As filed with the Securities and Exchange Commission on September 12, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SUN BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 6021 52-1382541
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(State or Other Jurisdiction (Primary Standard Industry (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
226 Landis Avenue, Vineland, New Jersey 08360
(609) 691-7700
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Office)
Mr. Philip W. Koebig, III
Executive Vice President
Sun Bancorp, Inc.
226 Landis Avenue, Vineland, New Jersey 08360
(609) 691-7700
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(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Please send copies of all communications to:
John J. Spidi, Esq. Steven L. Kaplan, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C. ARNOLD & PORTER
1301 K Street, N.W., Suite 700 East 555 Twelfth Street, N.W.
Washington, D.C. 20005 Washington, D.C. 20004
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Proposed Amount of
Securities Being Registered Registered Maximum Maximum Registration Fee
Offering Price Aggregate
Per Share (1) Offering Price
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Common Shares 747,967 $30.75 $23,000,000 $6,969.69
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(1) Based on the average of the high and low sales price of the Common Shares
as reported by the Nasdaq SmallCap Market on September 11, 1997.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED __________, 1997
_________________ Shares
[LOGO]
Sun Bancorp, Inc.
Common Stock
Sun Bancorp, Inc., a New Jersey corporation (the "Company"), is
offering for sale _______ shares of its common stock, $1.00 par value per share
(the "Common Shares"), at a price of $__.__ per share (the "Offering"). The
Common Shares are currently quoted on the Nasdaq SmallCap Market under the
symbol "SNBC." Application has been made to have the Common Shares approved for
quotation on the Nasdaq National Market.
Prospective investors should carefully consider the factors set forth
in "Risk Factors" beginning on page __ hereof.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR
OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER INSURER OR GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting Discount
Price to Public and Commissions Proceeds to Company
(1) (2)
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Per Share............................ $ $
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Total(3)............................. $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. The
Underwriters will not receive any discounts or commissions on Common Shares
purchased by officers, directors or their associates. See "Underwriting."
(2) Before deducting estimated expenses of the Offering of approximately
$__________ payable by the Company.
(3) The Company has granted the Underwriters an option to purchase up to
________ additional Common Shares at the Price to Public less Underwriting
Discounts and Commissions solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Commissions and Proceeds to Company will be
increased to $__________, $__________ and $__________, respectively. The
managing underwriter will receive a financial advisory fee of $100,000. See
"Underwriting."
The shares of Common Stock are offered severally by the Underwriters
named herein, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters. The Underwriters reserve the right to reject orders in
whole or in part and to withdraw, cancel or modify the Offering without notice.
It is expected that delivery of certificates representing the shares of Common
Stock will be made to the Underwriters on or about __________ ____, 1997.
------------------------------
Advest, Inc.
The date of this Prospectus is ________, 1997
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sales of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such State.
<PAGE>
MAP
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES
OFFERED HEREBY, INCLUDING STABILIZATION, THE PURCHASE OF COMMON SHARES TO COVER
SYNDICATE SHORT POSITIONS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus is based on the assumption that the Underwriters (as defined
herein) will not exercise their over-allotment option. In August 1997, the Board
of Directors declared a three for two stock split of the Company's common stock,
par value $1.00 per share, effected in the form of a 50% common stock dividend
paid in September 1997. Where appropriate, amounts throughout this Prospectus
have been adjusted to reflect the stock split.
THE COMPANY
The Company, a New Jersey corporation, is a bank holding company
headquartered in Vineland, New Jersey with two subsidiaries, Sun National Bank
(the "Bank"), a national banking association and Sun Capital Trust, a Delaware
business trust. At June 30, 1997, the Company had total assets of $585.2
million, total deposits of $467.4 million and total shareholders' equity of
$29.1 million. Substantially all of the Bank's deposits are federally insured by
the Bank Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The deposits acquired pursuant to the Oritani
branch purchase are federally insured by the Savings Association Insurance Fund
("SAIF") which is also administered by the FDIC. The Company's principal
business is to serve as a holding company for the Bank. As a registered bank
holding company, the Company is subject to the supervision and regulation of the
Board of Governors of the Federal Reserve System (the "Federal Reserve").
The Company was incorporated, and the Bank was chartered, in 1985. In
April 1995, the Company changed its name from Citizens Investments, Inc. to its
present name. It is the Company's strategy to expand its retail market
throughout southern and central New Jersey. Since 1994, the Company has
successfully completed the acquisition of two commercial banks with a total of
$117 million in assets as well as four purchase and assumption transactions in
which the Company acquired fifteen branches with $229 million in deposits. The
Company opened three de novo branches: Cape May in March 1997, Toms River in
June 1997 and Long Beach Island in June 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview." In
addition, the Company entered into an agreement to acquire eleven branches, with
$177 million in deposits, from The Bank of New York, New York, New York (see
"Oritani and Bank of New York Branch Purchases"). Through its acquisition and
expansion program, the Company has significantly increased its asset size as
well as the Bank's retail network. At December 31, 1993, the Company's total
consolidated assets were $112.0 million as compared to $585.2 million at June
30, 1997.
The Bank provides community banking services through 28 branches
located in southern New Jersey. The Bank offers a wide variety of consumer and
commercial lending and deposit services. The loans offered by the Bank include
commercial and industrial loans, commercial real estate loans, home equity
loans, mortgage loans and installment loans. The Bank also offers deposit and
personal banking services including checking, regular savings, money market
deposits, term certificate accounts and individual retirement accounts. Through
a third party arrangement, the Bank also offers mutual funds, securities
brokerage and investment advisory services. The Bank considers its primary
market area to be the New Jersey counties of Atlantic, Burlington, Camden, Cape
May, Cumberland, Mercer, Ocean and Salem. The Bank's market area contains a
diverse base of customers, including agricultural, manufacturing, transportation
and retail consumer businesses.
The executive office of the Company is located at 226 Landis Avenue,
Vineland, New Jersey 08360 and its telephone number is (609) 691-7700.
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3
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Financial Summary
<TABLE>
<CAPTION>
At or for the Six
Months Ended
June 30, At or for Year Ended December 31,
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1997 1996 1995 1994 1993 1992
------------------- ---------- ------------- -------------- -------------- --------
(Dollars in thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C> <C>
Net income .............. $ 1,482 $ 3,013 $ 2,819 $ 1,840 $ 1,128 $ 813
Net income per share
(fully diluted) ........ 0.47 0.99 0.97 0.90 0.64 0.46
Total assets ............ 585,219 436,795 369,895 217,351 112,015 104,162
Loans receivable (net) .. 363,705 295,501 183,634 134,861 83,387 82,080
Shareholders' equity .... 29,071 27,415 24,671 20,571 12,306 11,178
Return on average
assets ................. 0.62% 0.74% 1.03% 1.09% 1.04% 0.74%
Return on average
equity ................. 10.69% 11.99% 12.42% 11.74% 9.61% 7.56%
Net yield on
interest-earning assets 4.33% 4.57% 5.30% 5.39% 5.29% 4.96%
</TABLE>
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4
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THE OFFERING
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Common Shares Offered..................................... ______ shares of Common Stock.
Common Shares Outstanding prior to the Offering........... __________ shares
Common Shares Outstanding after the Offering.............. ________ shares. Assumes no exercise of the
Underwriters' over-allotment option to purchase up
to ________ Common Shares. See "Underwriting."
Estimated Net Proceeds to the Company..................... $________. Assumes no exercise of the
Underwriters' over-allotment option to purchase up
to ________ Common Shares. See "Underwriting."
Dividends on Common Shares................................ Historically, the Company has not paid cash
dividends on its Common Shares. The Company
paid a 5% stock dividend on October 30, 1996 and a
5% stock dividend on June 25, 1997. In August
1997, the Company declared a three for two
common stock split effected by means of a 50%
stock dividend paid in September 1997. Future
declarations of dividends by the Board of Directors
will depend upon a number of factors, including the
Company's and the Bank's financial condition and
results of operations, investment opportunities
available to the Company or the Bank, capital
requirements, regulatory limitations, tax
considerations, the amount of net proceeds retained
by the Company and general economic conditions.
See "Price Range of Common Shares; Dividends,"
and "Risk Factors -- Limitations on Payment of
Dividends."
Use of Proceeds........................................... The proceeds received by the Company from the sale
of the Common Shares will be used to contribute
capital to the Bank. The Bank intends to use the
capital for general corporate purposes, primarily to
support The Bank of New York branch purchase.
