent bank holding company of Ocean for approximately $6,560,000.
The purchase method of accounting was used to record the acquisition.
Excess cost over fair value of assets acquired resulting from the
valuations amounted to approximately $920,000 and is being amortized
over 15 years using the straight-line method.
A summary statement of the cash used to purchase Ocean is set forth
below:
Fair value of assets purchased $68,357,063
Liabilities assumed 61,511,320
----------
Cash paid 6,845,743
Cash acquired 1,873,035
----------
Net cash used for purchase $ 4,972,708
==========
The results of operations of the acquired entities have been included
in the consolidated results of operations from the dates of
acquisitions.
48
<PAGE>
4. INVESTMENT SECURITIES
During 1995, in accordance with the implementation of the SFAS No. 115
Guide, the Company reclassified as available for sale, its entire
portfolio of held to maturity investment securities (including
mortgage-backed securities). The carrying amounts of investment
securities and the approximate market values at March 31, 1996,
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
March 31, 1996
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
Available for Sale:
Debt securities:
<S> <C> <C> <C> <C>
U.S. Treasury obligations $70,516,883 $75,382 $(1,116,730) $69,475,535
U.S. Agency obligations 18,427,775 17,339 (207,167) 18,237,947
State and municipal obligations 29,503,196 34,815 (396,820) 29,141,191
Other bonds 11,198,432 12,695 (152,842) 11,058,285
Mortgage-backed securities 64,608 (1,873,559) 64,608
--------------------------------------------------------------------------------
Total debt securities 129,710,894 140,231 (1,873,559) 127,977,566
--------------------------------------------------------------------------------
Equity securities:
Federal Reserve Bank stock 584,800 584,800
Federal Home Loan Bank stock 1,110,800 1,110,800
Atlantic Central Bank for Bankers stock 83,250 83,250
--------------------------------------------------------------------------------
Total equity securities 1,778,850 1,778,850
--------------------------------------------------------------------------------
Total $131,489,744 $140,231 $(1,873,559) $116,854,673
================================================================================
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
Available for Sale:
Debt securities:
<S> <C> <C> <C> <C>
U.S. Treasury obligations $41,674,219 $245,730 $(15,461) $41,904,488
State and municipal obligations 16,666,509 103,281 (28,199) 16,741,591
Other bonds 44,901,919 70,123 (9,342) 44,962,700
Mortgage-backed securities 41,734,347 289,003 (25,483) 41,997,667
-----------------------------------------------------------------------------------
Total debt securities 144,976,994 708,137 (78,485) 145,606,646
-----------------------------------------------------------------------------------
Equity securities:
Federal Reserve Bank stock 533,800 533,800
Federal Home Loan Bank stock 818,200 818,200
Atlantic Central Bank for Bankers stock 50,250 50,250
-----------------------------------------------------------------------------------
Total equity securities 1,402,250 1,402,250
-----------------------------------------------------------------------------------
Total $146,379,244 $708,137 $(78,485) $147,008,896
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
Available for Sale:
Equity securities:
<S> <C> <C> <C> <C>
Federal Reserve Bank stock $313,250 $313,250
-----------------------------------------------------------------------------------
Total equity securities 313,250 313,250
-----------------------------------------------------------------------------------
Held to Maturity:
Debt securities:
U.S. Treasury obligations 20,033,886 $17,479 $(387,191) 19,664,174
State and municipal obligations 13,550,137 337 (287,683) 13,262,791
Other bonds 7,406,062 375 (177,875) 7,228,562
Mortgage-backed securities 19,334,650 28,743 (533,724) 18,829,669
-----------------------------------------------------------------------------------
Total debt securities 60,324,735 46,934 (1,386,473) 58,985,196
-----------------------------------------------------------------------------------
Total $60,637,985 $46,934 $(1,386,473) $59,298,446
===================================================================================
</TABLE>
50
<PAGE>
For the first three months of 1996, the Bank sold $21,832,589 of
securities available for sale resulting in a gross gain of $159,804.
During 1995, the Bank sold $24,240,439 of securities available for sale
resulting in a gross gain of $377,126. There were no such sales during
1994 and 1993.
The Bank was required to maintain an average reserve balance with the
Federal Reserve Bank of $2,882,000 and $2,263,000 at March 31, 1996 and
December 31, 1995, respectively.
The maturity schedule of the investment in debt securities available
for sale at March 31, 1996 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $18,738,417 $18,759,140 $64,635,959 $64,654,560
Due after one year through five years 86,135,228 84,832,971 28,922,885 29,218,662
Due after five years through ten years 12,242,638 12,069,683 4,304,621 4,326,614
Due after ten years 12,530,003 12,251,164 5,379,182 5,408,943
-------------------------------------------------------------------------
129,646,286 127,912,958 103,242,647 103,608,779
Mortgage-backed securities 64,608 64,608 41,734,347 41,997,867
-------------------------------------------------------------------------
$129,710,894 $127,977,566 $144,976,994 $145,606,646
=========================================================================
</TABLE>
At March 31, 1996 and December 31, 1995, $4,000,000 of U.S. Treasury
notes are pledged to secure public deposits.
5. LOANS
The components of loans as of March 31, 1996, December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial and industrial $137,624,819 $118,874,150 $69,248,601
Real estate-residential mortgages 53,362,058 54,414,800 56,432,607
Installment 12,319,320 12,409,321 10,787,424
---------------------------------------------------------------------
Total gross loans 203,306,197 185,698,271 136,468,632
Allowance for loan losses (1,960,172) (2,064,640) (1,607,375)
---------------------------------------------------------------------
Net loans $201,346,025 $183,633,631 $134,861,257
=====================================================================
Non-accrual loans $1,869,668 $2,658,118 $1,900,910
=====================================================================
</TABLE>
51
<PAGE>
There were no irrevocable commitments to lend additional funds on
non-accrual loans at March 31, 1996. The reduction in interest income
resulting from non-accrual loans was $45,698 and $7,124 for the three
month periods ended March 31, 1996 and 1995, respectively. There was no
interest income recognized on these loans during the three month
periods ended March 31, 1996 and 1995.
Certain officers, directors and their associates (related parties) have
loans and conduct other transactions with the Company. Such
transactions are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
other non-related party transactions. The aggregate dollar amount of
these loans to related parties as of March 31, 1996, December 31, 1995
and 1994, along with an analysis of the activity for the first three
months of 1996 and the years ended December 31, 1995 and 1994 is
summarized as follows:
<TABLE>
<CAPTION>
For the Three
Month Period For the Years Ended
Ended March 31, December 31,
-----------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $8,833,227 $6,344,023 $2,748,785
Additions 141,730 4,272,121 4,088,806
Repayments (965,377) (1,782,917) (493,568)
-----------------------------------------------------------------
Balance, end of period $8,009,580 $8,833,227 $6,344,023
=================================================================
</TABLE>
Under approved lending decisions, the Company has commitments to lend
additional funds totaling approximately $43,839,000, $67,928,316 and
$21,677,560 at March 31, 1996, December 31, 1995 and 1994,
respectively. 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. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The type and amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower.
Most of the Bank's business activity is with customers located within
its local market area. Generally, loans granted are secured by
commercial real estate, residential real estate and other assets. The
ultimate repayment of loans is dependent to a certain degree on the
local economy and real estate market.