See "Use of Proceeds" and "Oritani and Bank of
New York Branch Purchases."
Nasdaq National Market Symbol............................. Application has been made to have the Common
Shares approved for quotation on the Nasdaq
National Market under the symbol "SNBC."
</TABLE>
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors," beginning on page 7.
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5
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SELECTED CONSOLIDATED FINANCIAL DATA
The following summary information regarding the Company should be read in
conjunction with the consolidated financial statements of the Company and notes
beginning on page F-1. Consolidated historical financial and other data
regarding the Company at or for the six months ended June 30, 1997, have been
prepared by the Company without audit and may not be indicative of results on an
annualized basis or any other period. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) that are necessary
for a fair presentation for such periods or dates have been made.
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<CAPTION>
At or For the Six
Months Ended
June 30, (1) At or For the Years Ended December 31,
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1997 1996 1995 1994 1993 1992
------------------- ----------- ----------- ----------- --------- --------
(Dollars in thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C> <C>
Selected Results of Operations
Interest income.............................. $ 18,145 $ 29,270 $ 20,850 $ 12,194 $ 8,164 $ 8,629
Net interest income.......................... 9,454 16,736 13,163 8,256 5,327 4,991
Provision for loan losses.................... 825 900 808 383 2 96
Net interest income after
provision for loan losses................. 8,629 15,836 12,355 7,873 5,325 4,895
Other income................................. 776 1,746 1,651 732 472 770
Other expenses............................... 7,332 13,207 10,047 5,991 4,198 4,354
Net income................................... 1,482 3,013 2,819 1,840 1,128 813
Per Share Data
Net income
Primary................................... 0.47 1.00 0.97 0.90 0.64 0.46
Fully diluted............................. 0.47 0.99 0.97 0.90 0.64 0.46
Book value................................... 9.97 9.68 9.11 10.88 7.31 6.65
Selected Balance Sheet Data
Assets....................................... 585,219 436,795 369,895 217,351 112,015 104,162
Cash and investments......................... 188,418 117,388 164,251 70,809 24,134 17,670
Loans receivable (net) ...................... 363,705 295,501 183,634 134,861 83,387 82,080
Deposits..................................... 467,394 385,987 335,248 196,019 99,099 91,837
Borrowings and securities sold under
agreements to repurchase................... 57,426 21,253 8,000 -- -- --
Shareholders' equity......................... 29,071 27,415 24,671 20,571 12,306 11,178
Performance Ratios
Return on average assets..................... 0.62% 0.74% 1.03% 1.09% 1.04% 0.74%
Return on average equity..................... 10.69% 11.99% 12.42% 11.74% 9.61% 7.56%
Net yield on interest-earning assets......... 4.33% 4.57% 5.30% 5.39% 5.29% 4.96%
Asset Quality Ratios
Non-performing loans to total loans.......... 0.72% 0.81% 1.72% 1.82% 1.84% 1.02%
Non-performing assets to total loans
and other real estate owned................ 0.90% 1.06% 2.19% 2.56% 2.26% 1.19%
Net charge-offs to average total loans....... 0.12% 0.16% 0.23% 0.29% 0.02% 0.14%
Total allowance for loan losses to total
non-performing loans....................... 127.32% 107.26% 64.47% 64.74% 69.10% 128.53%
Capital Ratios
Equity to assets............................. 4.97% 6.28% 6.67% 9.46% 10.99% 10.73%
Tier 1 risk-based capital ratio.............. 7.52% 7.44% 8.67% 14.01% 15.59% 12.80%
Total risk-based capital ratio............... 12.99% 8.28% 9.64% 15.22% 16.84% 14.05%
Leverage ratio............................... 5.68% 5.43% 5.74% 8.44% 10.74% 9.31%
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(1) Ratios are annualized where appropriate.
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6
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Shares offered by this Prospectus. Certain statements in this Prospectus are
forward-looking and are identified by the use of forward-looking words or
phrases such as "intended," "will be positioned," "expects," is or are
"expected," "anticipates," and "anticipated." These forward-looking statements
are based on the Company's current expectations. To the extent any of the
information contained in this Prospectus constitutes a "forward-looking
statement" as defined in Section 27A(i)(1) of the Securities Act, the risk
factors set forth below are cautionary statements identifying important factors
that could cause actual results to differ materially from those in the
forward-looking statement.
Status of the Company as a Bank Holding Company
The Company is a legal entity separate and distinct from the Bank,
although the principal source of the Company's cash revenues is dividends from
the Bank.
The right of the Company to participate in the assets of any subsidiary
upon the latter's liquidation, reorganization or otherwise (and thus the ability
of the holders of Common Stock to benefit indirectly from any such distribution)
will be subject to the claims of the subsidiaries' creditors, which will take
priority except to the extent that the Company may itself be a creditor with a
recognized claim.
The Bank is also subject to restrictions under federal law which limit
the transfer of funds by the Bank to the Company, whether in the form of loans,
extensions of credit, investments, asset purchases or otherwise. Such transfers
by the Bank to the Company are limited in amount to 10% of the Bank's capital
and surplus. Furthermore, such loans and extensions of credit are required to be
secured in specified amounts.
Rapid Growth
During the last three years, the Bank has experienced rapid and
significant growth. The total assets of the Bank have increased from $112.0
million at December 31, 1993, to $585.2 million at June 30, 1997. Although the
Bank believes that it has adequately managed its growth in the past, there can
be no assurance that the Bank will continue to experience such rapid growth, or
any growth, in the future and, to the extent that it does experience continued
growth, that the Bank will be able to adequately and profitably manage such
growth. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The continued growth has led the Company to undertake the present
offering of Common Shares. The capital to be raised from the sale of the Common
Shares offered hereby, is necessary to provide sufficient capital to support the
growth of assets. No assurance can be given that this rapid growth will
continue, but, if it does, there is no assurance that the earnings of the
Company and the Bank can adequately provide the necessary capital for the Bank
and the Company to maintain required regulatory capital levels commensurate with
continued rapid growth. After giving effect to the sale of the Common Shares and
the Oritani and Bank of New York branch purchases, the Company and the Bank will
be "well capitalized" for federal bank regulatory purposes. The level of future
earnings of the Company also will depend on the ability of the Company and the
Bank to profitably deploy and manage the increased assets. The rapid growth of
the Bank in asset size and the rapid increase in its volume of total loans
during the past three years have increased the possible risks inherent in an
investment in the Company.
7
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Although the Bank has experienced moderate loan losses to date, the
rapid growth of its loan portfolio from $83.4 million at December 31, 1993, to
$363.7 million at June 30, 1997, may result in an increase to its loan loss
experience. Due to the high volume of recent loans, many of the loans of the
Bank are unseasoned, thereby increasing the potential for additional loan losses
even if the Bank continues to adhere to the same underwriting criteria and
monitoring procedures that have resulted in the Bank's moderate loan loss
experience. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Lending Activities." The Office of the Comptroller of
the Currency (the "OCC") has previously stated that banks experiencing rapid
growth may be subject to greater risks.
Loan Portfolio Considerations
During the past three years, the Company has experienced significant
growth in its loan portfolio. Net loans increased to $363.7 million at June 30,
1997, from $83.4 million at December 31, 1993. While many components of the loan
portfolio have contributed to this increase over the past three years, much of
this loan growth has occurred in the portfolio of commercial and industrial
loans. Commercial and industrial loans increased by 87.7% or $104.2 million
during 1996 as compared to 1995 and comprised 75.5% of total loans as of
December 31, 1996. As of June 30, 1997, commercial and industrial loans
comprised 77.5% of total loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Analysis of Loan Portfolio." As a
result of this recent growth, a significant portion of the Company's total loan
portfolio may be considered unseasoned and, therefore, specific payment and loss
experience for this portion of the portfolio has not yet been fully established.
In addition, the nature of commercial and industrial loans is such that they may
present more credit risk to the Company than other types of loans such as home
equity or residential real estate loans. Further, these loans are concentrated
in Atlantic, Burlington, Camden, Cape May, Cumberland, Ocean, and Salem
Counties, in southern New Jersey. As a result, a decline in the general economic
conditions of southern New Jersey could have a material adverse effect on the
Company's financial condition and results of operations taken as a whole. See
"Business of the Company--Lending Activities--Commercial and Industrial Loans."