52
<PAGE>
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
For the Three
Month Period For the Years Ended
Ended March 31, December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, beginning of period $2,064,640 $1,607,375 $1,067,402 $1,083,916
Charge-offs (334,061) (426,289) (349,439) (25,178)
Recoveries 4,593 75,894 34,829 6,291
---------------------------------------------------------------------------------------
Net charge-offs (329,468) (350,395) (314,610) (18,887)
Allowance on acquired loans 471,912
Provision for loan losses 225,000 807,660 382,671 2,373
---------------------------------------------------------------------------------------
Balance, end of period $1,960,172 $2,064,640 $1,607,375 $1,067,402
=======================================================================================
</TABLE>
The provision for loan losses charged to expense is based upon past
loan and loss experience and an evaluation of potential losses in the
current loan portfolio, including the evaluation of impaired loans
under SFAS Nos. 114 and 118. A loan is considered to be impaired when,
based upon current information and events, it is probable that the Bank
will be unable to collect all amounts due according to the contractual
terms of the loan. An insignificant delay or insignificant shortfall in
amount of payments does not necessarily result in the loan being
identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant.
Impairment losses are included in the provision for loan losses. SFAS
Nos. 114 and 118 do not apply to large groups of smaller balance,
homogeneous loans that are collectively evaluated for impairment,
except for those loans restructured under a troubled debt
restructuring. Loans collectively evaluated for impairment include
consumer loans and residential real estate loans, and are not included
in the data that follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------------------------------------------
Impaired loans with related reserve for loan losses
<S> <C> <C>
($296,307) calculated under SFAS No. 114 $ -- $ 454,489
Impaired loans with no related reserve for loan losses calculated 527,908 527,908
under SFAS No. 114
----------------------------------------------
Total impaired loans $ 527,908 $ 982,397
==============================================
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
For the Three
Months Ended Year Ended
March 31, December 31,
1996 1995
----------------------------------------------
<S> <C> <C>
Average impaired loans $ 527,908 $ 411,289
Interest income recognized in impaired loans -- 18,561
Cash basis interest income recognized on impaired loans -- --
</TABLE>
Interest payments on impaired loans are typically applied to principal
unless the ability to collect the principal amount is fully assured, in
which case interest is recognized on the cash basis.
Commercial loans and commercial real estate loans are placed on
non-accrual at the time the loan is 90 days delinquent unless the
credit is well secured and in the process of collection. Generally,
commercial loans are charged off no later than 120 days delinquent
unless the loan is well secured and in the process of collection, or
other extenuating circumstances support collection. Residential real
estate loans are typically placed on non-accrual at the time the loan
is 90 days delinquent. Other consumer loans are typically charged off
at 90 days delinquent. In all cases, loans must be placed on
non-accrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
7. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment consist of the following major
classifications:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C>
Land $2,873,500 $2,873,500 $1,403,000
Buildings 6,861,123 6,861,123 3,422,005
Leasehold improvements and equipment 3,146,063 3,090,188 1,996,771
---------------------------------------------------------------------
12,880,686 12,824,811 6,821,776
Accumulated depreciation and amortization (1,522,904) (1,405,636) (1,129,007)
---------------------------------------------------------------------
Total $11,357,782 $11,419,175 $5,692,769
=====================================================================
</TABLE>
54
<PAGE>
8. REAL ESTATE OWNED, NET
Real estate owned, net, consisted of the following:
<TABLE>
<CAPTION>
March 31 December 31,
1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial buildings $606,501 $492,501 $430,559
Residential buildings 249,877 471,801 712,481
-------------------------------------------------------------------------
856,378 964,302 1,143,040
Allowance (54,000) (88,000) (110,160)
-------------------------------------------------------------------------
Total $802,378 $876,302 $1,032,880
=========================================================================
</TABLE>
During the first three months of 1996, $27,660 was charged against
operations to adjust real estate owned for declines in value. During
1995, 1994 and 1993, $78,000, $120,000 and $195,558, respectively, was
charged against operations to adjust real estate owned for declines in
value.
9. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits $127,524,799 $128,802,293 $75,004,480
Savings deposits 63,456,376 66,970,293 62,555,520
Time certificates under $100,000 139,033,817 122,415,317 52,601,673
Time certificates $100,000 or more 21,059,585 17,059,893 5,857,147
-------------------------------------------------------------------
Total $351,074,577 $335,247,796 $196,018,820
===================================================================
</TABLE>
Of the total Demand deposits, approximately $66,778,000, $62,700,000
and $38,800,000 are non-interest bearing at March 31, 1996, December
31, 1995 and 1994.
55
<PAGE>
A summary of certificates by year of maturity is as follows:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------
March 31, December 31,
----------------------------------------------------
<S> <C> <C>
1997 $115,604,798 $88,857,521
1998 35,927,933 41,775,948
1999 4,622,104 4,281,580
Thereafter 3,938,576 4,580,161
----------------------------------------------------
Total $160,093,402 $139,475,210
====================================================
</TABLE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
For the Three
Month Periods For the Years Ended
Ended March 31, December 31,
----------------------------------------------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Savings deposits $668,560 $631,084 $2,818,670 $1,839,655 $1,128,288
Time certificates 1,651,175 1,614,409 1,638,376 1,143,336 1,017,522
Interest-bearing checking 326,455 183,847 326,896 258,837 249,743
----------------------------------------------------------------------------------
Total $2,555,989 $1,494,173 $7,639,933 $3,844,753 $2,836,575
==================================================================================
</TABLE>
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances are collateralized under a blanket
collateral lien agreement. There were no Federal Home Loan Bank
advances outstanding at March 31, 1996. The amount outstanding at
December 31, 1995, of $8,000,000 was borrowed under an overnight line
of credit at an interest rate of 5.875%. Interest expense on advances
was $13,925 and $6,733 for the three month period ended March 31, 1996
and the year ended December 31, 1995, respectively. There were no such
borrowings during 1994 or 1993.
11. STOCK OPTION PLAN
On April 18, 1995, the Company adopted a Stock Option Plan (the "1995
Plan"). Options granted under the 1995 Plan may be either qualified
incentive stock options or non-qualified options as determined by the
Executive Compensation Committee.
Options granted under the 1995 Plan are at the estimated fair value at the
date of grant and are exercisable at the time of the grant and for 10
years thereafter. There were 100,000 shares of stock reserved for issuance
under the 1995 Plan.
On May 31, 1985, the Company adopted a Stock Option Plan (the "1985
Plan"). During 1995, options were no longer eligible to be granted under
the 1985 Plan. Options granted under the 1985 Plan were either qualified
incentive stock options or non-qualified options as determined by the
Executive Compensation Committee.
Options granted under the 1985 Plan were at the estimated fair value at
the date of grant and are exercisable at the time of the grant and until
the year 2001. There are 237,983 shares of stock reserved for issuance
under the 1985 Plan.
56
<PAGE>
Options granted and outstanding under the 1995 and 1985 Plans are as
follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
-----------------------------
<S> <C> <C>
March 31, 1996 at prices ranging from $7.54 to $16.19 176,848 149,607
December 31, 1995, at prices ranging from $7.54 to $16.19 177,289 149,607
December 31, 1994, at prices ranging from $7.54 to $16.19 87,220 191,978
December 31, 1993 at prices ranging from $7.54 to $16.19 89,670 191,978
</TABLE>
Activity in the stock option plans was as follows:
<TABLE>
<CAPTION>
For the Three
Month Period For the Years Ended
Ended March 31, December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period 326,896 279,198 281,648 265,648
Options granted 125,000 16,000
Options exercised (74,741) (450)
Options expired (441) 2,561 (2,000)
---------------------------------------------------------------------------
Balance, end of period 326,455 326,896 279,198 281,648
===========================================================================
</TABLE>
Under the 1995 Plan, the nonqualified options expire ten years and ten
days after the date of grant, unless terminated earlier under the option
terms. The incentive options expire ten years after the date of grant,
unless terminated earlier under the option terms. Under the 1985 Plan, all
options expire in the year 2001.