Allowance for Loan Losses
The risk of loan losses varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value of the collateral for the loan. Management maintains an allowance for
loan losses based upon, among other things, historical experience, an evaluation
of economic conditions and regular review of delinquencies and loan portfolio
quality. Based upon such factors, management makes various assumptions and
judgments about the ultimate collectibility of the loan portfolio and provides
an allowance for loans losses based upon a percentage of the outstanding
balances and for specific loans when their ultimate collectibility is considered
questionable. If management's assumption and judgments prove to be incorrect and
the allowance for loan losses is inadequate to absorb future credit losses, or
if the bank regulatory authorities require the Bank to increase the allowance
for loan losses, the Bank's earnings could be significantly and adversely
affected. Because certain lending activities involve greater risks, the
percentage applied to specific loan types may vary.
As of June 30, 1997, the allowance for loan losses was $3.4 million,
which represented 0.91% of total loans. The allowance for loan losses as a
percentage of nonperforming loans was 127.32% as of June 30, 1997. The Company
actively manages its nonperforming loans in an effort to minimize credit losses
and monitors its asset quality to maintain an adequate allowance for loan
losses. As its loan growth
8
<PAGE>
has increased, the Bank has increased its allowance for loan losses. The Company
believes that such allowance is adequate, however, future additions to the
allowance in the form of the provision for loan losses may be necessary due to
changes in economic conditions and growth of the Bank's loan portfolio.
Control by Management
A total of __________ Common Shares of the Company is beneficially
owned by the directors and executive officers of the Company, or _____% of the
Common Shares outstanding following the Offering, assuming directors and
executive officers purchase _______________ shares in the Offering and that the
Underwriters do not exercise the over-allotment option. Therefore, to the extent
they vote together, the directors and executive officers of the Company will
have the ability to exert significant influence over the election of the
Company's Board of Directors and other corporate actions requiring stockholder
approval. See "Security Ownership of Certain Beneficial Owners and Management"
and "Underwriting."
Limitations on Payment of Dividends
Historically, the Company has not paid cash dividends on its Common
Shares. The Bank is a wholly owned subsidiary of the Company and its principal
income-producing entity. Accordingly, dividends payable by the Company are
subject to the financial condition of the Bank and the Company as well as other
business considerations. In addition, because the Bank is a depository
institution insured by the FDIC, it may not pay dividends or distribute any of
its capital assets if it is in default on any assessment due the FDIC. Payment
of dividends by the Bank is restricted by statutory limitations. 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. OCC
regulations also impose certain minimum capital requirements that affect the
amount of cash available for the payment of dividends by the Bank. At June 30,
1997, under the recent earnings test, which is presently the more restrictive of
the available methods of calculating the dividend limitations of a national
bank, $8.3 million was available for payment as dividends from the Bank to the
Company without the need for approval from the OCC. Even if the Bank is able to
generate sufficient earnings to pay dividends, there is no assurance that its
Board of Directors might not decide or be required to retain a greater portion
of the Bank's earnings in order to maintain existing capital or achieve
additional capital necessary because of (i) an increase in the capital
requirements established by the OCC, (ii) a significant increase in the total of
risk-weighted assets held by the Bank, (iii) a significant decrease in the
Bank's income, (iv) a significant deterioration of the quality of the Bank's
loan portfolio, (v) a determination by the OCC that the payment of a dividend
would (under the circumstances) constitute an "unsafe or unsound" banking
practice, or (vi) new federal or state regulations. The occurrence of any of
these events would decrease the amount of funds potentially available for the
payment of dividends. In addition, under Federal Reserve policy, the Company is
required to maintain adequate regulatory capital and is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank in circumstances where it might not do so absent such a policy. This policy
could have the effect of reducing the amount of dividends declarable by the
Company.
9
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Competition
The banking business is highly competitive. In its primary market area,
the Bank competes with other commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. Many of
the Bank's primary competitors have substantially greater resources and lending
limits than the Bank and may offer certain services, such as trust services,
that the Bank does not provide at this time. The profitability of the Company
depends upon the Bank's ability to compete in its primary market area.
See "Business -- Competition."
Supervision and Regulation
Bank holding companies and banks operate in a highly regulated
environment and are subject to the supervision and examination by several
federal regulatory agencies. The Company is subject to the Bank Holding Company
Act of 1956, as amended ("BHCA"), and to regulation and supervision by the
Federal Reserve, and the Bank is subject to regulation and supervision by the
OCC and the FDIC. The Bank is also a member of the Federal Home Loan Bank of New
York (the "FHLB") and is subject to regulation thereby. Federal and state
banking laws and regulations govern matters ranging from the regulation of
certain debt obligations, changes in the control of bank holding companies, and
the maintenance of adequate capital to the general business operations and
financial condition of the Bank, including permissible types, amounts and terms
of loans and investments, the amount of reserves against deposits, restrictions
on dividends, establishment of branch offices, and the maximum rate of interest
that may be charged by law. The Federal Reserve, the FDIC, and the OCC also
possess cease and desist powers over bank holding companies and banks, to
prevent or remedy unsafe or unsound practices or violations of law. These and
other restrictions limit the manner in which the Company and the Bank may
conduct their business and obtain financing. Furthermore, the commercial banking
business is affected not only by general economic conditions, but also by the
monetary policies of the Federal Reserve. These monetary policies have had, and
are expected to continue to have, significant effects on the operating results
of commercial banks. Changes in monetary or legislative policies may affect the
ability of the Bank to attract deposits and make loans. See "Supervision and
Regulation."
Potential Impact of Changes in Interest Rates
The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between its interest income on
interest-earning assets and its interest expense on interest-bearing
liabilities. The Company, like most financial institutions, is affected by
changes in general interest rate levels and by other economic factors beyond its
control. Interest rate risk arises from mismatches (i.e., the interest
sensitivity gap) between the dollar amount of repricing or maturing assets and
liabilities, and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More assets repricing or maturing than
liabilities over a given time period is considered asset-sensitive and is
reflected as a positive gap, and more liabilities repricing or maturing than
assets over a given time period is considered liability-sensitive and is
reflected as negative gap. An asset-sensitive position (i.e., a positive gap)
will generally enhance earnings in a rising interest rate environment and will
negatively impact earnings in a falling interest rate environment, while a
liability-sensitive position (i.e., a negative gap) will generally enhance
earnings in a falling interest rate environment and negatively impact earnings
in a rising interest rate environment. Fluctuations in interest rates are not
predictable or controllable. The Company has attempted to structure its asset
and liability management strategies to mitigate the impact on net interest
income of changes in market interest rates. However, there can be no assurance
10
<PAGE>
that the Company will be able to manage interest rate risk so as to avoid
significant adverse effects in net interest income. At June 30, 1997, the
Company had a one year cumulative negative gap of 12.57%. This negative gap
position may, as noted above, have a negative impact on earnings in a rising
interest rate environment. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Gap Analysis."
Limited Trading Market; Possible Volatility of Stock Price
Prior to this Offering, the Common Shares have been quoted on the
Nasdaq SmallCap Market, with trading in Common Shares being limited and
infrequent. Since August 29, 1996, trading volume for Common Shares has averaged
less than 10,000 shares per week. Application has been made to have the Common
Shares approved for quotation on the Nasdaq National Market, but one of the
requirements for listing is the presence of three market makers for the Common
Shares. Nasdaq National Market maintenance standards require the existence of
two market makers for continued listing. Advest, Inc. has advised the Company
that it intends to continue to make a market in Common Shares so long as the
volume of trading activity in the Common Shares and certain other market making
considerations justify doing so. However, there can be no assurance that an
established and liquid trading market will develop or, if developed, will be
sustained following the Offering. The market price of the Common Shares could be
subject to significant fluctuations in response to variations in quarterly and
yearly operating results, general trends in the banking industry and other
factors. In addition, the stock market can experience price and volume
fluctuations that may be unrelated or disproportionate to the operating
performance of affected companies. These broad fluctuations may adversely affect
the market price of the Common Shares.
Economic Conditions and Monetary Policies
Conditions beyond the Company's control may have a significant impact
on changes in net interest income from one period to another. Examples of such
conditions could include: (i) the strength of credit demands by customers; (ii)
fiscal and debt management policies of the federal government, including changes
in tax laws; (iii) the Federal Reserve's monetary policy; (iv) the introduction
and growth of new investment instruments and transaction accounts by non-bank
financial competitors; and (v) changes in rules and regulations governing the
payment of interest on deposit accounts.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the _________ Common
Shares offered by the Company (after giving effect to the payment of estimated
offering expenses) are estimated to be approximately $___________ ($_________ if
the Underwriters' over-allotment option is exercised in full). Such proceeds
will qualify under the capital adequacy guidelines of the Federal Reserve as
Tier 1 capital for the Company. The net proceeds will be used by the Company to
provide additional equity capital to the Bank. The Bank intends to use the
capital for general corporate purposes, primarily to support the Bank of New
York branch purchase.