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, from time to time, may be a defendant in legal proceedings
related to the conduct of its business. Management, after consultation
with legal counsel, believes that the liabilities, if any, arising from
such litigation and claims will not be material to the consolidated
financial statements.
In the normal course of business, the Bank has various commitments and
contingent liabilities, such as customers' letters of credit (including
standby letters of credit of $6,588,000, $6,196,871 and $3,756,039 at
March 31, 1996, December 31, 1995 and 1994, respectively), which are not
reflected in the accompanying financial statements. Standby letters of
credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. In the judgment of management, the
financial position of the Company will not be affected materially by the
final outcome of any contingent liabilities and commitments.
Office space and branch facilities are leased from a company affiliated
with the chairman under separate agreements with the Company. The leases,
which expire in the year 2012, provide for a combined annual rental of
$286,641 with annual increases based on increases in the Consumer Price
Index.
57
<PAGE>
In February 1985, the Bank entered into an agreement with a partnership
comprised of directors and shareholders of the Bank to lease an office
building for an initial term of 10 years with three renewal options of
five years each, requiring annual rentals of $96,000 in addition to real
estate taxes during the extension periods. The Bank has exercised its
first five-year renewal option. The Bank subleases a portion of the office
building.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consisted of the following at March 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $381,608
1998 446,297
1999 415,041
2000 415,041
2001 327,041
Thereafter 3,533,664
-----------
Total $55,186,912
===========
</TABLE>
Rental expense included in occupancy and equipment expenses for all
operating leases was $127,887, $126,371, $510,285, $390,157 and $343,566
for the three month periods ended March 31, 1996 and 1995 and for the
years ended December 31, 1995,1994 and 1993, respectively.
13. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
For the Three
Month Periods For the Years Ended
Ended March 31, December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1995 1994 1993
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current $263,085 $236,527 $1,167,398 $968,970 $831,853
Deferred 72,915 (4,527) (27,398) (193,836) (198,015)
---------------------------------------------------------------------------------------------------------
Total $336,000 $232,000 $1,140,000 $775,134 $633,838
=========================================================================================================
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts
are as follows:
58
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
-------------------------------------------------------------
Deferred tax asset:
<S> <C> <C> <C>
Investments marked to market $589,330
Allowance for loan losses 374,827 $427,997 $311,418
Deferred loan fees 83,020 89,012 83,589
Other real estate, net 77,764 89,324 132,786
Goodwill amortization 49,179 20,358
Other 35,465 62,229 230,593
-------------------------------------------------------------
Total deferred tax asset 1,209,585 688,920 758,386
-------------------------------------------------------------
Deferred tax liability:
Property (273,921) (269,671) (366,535)
Investments marked to market (214,080)
-------------------------------------------------------------
Total deferred tax liability (273,921) (483,751) 366,535
-------------------------------------------------------------
Net deferred tax asset $935,664 $205,169 $391,851
=============================================================
</TABLE>
The provision for federal income taxes differs from that completed at the
statutory rate as follows:
<TABLE>
<CAPTION>
For the Three
Month Periods For the Years Ended
Ended March 31, December 31,
------------------------------------------------------------------------------------------
1996 1995 1995 1994 1993
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax computed at the statutory rate $341,550 $293,449 $1,345,948 $889,028 $543,744
Increase in charge resulting from:
State tax, net of federal benefits 33,785 47,804
Goodwill amortization 14,290 14,290 57,160 43,464 34,366
Tax exempt interest, net (33,895) (28,941) (157,940) (72,009) (13,306)
Other, net 14,055 (46,798) (105,168) (119,134) 21,230
------------------------------------------------------------------------------------------
Total $336,000 $232,000 $1,140,000 $775,134 $633,838
==========================================================================================
</TABLE>
59
<PAGE>
14. EARNINGS PER SHARE
Earnings per common share and common equivalent share is computed by
dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the year. Stock
options granted and outstanding have been considered to be the equivalent
of common stock from the time of issuance in 1985. The number of common
shares was increased by the number of shares issuable on the exercise of
options when the market price of the common stock exceeds the exercise
price of the options. This increase in the number of common shares was
reduced by the number of common shares that are assumed to have been
purchased with the proceeds from the exercise of the options (treasury
stock method); those purchases were assumed to have been made at the
estimated market price of the common stock, but not to exceed twenty
percent of the outstanding shares. Amounts in excess of this limitation
are assumed to have been exercised and the aggregate proceeds therefrom to
have been applied first to reduce short-term or long term borrowings. Any
remaining funds were invested in U.S. Government securities or commercial
paper, with appropriate recognition of any income tax effect. The market
price of common shares is based either on an independent valuation of the
Company's shares or on the price received on shares sold on or near the
reporting dates.
Earnings per share were calculated as follows:
<TABLE>
<CAPTION>
For the Three
Month Periods For the Years Ended
Ended March 31, December 31,
--------------------------------------------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Assumptions:
<S> <C> <C> <C> <C> <C>
Net income for the period $668,560 $631,084 $2,818,670 $1,839,655 $1,128,288
Average common shares outstanding 1,651,175 1,614,409 1,638,376 1,143,336 1,017,522
Dilutive options outstanding to
purchase equivalent shares 326,455 183,847 326,896 258,837 249,743
Average exercise price per share $10.61 $8.64 $10.62 $8.49 $8.41
Estimated market value per common share
to be used $17.00 $13.00 $17.00 $13.00 $10.00
Computations:
Application of assumed proceeds:
Towards repurchase of outstanding common shares
at applicable market value $3,464,993 $1,588,990 $3,471,962 $2,196,232 $2,035,040
Reduction of debt - - - - -
Purchase of U.S. Government securities - - - - 64,545
--------------------------------------------------------------------------------
$3,464,993 $1,588,990 $3,471,962 $2,196,232 $2,099,585
--------------------------------------------------------------------------------
Adjustment of net income:
Actual net income $668,560 $631,084 $2,818,670 $1,839,655 $1,128,288
Interest increase, net of tax effect - - - - 1,538
--------------------------------------------------------------------------------
Adjusted net income $668,560 $631,084 $2,818,670 $1,839,655 $1,129,826
================================================================================
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Adjustment of shares outstanding:
<S> <C> <C> <C> <C> <C>
Actual average shares outstanding 1,651,175 1,614,409 1,638,376 1,143,336 1,017,522
Net additional shares issuable 122,632 61,617 122,663 89,896 46,239
-------------------------------------------------------------------------------
Adjusted shares outstanding 1,773,807 1,676,026 1,761,039 1,233,232 1,063,761
===============================================================================
Earnings per share:
Before adjustment $0.40 $0.39 $1.72 $1.61 $1.11
===============================================================================
After adjustment $0.38 $0.38 $1.60 $1.49 $1.06
===============================================================================
</TABLE>
15. REGULATORY MATTERS
The ability of the Bank to pay dividends to the Company is controlled by
certain regulatory restrictions. Permission from the Comptroller of the
Currency is required if the total of dividends declared in a calendar year
exceeds the total of the Bank's net profits, as defined by the
Comptroller, for that year, combined with its retained net profits of the
two preceding years.