11
<PAGE>
ORITANI AND BANK OF NEW YORK BRANCH PURCHASES
Oritani Branch Purchase
On July 24, 1997, the Bank acquired approximately $34 million in
deposit liabilities in three branch offices (the "Oritani branch purchase")
located in the Camden County, New Jersey communities of Clementon, Lindenwold
and Merchantville, from Oritani Savings Bank, SLA, Hackensack, New Jersey
("Oritani"). The Bank paid Oritani a premium of $2,151,000 for the assumption of
the deposit liabilities. The Bank purchased two branches owned by Oritani at
their fair market value and assumed the lease on the third branch location. The
Bank received approximately $30 million in net proceeds from the transaction.
The investment and lending activities of the Oritani branches purchased did not
transfer to the Bank.
As of June 30, 1997, the cost of funds related to the deposits assumed
from the Oritani branch purchase was approximately 4.64%. Management does not
believe there will be a material deposit outflow after the branch purchase. The
Bank has historically priced its deposit products to be competitive in the
markets served. For the six months ended June 30, 1997, the Bank's average cost
of deposits was 3.41%. It is anticipated that this practice, combined with the
level of personal service provided, will allow the Bank to retain a significant
portion of the deposits acquired. In this regard, Oritani has agreed not to
directly solicit the deposit customers affected by the branch purchases, nor
establish a branch or automatic teller machine ("ATM") facility within Camden
County, New Jersey for a period of one year.
While management does not believe the Oritani branch purchase will have
a significant, long-term, adverse impact on its operations, it is expected that
it will have a short-term impact on its performance and financial position
ratios, such as its return on average assets and its loan to deposit ratio, as
net cash received in the branch purchase is gradually invested in investment
securities and loans.
Bank of New York Branch Purchase
On June 4, 1997, the Bank entered into a Branch Purchase and Deposit
Assumption Agreement with The Bank of New York to acquire approximately $177
million in deposit liabilities and approximately $29 million of loans and eleven
branch offices (the "Bank of New York branch purchase") located in the southern
and central New Jersey counties of Atlantic, Mercer, Middlesex and Somerset.
Based upon June 30, 1997 deposits, the Bank agreed to pay The Bank of New York a
premium of approximately $17.1 million (9.75%) for the assumption of the deposit
liabilities and will receive approximately $159.9 million in net proceeds in the
form of cash, real estate and loans. The deposits to be assumed consist of
$154.8 million in core deposits (demand deposits, savings deposits, money market
accounts, etc.) and $22.1 million in time deposits (certificates of deposit).
The investment and some of the lending activities of the Bank of New York
branches to be purchased will not be transferred to the Bank. The Bank of New
York branch purchase will be accounted for using the purchase method of
accounting and is expected to close during the fourth quarter of 1997, subject
to regulatory approval. There can be no assurance that regulatory approval will
be obtained, or that such approval, if any, will not delay consummation of The
Bank of New York branch purchase, or will not contain conditions that would
cause the Bank to abandon the transaction.
As of June 30, 1997, based on information supplied to the Bank by The
Bank of New York, the cost of funds related to the deposits to be assumed from
the Bank of New York branch purchase, was approximately 1.70%. The Bank has
historically priced its deposit products to be competitive in the
12
<PAGE>
markets served. It is anticipated that this practice, combined with the level of
personal service provided, will allow the Bank to retain a significant portion
of the deposits to be acquired, but there can be no assurance that the Bank will
not experience a material deposit outflow following consummation of the
transaction. In this regard, The Bank of New York has agreed not to directly
solicit the deposit customers affected by the branch purchase for a period of
two years.
Management believes that the Bank of New York branch purchase will have
a short-term adverse impact on certain financial position ratios, such as its
loan to deposit ratio, as net cash received in the branch purchase is gradually
invested in interest-earning assets. However, due to the assumed low cost of
funds related to the deposits to be acquired, management expects The Bank of New
York branch purchase to positively impact its interest rate spread and net
interest income.
13
<PAGE>
Pro Forma Consolidated Statement of Financial Condition
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Bank of New
Stock York Branch Oritani Branch Pro Forma
Offering Purchase Purchase Consolidated
Company Dr. (Cr.) Dr. (Cr.) Dr. (Cr.) Company
------- --------- --------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets
Cash and amounts due from banks............. $ 26,688 $ -- $ 3,000 (1) $ 181 (1) $ 29,869
Federal funds sold.......................... 11,150 20,000 ((4) 135,300 (1) 33,338 (1)
(1,380) (4) (17,100) (3) (2,151) (2) 179,157
Investment securities available-for-
sale...................................... 150,581 -- -- 150,581
Loans receivable (net)...................... 363,705 29,000 (1) -- (1) 392,705
Bank properties and equipment............... 14,211 9,600 (1) 547 (1) 24,358
Real estate owned........................... 666 666
Accrued interest receivable................. 4,587 4,587
Excess of cost over fair value
of net assets acquired.................... 9,558 17,100 (3) 2,151 (2) 28,809
Deferred taxes.............................. 1,227 1,227
Other assets................................ 2,846 -- -- -- 2,846
------- ------- ------- -------- ---------
Total.................................... $585,219 $ 18,620 $176,900 $ 34,066 $ 814,805
======= ======= ======= ======== =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits.................................... $467,394 $ -- $176,900 (1) $ 33,922 (1) $ 678,216
Advances from the FHLB...................... 48,500 48,500
Securities sold under agreements
to repurchase............................. 8,925 8,925
Other liabilities........................... 2,578 -- 144 2,723
------- -------- ------- ---------
Total liabilities......................... 527,398 176,900 34,066 738,364
------- -------- ------- ---------
Guaranteed preferred beneficial interest
in subordinated debt...................... 28,750 28,750
Shareholders' equity:
Preferred stock............................. -- --
Common stock................................ 1,945 1,945
Surplus..................................... 18,090 18,620 (4) 36,710
Retained earnings........................... 9,902 9,902
Unrealized (loss) on securities, net
of income taxes........................... (866) -- -- -- (866)
------ ------- -------- -------- ---------
Total shareholders' equity.................. 29,071 18,620 -- -- 47,691
-------- ------- -------- -------- ----------
Total....................................... $ 585,219 $ 18,620 $ 176,900 $ 34,066 $ 814,805
======== ======= ======== ======== ==========
</TABLE>
- ------------------
(1) To record branch purchase.
(2) To record premium paid on the assumption of the deposit liabilities ($2.2
million). The excess of cost over fair value of net assets acquired will be
amortized over a seven year period.
(3) To record premium paid on the assumption of the deposit liabilities ($17.1
million). The excess of cost over fair value of net assets acquired will be
amortized over a seven year period.
(4) To record net proceeds from common stock offering.
14
<PAGE>
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of
the Company at June 30, 1997, (ii) the consolidated capitalization of the
Company giving effect to the issuance of the Common Shares hereby offered by the
Company assuming the Underwriters' over-allotment was not exercised, (iii) the
pro forma effect of the Oritani and Bank of New York branch purchases, and (iv)
the actual and pro forma capital ratios of the Company and the Bank.
<TABLE>
<CAPTION>
(Unaudited)
As Adjusted
--------------------------------------------------------
Sale of Common
Shares and Oritani
Sale of and Bank of New York
Actual Common Shares Branch Purchases
------ ------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Guaranteed preferred beneficial interest in
subordinated debt................................ $28,750 $28,750 $28,750
SHAREHOLDERS' EQUITY:
Preferred stock $1 par value, 1,000,000
shares authorized, none issued................. -- -- --
Common stock $1 par value - 10,000,000
shares authorized; 1,945,417 outstanding........ 1,945 1,945 1,945
Surplus.......................................... 18,090 36,710 36,710
Retained earnings................................ 9,902 9,902 9,902
Unrealized loss on securities available-for-
sale, net of income taxes....................... (866) (866) (866)
Total shareholders' equity................... 29,071 47,691 47,691
------- -------- -------
Total capitalization........................... $ 57,821 $ 76,441 $ 74,441
======= ======== =======
COMPANY CAPITAL RATIOS(1):
Tier 1 risk-based capital ratio.................. 7.52% 13.54% 7.54%
Total risk-based capital ratio................... 12.99 17.44 10.88
Leverage ratio................................... 5.93 8.86 6.58
BANK CAPITAL RATIOS(2):
Tier 1 risk-based capital ratio.................. 11.44 15.93 9.55
Total risk-based capital ratio................... 12.27 16.76 10.25
Leverage ratio................................... 8.63 11.56 8.57
</TABLE>
- ------------------------
(1) The capital ratios, as adjusted, are computed including the total
estimated net proceeds from the sale of the Common Shares, in a manner
consistent with Federal Reserve guidelines.
(2) Assumes that the Company will contribute all the net proceeds from the
sale of the Common Shares to the Bank. The capital ratios, as adjusted,
are computed in a manner consistent with OCC guidelines.
15
<PAGE>
PRICE RANGE OF COMMON SHARES; DIVIDENDS
The Company's Common Shares have been quoted on the Nasdaq SmallCap Market
under the symbol "SNBC" since August 29, 1996 with trading in Common Shares
being limited and infrequent. Since August 29, 1996, trading volume for Common
Shares has averaged less than 10,000 shares per week. Application has been made
to have the Common Shares approved for quotation on the Nasdaq National Market.
The following table sets forth the high and low closing sale prices for the
Common Shares for the calendar quarters indicated, as published by the Nasdaq
SmallCap Market.
High Low
---- ---
1996
Third quarter (from August 29, 1996)..... $13.61 $12.70
Fourth quarter........................... 14.13 12.70
1997
First quarter............................ 14.76 13.01
Second quarter........................... 15.67 13.65
Third quarter (through August 31, 1997).. 18.00 14.83
The last reported sale price of the Common Shares on the Nasdaq SmallCap
Market as of __________, 1997 was $__________. There were _____ holders of
record of the Company's Common Shares as of __________, 1997.
Historically, the Company has not paid cash dividends on its Common Shares.
The Company paid a 5% stock dividend on October 30, 1996 and a 5% stock dividend
on June 25, 1997. In August 1997, the Company declared a three for two Common
Share stock split effected by means of a 50% stock dividend paid in September
1997. Future declarations of dividends by the Board of Directors will depend
upon a number of factors, including the Company's and the Bank's financial
condition and results of operations, investment opportunities available to the
Company or the Bank, capital requirements, regulatory limitations, tax
considerations, the amount of net proceeds retained by the Company and general
economic conditions.
The ability of the Company to pay dividends is dependent on the ability of
the Bank to pay dividends to the Company. Because the Bank is a depository
institution insured by the FDIC, it may not pay dividends or distribute any of
its capital assets if it is in default on any assessment due the FDIC. In
addition, OCC regulations also impose certain minimum capital requirements that
affect the amount of cash available for the payment of dividends by the Bank.
Under Federal Reserve policy, the Company is required to maintain adequate
regulatory capital and is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where it
might not do so absent such a policy. This policy could have the effect of
reducing the amount of dividends declarable by the Company.
16
<PAGE>
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 and
commercial real estate 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.
Overview
Beginning in 1993, the Company embarked upon a strategy to expand its
operations and retail market throughout southern New Jersey through internal
growth and mergers and acquisitions. The Board and management perceived
opportunities to expand the Company as a result of a lack of competitive
commercial banking services being provided to local businesses and the need for
a locally based and managed community bank. Continued consolidation of the
banking industry and a regionalization of decision-making authority by larger
banking institutions left many businesses and individuals in the Bank's market
area underserved.
In mid-1994, the Company acquired the First National Bank of Tuckahoe
("Tuckahoe") which operated three branch offices in Cape May County, and
Southern Ocean State Bank ("Ocean"), which operated four branches in Ocean
County. The two transactions, combined, resulted in the acquisition of $49
million of loans and $105 million of deposits and an increase in assets of $117
million. These banks and their operations were merged into the Bank in 1994.
In 1995, as the result of further consolidation of banks and their
restructuring of operations in New Jersey, the Bank acquired $52 million of
deposits and four branches located in the southern New Jersey counties of
Cumberland, Atlantic and Ocean from NatWest Bank and $70 million of deposits and
four branches located in Cumberland and Burlington counties from New Jersey
National Bank. As a result of these two branch purchase transactions, the Bank
acquired $122 million of deposits; the corresponding amount of cash received to
fund the deposit transfer was initially used to purchase investment securities.
In addition, the Bank opened a new banking office in Pleasantville in 1995 and
an office in Cape May Court House in 1996.
On June 5, 1997, the Bank acquired $73 million in deposit liabilities
and $2.5 million of loans and four branch offices located in the southern New
Jersey counties of Salem and Burlington from First Union National Bank,
Avondale, Pennsylvania ("First Union"). On July 24, 1997, the Bank acquired
approximately $34 million in deposit liabilities and three branch offices
located in Camden County, New
17
<PAGE>
Jersey from Oritani. In addition, the Bank opened de novo branches in Cape May
in March 1997, Toms River in June 1997 and Long Beach Island in June 1997.
In recent years, the Bank also has experienced a significant level of
loan growth. The Bank's loan portfolio increased from $83.4 million at December
31, 1993, to $363.7 million at June 30, 1997. Much of this loan growth is
attributable to the Bank's hiring of a number of experienced loan officers
previously employed by money center and multi-state regional banking
organizations. In most cases, these loan officers brought with them established
contacts and relationships with individuals or entities throughout the Bank's
primary market area and have been able thereby to increase the Bank's customer
base and the number of loan originations. Loan growth has also been attributable
to market penetration. The Bank also has established a number of regional
advisory boards, comprised of prominent local business and community
representatives, that were responsible for referring approximately $50 million
in loans to the Bank in 1996, representing one-third of all new outstanding
loans in such year. In addition, the Bank has made significant efforts to
increase its share of seasonal lending, which has contributed to the Bank's loan
growth. As noted previously, a significant portion of the Bank's total loan
portfolio may be considered unseasoned and, therefore, specific payment
experience for this portion of the portfolio has not yet been established.
To support and manage the expanded operations of the Bank and to
provide adequate management resources to support the further expansion and
growth, the Bank began to recruit and hire, in addition to experienced
commercial loan officers, credit, compliance, loan review and internal audit
personnel, operations personnel and senior level executives. In addition, the
Bank has enhanced and expanded its operational and management information system
and taken steps to enhance its oversight of third-party vendors. While the Bank
continues to monitor its rapid growth, and the adequacy of management and
resources available to support such growth, there can be no assurance that the
Bank will be successful in managing all elements relating to its rapid growth.
The growth and expansion of operations through mergers and acquisitions
and internal growth has resulted in a significant increase in assets, loans and
deposits since December 31, 1993, and a concomitant increase in net interest
income, non-interest income and non-interest expenses.
Results of Operations
Net income increased by $90,000 for the six months ended June 30, 1997,
to $1.5 million from $1.4 million for the six months ended June 30, 1996. Net
interest income increased $1.7 million and the provision for loan losses
increased $375,000 for the six months ended June 30, 1997, compared to the same
period in 1996. Other income decreased by $82,000 to $776,000 for the six months
ended June 30, 1997 as compared to $858,000 for the six months ended June 30,
1996. Other expenses increased by $1.2 million to $7.3 million for the six
months ended June 30, 1997, as compared to $6.1 million for the six months ended
June 30, 1996.
Net income for the year ended December 31, 1996, was $3.0 million or
$1.58 per share in comparison to $2.8 million or $1.52 per share for the year
ended December 31, 1995. The increase in net income was primarily due to an
increase in net interest income of $3.6 million which was substantially offset
by an increase in non-interest expenses of $3.2 million, an increase in the
provision for loan losses of $92,000 and an increase in income tax expense of
$222,000 in comparison to the results of operations for 1995.
18
<PAGE>
Net income for the year ended December 31, 1995, increased $979,000, or
53.2%, to $2.8 million from $1.8 million for the year ended December 31, 1994.
The increase in net income was generally attributable to a large increase in net
interest income of $4.9 million and an increase of $900,000 in non-interest
income. Net interest income increased from $8.3 million in 1994 to $13.2 million
in 1995; and non-interest income increased from $732,000 in 1994 to $1.7 million
in 1995. This increase was partially offset by increases in non-interest
expenses of $4.1 million, an increase in the provision for loan losses of
$400,000 and an increase in income tax expense of $365,000. Non-interest
expenses increased from $6.0 million in 1994 to $10.0 million in 1995. The
provision for loan losses increased from $383,000 in 1994 to $808,000 in 1995.