The Bank is also required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by banking regulators. At March 31,
1996 and December 31, 1995, the Bank is required to have minimum Leverage
ratios, Tier 1 and Total Risk-Based Capital ratios of 4.00%, 4.00% and
8.00%, respectively. The Bank's actual ratios at March 31, 1996 were
5.24%, 8.28% and 9.15%, respectively. At December 31, 1995, the Bank's
actual ratios were 5.68%, 8.32% and 9.25%, respectively.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
61
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995 December 31, 1994
-------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Amount Amount Amount Amount Amount
-------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $23,085,480 $23,085,480 $17,242,366 $17,242,366 $10,170,697 $10,170,697
Investment securities 129,756,416 129,756,416 147,008,896 147,008,896 60,637,985 59,298,446
Loans receivable 201,346,025 202,537,769 183,633,631 187,037,088 134,861,257 138,414,095
Liabilities:
Demand deposits 127,524,799 127,524,799 128,802,293 128,802,293 75,004,480 75,004,480
Savings deposits 63,456,376 63,456,376 66,970,293 66,970,293 62,555,520 62,555,520
Certificates of deposit 160,093,402 160,855,200 139,475,210 140,877,573 58,458,820 58,277,701
Federal Home Loan Bank
Advances 8,000,000 8,000,000
</TABLE>
Cash and cash equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment securities - For investment securities, fair values are based
on quoted market prices, dealer quotes and prices obtained from
independent pricing services.
Loans receivable - The fair value was estimated by discounting approximate
cash flows of the portfolio to achieve a current market yield.
Demand deposits, savings deposits, certificates of deposit and advances
from the Federal Home Loan Bank The fair value of demand deposits, savings
deposits and advances from the Federal Home Loan Bank is the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated using rates currently offered for deposits and
advances of similar remaining maturities.
Commitments to extend credit and letters of credit - The majority of the
Bank's commitments to extend credit and letters of credit carry current
market interest rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by either the Bank
or the borrower, they only have value to the Bank and the borrower. The
carrying amount is a reasonable estimate of fair value.
No adjustment was made to the entry-value interest rates for changes in
credit performing commercial loans and real estate loans for which there
are no known credit concerns. Management segregates loans in appropriate
risk categories. Management believes that the risk factor embedded in the
entry-value interest rates along with the general reserves applicable to
the performing commercial and real estate loan portfolios for which there
are no known credit concerns result in a fair valuation of such loans on
an entry-value basis.
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1996, December 31,
1995 and 1994. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued
62
<PAGE>
for purposes of these consolidated financial statements since March 31,
1996, December 31, 1995 and 1994, and therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
17. INTEREST RATE RISK
The Company's exposure to interest rate risk results from the difference
in maturities on interest-bearing liabilities and interest-earning assets
and the volatility of interest rates. Because the Company's assets have a
shorter maturity than its liabilities, the Company's earnings will tend to
be negatively affected during periods of declining interest rates.
Conversely, this mismatch should benefit the Company during periods of
rising interest rates. Management monitors the relationship between the
interest rate sensitivity of the Company's assets and liabilities.
18. SUBSEQUENT EVENT
On June 6, 1996, Adolph F. Calovi, President and C.E.O. of the Company
exercised his option to purchase 101,346 shares of Common Stock at an
average purchase price of $9.40 per share. The shares were
subsequently sold to Bernard A. Brown, Chairman and Philip W. Koebig,
III, Executive Vice President.