Income tax expense increased from $775,000 in 1994 to $1.1 million in 1995.
Net Interest Income. Net interest income is the most significant component of
the Company's income from operations. Net interest income is the difference
between interest received on interest-earning assets (primarily loans and
investment securities) and interest paid on interest-bearing liabilities
(primarily deposits and borrowed funds). Net interest income depends on the
volume of and rate earned on interest-earning assets and the volume of and
interest rate paid on interest-bearing liabilities.
19
<PAGE>
The following table sets forth a summary of average balances with
corresponding interest income and interest expense as well as average yield and
cost information for the periods presented. Average balances are derived from
daily balances.
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1997(1)
---------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable (2)................. $318,016 $14,789 9.30%
Investment securities ............... 116,326 3,292 5.66
Federal funds sold................... 2,324 64 5.55
------- ------ ----
Total interest-earning assets...... 436,666 18,145 8.31
Non-interest-earning assets............ 39,028
-------
Total assets......................... $475,694
========
Interest-bearing liabilities:
Interest-bearing deposit accounts.... $319,565 6,556 4.10
Borrowed money....................... 45,214 1,310 5.79
Interest on guaranteed preferred
beneficial interest in
subordinated debt.................. 16,391 825 10.07
------ ----- -----
Total interest-bearing liabilities. 381,170 8,691 4.56
Non-interest-bearing liabilities....... 66,781
--------
Total liabilities.................... 447,951
Shareholders' equity (3)............... 27,743
------
Total liabilities and shareholders'
equity............................. $475,694
========
Net interest income.................... $9,454
======
Interest rate spread (4)............... 3.75%
====
Net yield on interest-earning assets (5) 4.33%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 114.56%
======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ---------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (2)................. $235,744 $22,074 9.36% $155,139 $15,101 9.73 % $108,265 $9,591 8.86 %
Investment securities ............... 129,164 7,127 5.52 85,445 5,286 6.19 33,931 2,151 6.34
Federal funds sold................... 1,323 68 5.14 7,756 463 5.97 10,988 452 4.11
--------------- ---- ------ -------
Total interest-earning assets...... 366,231 29,269 7.99 248,340 20,850 8.40 153,184 12,194 7.96
Non-interest-earning assets............ 40,316 24,409 15,076
------- ------- ------
Total assets......................... $406,547 $272,749 $168,260
======== ======= ========
Interest-bearing liabilities:
Interest-bearing deposit accounts.... $298,538 11,954 4.00 $202,276 7,640 3.78 $122,843 3,845 3.13
Borrowed money....................... 10,397 580 5.58 775 47 6.06 1,202 93 7.74
Interest on guaranteed preferred
beneficial interest in
subordinated debt.................. -- -- -- -- -- -- -- -- --
----------------- ------- -------- --------- ------ -------- ------- ------
Total interest-bearing liabilities. 308,935 12,534 4.06 203,051 7,687 3.79 124,045 3,938 3.17
Non-interest-bearing liabilities....... 72,486 47,004 28,551
------- ------- ------
Total liabilities.................... 381,421 250,055 152,596
Shareholders' equity (3)............... 25,126 22,694 15,664
------- ------- ------
Total liabilities and shareholders'
equity............................. $406,547 $272,749 $168,260
======== ======== =======
Net interest income.................... $16,735 $13,163 $8,256
======= ====== ======
Interest rate spread (4)............... 3.93 % 4.61 % 4.79 %
==== ==== ====
Net yield on interest-earning assets (5) 4.57 % 5.30 % 5.39 %
==== ==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.55 % 122.30 % 123.49 %
====== ====== ======
</TABLE>
----------------------
(1) Ratios for six 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) Averages were computed using month end balances.
(4) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities. (5) Net yield on interest-earning assets
represents net interest income as a percentage of average
interest-earning assets.
20
<PAGE>
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>
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
-------------------------------------------- --------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------- --------------------------------------------
Rate / Rate /
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income: (In thousands)
Loans receivable ............... $ 7,847 ($ 575) ($ 299) $ 6,973 $ 4,156 $ 945 $ 409 $ 5,510
Investment securities .......... 2,707 (573) (293) 1,841 3,264 (51) (45) 3,135
Federal funds sold ............. (382) (65) 53 (394) (133) 204 (60) 11
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets $ 10,172 ($ 1,213) ($ 539) $ 8,420 $ 7,287 $ 1,098 $ 271 $ 8,656
======== ======== ======== ======== ======== ======== ======== ========
Interest expense:
Deposit accounts ............... $ 3,658 $ 445 $ 211 $ 4,314 $ 2,483 $ 796 $ 515 $ 3,795
Borrowings ..................... 584 (4) (47) 533 (33) (20) 7 (46)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities................. $4,242 $ 441 $ 164 $ 4,847 $ 2,450 $ 776 $ 522 $ 3,749
====== ======== ======== ======== ======== ======== ======== ========
Change in net interest income .... $ 5,930 ($ 1,654) ($ 703) $ 3,573 $ 4,837 $ 322 ($ 252) $ 4,907
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Net interest income increased $1.7 million, or 22%, to $9.5 million at
June 30, 1997, as compared to June 30, 1996. The increase in net interest income
was due to a $4.8 million increase in interest income partially offset by a $3.1
million increase in interest expense. Net interest income increased $3.6
million, or 27%, to $16.7 million in 1996 compared to $13.2 million in 1995. The
increase is due primarily to the growth of average interest-earning assets from
$248.3 million in 1995 to $366.2 million in 1996, partially offset by a decline
in the interest rate spread from 4.61% in 1995 to 3.93% in 1996. The decline in
the interest rate spread had a corresponding impact on the net interest margin
which declined 73 basis points to 4.57% in 1996.
The increase in average interest-earning assets of $117.9 million
reflects an increase of $80.6 million in average loans and $43.7 million in
average investment securities which were funded by an increase of $105.9 million
of average interest-bearing liabilities and an increase of $25.5 million of
average non-interest-bearing liabilities. This increase in interest-bearing
liabilities reflects the acquisition of the branches and deposits in 1995, the
growth of deposits at existing offices in 1996, the opening of two new branches
in 1995 and 1996, and an increase in borrowings in 1996.
On March 17, 1997, the Company's subsidiary, Sun Capital Trust (the
"Trust") issued $25 million of 9.85% Preferred Securities with a stated value
and liquidation preference of $25 per share. The proceeds from the sale of the
Preferred Securities were utilized by the Trust to invest in $25 million of
9.85% Junior Subordinated Debentures (the "Debentures") of the Company, due in
March 2027. On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional
21
<PAGE>
$3,750,000 of the Preferred Securities on the same terms as the original
issuance to cover over-allotments. The proceeds from the sale of the Preferred
Securities were utilized by the Trust to invest in $3,750,000 of the Debentures
of the Company. In view of these transactions, the Company will incur increased
interest expense in future periods at a higher cost of funds than the average
cost of the Bank's deposits. For the six months ended June 30, 1997, the Company
incurred $825,000 of such interest expense.
The interest rate spread and net interest margin decreased as of June
30, 1997, compared to December 31, 1996, due to higher costs on borrowed money
as well as interest on guaranteed preferred beneficial interest in subordinated
debt. The interest rate spread and net interest margin declined in 1996 compared
to 1995 due to a decline in the yield on average interest-earning assets from
8.40% in 1995 to 7.99% in 1996 and an increase in the interest cost of average
interest-bearing liabilities from 3.79% in 1995 to 4.06% in 1996. If the Bank is
able to maintain the low cost of funds on the deposits to be assumed in the Bank
of New York branch purchase, management anticipates such acquisition will
positively impact the interest rate spread and net interest margin in future
periods. However, there can be no assurance that the Company can maintain a low
cost of funds on such deposits or that the Company can retain substantially all
such deposits to be assumed, each of which may have an adverse impact on the
Company's results of operations and financial condition.
The yield on average interest-earning assets declined in 1996 due to a
decline in the yield on loans and investment securities. As general market
interest rates were relatively stable during 1995 and 1996, the decline in the
yield of loans in 1996 reflects the impact of increased competition for new loan
originations The decline in the yield of investment securities was due primarily
to a restructuring of the available-for-sale investment securities portfolio
during 1996.
The increase in the interest cost of average interest-bearing
liabilities is due principally to an increase in the interest cost of
interest-bearing deposits from 3.78% in 1995 to 4.00% in 1996. The higher
interest cost of deposits in 1996 reflects primarily the increase in
certificates of deposit, as a percentage of total deposits and premium interest
rates offered by the Bank on certificates of deposit during 1996. The premium
rates were offered on selected maturities of certificates of deposit to generate
deposit growth to fund the significant loan demand experienced by the Bank.
Net interest income increased $4.9 million, or 59%, to $13.2 million in
1995 compared to $8.3 million in 1994. The increase is due primarily to an
increase in average earning assets, from $153.2 million in 1994 to $248.3
million in 1995, partially offset by a decline in the interest rate spread from
4.79% in 1994 to 4.61% in 1995. The decline in the spread results from a shift
in the deposit mix from lower cost savings deposits into higher cost time
deposits and was offset by an increase in the yield on earning assets from 7.96%
in 1994 to 8.40% in 1995. The yield on earning assets increased due to a shift
in investment from lower yielding federal funds sold to investment securities,
an increase in loan yields from 8.86% in 1994 to 9.73% in 1995, and an increased
yield on federal funds sold from 4.11% in 1994 to 5.97% in 1995.
The $95.2 million increase in earning assets was largely the result of
branches acquired in 1995 and assets acquired in the Tuckahoe and Ocean
transactions completed in 1994.
The average balance of loans outstanding increased $46.9 million in
1995, to $155.1 million from $108.3 million in 1994. The increase in loans was a
result of the full year's impact of the acquisition of Tuckahoe and Ocean and
the origination of new loans during the year.
22
<PAGE>
The average balance of investment securities increased from $33.9
million in 1994 to $85.4 million in 1995 as a direct result of the acquisitions
that occurred in mid-1994 and branch acquisitions in 1995. The positive impact
on interest income resulting from increased balances was slightly offset by a
decline in yield from 6.34% to 6.19% in 1995.
Average interest-bearing deposit balances increased 65% from $122.8
million in 1994 to $202.3 million in 1995, primarily due to the bank and branch
acquisitions. The impact on interest expense was augmented by an increase in the
cost of deposits from 3.13% in 1994 to 3.78% in 1995. The increased interest
costs resulted from a shift in deposit composition and an increased cost on time
deposits. In 1994, savings and time deposits each comprised 31% of total
deposits, while time deposits in 1995 increased to 39% of deposits and savings
declined to 23% of deposits. In addition, the cost of time deposits increased
from 3.95% to 5.48% primarily due to generally higher market rates.
Interest on borrowed funds decreased $46,000 from $93,000 in 1994 to
$47,000 in 1995. The decrease was primarily due to a decrease in average
balances, from $1.2 million in 1994 to $775,000 in 1995. As a result of the cash
it received from its 1994 and 1995 acquisitions, the Bank had a significantly
lower need to borrow funds.
Provision for Loan Losses. For the six months ended June 30, 1997, the provision
for loan losses amounted to $825,000, an increase of $375,000, or 83.3%,
compared to $450,000 for the same period in 1996. The increase was primarily the
result of the increase in the Company's loan portfolio of approximately $130.2
million at June 30, 1997, compared with June 30, 1996, primarily reflecting
growth in the Bank's commercial loan portfolio. The Company recorded a provision
for loan losses of $900,000 in 1996 compared with $808,000 in 1995 and $383,000
in 1994. The increase in the provision for loan losses in 1995 was attributable
to an increase in the size of the loan portfolio due to the bank acquisitions in
1994 and internal loan growth in 1995. Management regularly performs an analysis
to identify the inherent risk of loss in its loan portfolio. This analysis
includes evaluation of concentrations of credit, past loss experience, current
economic conditions, amount and composition of the loan portfolio (including
loans being specifically monitored by management), estimated fair value of
underlying collateral, loan commitments outstanding, delinquencies, and other
factors.
The Bank will continue to monitor its allowance for loan losses and
make future adjustments to the allowance through the provision for loan losses
as conditions dictate. Although the Bank maintains its allowance for loan losses
at a level that it considers to be adequate to provide for the inherent risk of
loss in its loan portfolio, there can be no assurance that future losses will
not exceed estimated amounts or that additional provisions for loan losses will
not be required in future periods.
Non-Interest Income. Other income decreased $82,000 for the six month period
ended June 30, 1997, compared to the six month period ended June 30, 1996. The
decrease was primarily a result of lower gains on sales of investment securities
in 1997. These gains were $191,000 for the first six months of 1996 compared to
$16,000 for the same period in 1997. This decrease was partially offset by an
increase of $97,000 on service charges on deposit accounts, from $488,000 for
the six months ended June 30, 1996, to $585,000 for the same period in 1997. The
increase was caused by a higher fee structure and from a larger deposit base
resulting from previous branch acquisitions as well as internal growth.
Other operating income increased $95,000, or 5.7%, from $1.65 million
for the year ended December 31, 1995, to $1.75 million for the year ended
December 31, 1996. The increase was primarily a result of an increase in service
charges on deposit accounts and other service charges, partially offset
23
<PAGE>
by a reduction of gains on asset sales. Gains on sales of investment securities
declined by $170,000, from $377,000 in 1995 to $207,000 in 1996. During 1995,
the Company recognized $208,000 as gains on the sales of loans. During 1996,
there were no sales of loans in which gains or losses were recorded. Service
charges on deposit accounts increased $397,000, from $660,000 for the year ended
December 31, 1995, to $1.1 million in 1996. The increase was due to a larger
customer base in 1996 as a result of the branch acquisitions in 1995 and the
growth of the Bank's business and higher fees on deposit accounts. Other service
charges increased $88,000, from $28,000 in 1995 to $116,000 in 1996. The
increase was also a result of a larger customer base.
Other operating income increased $919,000, or 125%, from $732,000 for
the year ended December 31, 1994, to $1.7 million for the same period in 1995.
The increase was due to an increase in service charges on deposit accounts
augmented by gains on sales of loans and investment securities. Service charges
on deposit accounts increased $241,000, from $419,000 for the year ended
December 31, 1994, to $660,000 in 1995. The increased income was a result of a
larger customer base resulting from bank acquisitions occurring during 1994 and
branch acquisitions occurring during 1995. During 1995, the Company recorded
gains on sales of loans amounting to $208,000, and gains on sales of investment
securities amounting to $377,000. During 1994, there were no gains on sales of
loans or investment securities.
Non-Interest Expenses. Other expenses increased approximately $1.2 million, to
$7.3 million for the six months ended June 30, 1997, as compared to $6.1 million
for the same period in 1996. The increase was a result of operating a larger
organization. Of the increase, $730,000 was in salaries and employee benefits,
$183,000 in equipment expense, $177,000 in data processing expense, $119,000 in
miscellaneous expenses, $77,000 in insurance expense and $55,000 in amortization
of excess of cost over fair value of assets acquired. This was offset by
decreases of $53,000 in postage and supplies and $61,000 in occupancy expense.
The increase in other expenses reflects the Company's strategy to support
planned expansion. Salaries and benefits increased due to additional staff
positions in lending, loan review, compliance and audit departments. The
increase in data processing expense and equipment expense was the result of
operating a larger institution than in the previous year. The increase in
insurance expense resulted from higher premium payments to the FDIC in 1997. The
higher amount was a result of the Bank being assessed a premium based on a
capital level of "adequately capitalized." As a result of the Bank's increased
capital, the FDIC premium has been reduced. Substantially all of the Bank's
deposits are federally insured by the BIF, however, approximately $34 million of
deposits, which were acquired pursuant to the Oritani branch purchase, are
federally insured by the SAIF. The decreased occupancy expense is related to
lower utility usage and grounds maintenance from a milder winter in 1997 and
savings resulting from real estate tax appeals.
Other operating expenses increased $3.2 million, from $10.0 million for
the year ended December 31, 1995, to $13.2 million for the year ended December
31, 1996. The increase reflects the Company's strategy to build an
infrastructure to support planned expansion. Non-interest expense was directly
impacted by increased salaries and employee benefits, equipment expense, data
processing and amortization of intangibles, partially offset by a reduction of
insurance expense. Salaries and employee benefits increased $1.8 million, from
$4.7 million for the year ended December 31, 1995, to $6.5 million during 1996.
The increase was a result of a higher number of officers and other employees
during 1996. In addition, during 1996 the Company began a 401(k) benefits plan.