63
<PAGE>
19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
-------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash $159,375 $159,205 $990,569
Investment in subsidiary 23,580,460 24,463,659 19,514,659
Office property and equipment 7,665 9,756 18,117
Accrued interest and other assets 32,286 38,176 47,841
-------------------------------------------------------------------
Total $23,779,786 $24,670,796 $20,571,186
===================================================================
SHAREHOLDERS' EQUITY
Common stock $1,651,175 $1,651,175 $1,556,434
Surplus 17,197,275 17,197,275 16,426,648
Retained earnings 6,075,334 5,406,774 2,588,104
Unrealized (loss) gain on securities available
for sale, net of taxes (1,143,998) 415,572
-------------------------------------------------------------------
TOTAL $23,779,786 $24,670,796 $20,571,186
===================================================================
</TABLE>
64
<PAGE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three
Month Periods For the Years Ended
Ended March 31, December 31,
--------------------------------------------------------------------------------
1996 1995 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $250 $4,528 $12,278 $(27,045) $ 114,874
Other income 7,200 10,825
Expenses 8,061 3,031 27,025 8,090 17,585
--------------------------------------------------------------------------------
(Loss) income before equity in undistributed
income of subsidiaries and income tax expense (7,811) 1,497 (14,747) (27,935) 108,114
Equity in undistributed income of subsidiaries 676,371 629,587 2,833,417 1,877,590 1,021,469
Income tax expense 10,000 1,295
--------------------------------------------------------------------------------
Net income $668,560 $631,084 $2,818,670 $1,839,655 $1,128,288
================================================================================
</TABLE>
65
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three
Month Period For the Years Ended
Ended March 31, December 31,
----------------- ------------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income $668,560 $631,084 $2,818,670 $1,839,655 $1,128,288
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 2,090 2,090 8,361 4,487 10,798
Undistributed income of subsidiaries (676,371) (629,587) (2,833,418) (1,877,591) (1,021,469)
Changes in assets and liabilities which
provided (used) cash:
Accrued interest and other assets 5,891 (8,009) 9,665 (9,712) (4,957)
Accounts payable and accrued expenses -- -- -- -- (8,892)
---------- ---------- ---------- ---------- -----------
Net cash provided by (used in)
operating activities 170 (4,422) 3,278 (43,161) 103,768
---------- ---------- ---------- ----------- -----------
Investing activities:
Proceeds from maturities of investment
securities 2,000,000
Purchase price of acquisitions, net of cash
received (7,801,950)
Purchase of properties and equipment (20,904)
Dividends from subsidiary 1,400,000
Advances to subsidiary (1,700,000) (1,200,000) --
------------ ------------ ----------
Net cash used in investing activities -- -- (1,700,000) (5,622,854) --
---------- ---------- ------------ ------------ ----------
Financing activities:
Net borrowings under line of credit agreement 4,500,000
Repayments of short-term borrowings (4,500,000)
Exercise of stock options 583,741 605,358
Proceeds from issuance of common stock 260,000 260,000 6,425,281
--------- --------- -----------
Net cash provided by financing activities -- 843,741 865,358 6,425,281 --
---------- --------- --------- ----------- ----------
Increase (decrease) in cash 170 839,319 (831,364) 759,266 103,768
Cash, beginning of period 159,205 990,569 990,569 231,303 127,535
--------- --------- --------- --------- ---------
Cash, end of period $159,375 $1,829,888 $159,205 $990,569 $231,303
======== ========== ======== ======== ========
</TABLE>
66
<PAGE>
Item 14. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Item 15. Financial Statements and Exhibits
(a) Financial Statements
SUN BANCORP, INC.
<TABLE>
<CAPTION>
<CAPTION>
<S> <C>
Page
Independent Auditors' Report............................................................................38
Consolidated Statements of Financial Condition as of March 31, 1996 and 1995, and
December 31, 1995 and 1994............................................................................39
Consolidated Statements of Income for the three months ended March 31, 1996
and 1995, and the Years Ended December 31, 1995, 1994 and 1993........................................40
Consolidated Statements of Shareholders' Equity for the three months ended
March 31, 1996 and 1995, and the Years Ended December 31, 1995, 1994 and 1993.........................41
Consolidated Statements of Cash Flows for the three months ended March 31, 1996
and 1995, and the Years Ended December 31, 1995, 1994 and 1993........................................42
Notes to Consolidated Financial Statements..............................................................44
</TABLE>
(b) Exhibits
3.1 Articles of Incorporation of Sun Bancorp, Inc. *
3.2 Bylaws of Sun Bancorp, Inc. *
4 Specimen of Stock Certificate *
10 The 1995 Stock Option Plan *
21 Subsidiaries of Sun Bancorp, Inc. *
27 Financial Data Schedules *
-------------------
* Previously filed.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
SUN BANCORP, INC.
August 6, 1996 By: /s/Philip W. Koebig III
- -------------- ---------------------------
Philip W. Koebig III
Executive Vice President