As a result of the Company match, as well as administrative costs, the Company
incurred approximately $91,000 in expenses during 1996. Equipment costs
increased $359,000, from $459,000 for the year ended December 31, 1995, to
$818,000 in 1996. Equipment costs increased as a result of the need for more
equipment to operate a larger
24
<PAGE>
organization, as well as upgrades to the Company's telephone system and
establishment of a computer network. Data processing fees increased $451,000,
from $635,000 for the year ended December 31, 1995, to $1.1 million for 1996.
The increase was a result of maintaining a larger deposit and loan base during
1996. The amortization of the excess cost over fair value of assets increased
$484,000, from $343,000 for the year ended December 31, 1995, to $827,000 in
1996. The increase was a result of a full year of amortizing the intangibles
associated with the 1995 acquisitions. Insurance expenses declined $187,000,
from $383,000 for the year ended December 31, 1995, to $196,000 for 1996. The
reduction of insurance expense was a result of lower insurance premiums assessed
by the FDIC amounting to $181,000.
Other operating expenses increased $4.1 million, from $6.0 million for
the year ended December 31, 1994, to $10.1 million in 1995. The increase was due
to increased salaries and employee benefits, date processing expense,
amortization of intangibles and other expenses. Salaries and employee benefits
increased $2.1 million, from $2.6 million for the year ended December 31, 1994,
to $4.7 million in 1995. The increase was a result of higher staffing levels as
a result of the acquisitions that occurred during 1995 and 1994. Data processing
fees increased by $316,000, from $319,000 for the year ended December 31, 1994,
to $635,000 in 1995. This increase was also due to added processing in
connection with the larger deposit and loan base resulting from the 1994 and
1995 acquisitions. The amortization of the excess cost over fair value of assets
acquired increased $209,000, from $134,000 for the year ended December 31, 1994,
to $343,000 in 1995. The increase was a direct result of the 1994 and 1995
acquisitions. Other expenses increased by $892,000, from $714,000 for the year
ended December 31, 1994, to $1.6 million in 1995. In 1995, these expenses
increased in almost all categories as a result of operating a larger
organization than in 1994.
Income Tax Expense. Income taxes decreased $78,000, from $668,000 to $590,000
for the six months ended June 30, 1996, and June 30, 1997, respectively. The
decrease resulted from a change in estimated taxes for prior periods. The
Company does not anticipate any significant change in its effective tax rate.
Income taxes increased $222,000, or 19%, from $1.1 million for the year ended
December 31, 1995, to $1.4 million for 1996. The increase was due to increased
pre-tax income. For the same reason, income taxes increased by $365,000, from
$775,000 for the year ended December 31, 1994, to $1.1 million in 1995.
Liquidity and Capital Resources
A major source of the Company's funding is its retail deposit branch
network, which management believes will be sufficient to meet its long-term
liquidity needs. The ability of the Company to retain and attract new deposits
is dependent upon the variety and effectiveness of its customer account
products, customer service and convenience, and rates paid to customers. The
Company also obtains funds from the repayment and maturities of loans and
maturities of investment securities, while additional funds can be obtained from
a variety of sources including loan sales, securities sold under agreements to
repurchase, FHLB advances, and other secured and unsecured borrowings. It is
anticipated that FHLB advances and securities sold under agreements to
repurchase will be secondary sources of funding, and management expects there to
be adequate collateral for such funding requirements.
The Company's primary uses of funds are the origination of loans, the
funding of the Company's maturing certificates of deposit, deposit withdrawals,
and the repayment of borrowings. Certificates of deposit scheduled to mature
during the twelve months ending June 30, 1998, total $200.8 million. The Company
may renew these certificates, attract new replacement deposits, or replace such
funds with
25
<PAGE>
borrowings. As noted above, the Company has paid premium rates on certain
certificates of deposit, accordingly, certain of these actions may require the
continued payment of premium rates with an adverse impact on net interest
income. 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. The Company has met this increased need for funds by attracting
higher levels of time deposits and utilizing lines of credit. For long-term
liquidity requirements, the Company has the ability to liquidate portions of its
investment portfolio, the entire balance of which was reclassified as
available-for-sale.
The Company anticipates that cash and cash equivalents on hand, the
cash flow from assets as well as other sources of funds will provide adequate
liquidity for the Company's future operating, investing and financing needs. In
addition to cash and cash equivalents of $37.8 million at June 30, 1997, the
Company has substantial additional secured borrowing capacity with the FHLB and
other sources. The Company anticipates a substantial increase in liquidity due
to the net cash received and to be received pursuant to the recent and pending
branch purchases. Excess liquidity has a negative impact on earnings resulting
from the lower yields on short-term assets. However, such net cash received or
to be received will be invested in investment securities and loans over time,
which will have the effect of decreasing the Company's liquidity. Management
will continue to monitor its liquidity in order to maintain it at a level which
is adequate but not excessive.
Net cash provided by operating activities for the six months ended June
30, 1997, was $343,000 compared to $703,000 for the same period in 1996. Net
cash provided by operating activities for the year ended December 31, 1996,
totaled $3.8 million, as compared to $4.1 million for the year ended December
31, 1995. Net cash provided by operating activities for the year ended December
31, 1995, totaled $4.1 million an increase of $2.6 million from the year ended
December 31, 1994.
Net cash used in investing activities for the six months ended June 30,
1997, totaled $102.0 million, as compared to $44.5 million for the six months
ended June 30, 1996. The increase was primarily attributable to a decrease of
$46.9 million in proceeds from maturities of investment securities
available-for-sale and a decrease of $50.9 million in proceeds from sale of
mortgage-backed securities available-for-sale, partially offset by $28.8 million
in proceeds from the issuance of the Debentures. Net cash used in investing
activities for the year ended December 31, 1996, totaled $64.4 million, a
decrease from the year ended December 31, 1995, of $80.7 million. The decrease
was primarily attributable to the 1995 branch acquisitions which resulted in an
increase in investment securities of $97.6 million, offset by an increase in
cash used for loan originations of approximately $62.0 million, and net proceeds
from sale of investment securities and mortgage-backed securities of
approximately $50.0 million.
Net cash used in investing activities for the year ended December 31,
1995, totaled $145.1 million, an increase from the year ended December 31, 1994,
of $137.6 million. This increase was primarily attributable to the 1995 branch
acquisitions which resulted in an increase in investment securities of $97.6
million and an increase in loan originations of $47.8 million.
Net cash provided by financing activities for the six months ended June
30, 1997, was $117.6 million, an increase of $74.6 million as compared to $43.0
million for the six months ended June 30, 1996. Net cash provided by financing
activities for the year ended December 31, 1996, totaled $65.1 million. This is
a result of a net increase in deposits of $50.7 million, an increase in net
borrowings of $13.3 million, and a $1.1 million increase resulting from the
proceeds of the exercise of stock options. The increase in deposits and net
borrowings were used primarily to fund the increase in loan originations and
investment securities.
26
<PAGE>
Net cash provided by financing activities for the year ended December
31, 1995, totaled $148.1 million. This is a result of an increase in deposits
resulting from the 1995 branch acquisitions of $122.5 million, a net increase in
customers deposits of $16.7 million, and an increase in net borrowings of $8.0
million. The increase in deposits and net borrowings were used primarily to fund
the increase in loan originations and investment securities.
The Company monitors its capital levels relative to its business
operations and growth and has sought to maintain the Bank's and its capital at
levels consistent with or in excess of the regulatory requirements. Due to the
pending branch purchases and the Company's anticipated further growth, the
Company is raising additional capital through this public offering of its Common
Shares.
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. Until its recent issuance of trust preferred
securities, 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 adequate risk-based capital
levels. Management monitors capital levels and, when appropriate, will recommend
a capital-raising effort to the Company's board of directors. The Company has
the ability to raise capital through a private placement or a public offering,
as may be appropriate. The following table sets forth the Bank's risk-based
capital levels at June 30, 1997:
<TABLE>
<CAPTION>
To Be Well Capitalized Ratio
Required for Under Prompt io
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ------------------ ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Risk-Based Capital..... $45,876 11.44% $16,041 4.00% $24,061 6.00%
Total Risk-Based Capital...... 49,227 12.27% 32,096 8.00% 40,120 10.00%
Leverage...................... 45,876 8.63% 21,264 4.00% 26,580 5.00%
</TABLE>
The following table sets forth the Company's risk-based capital levels at June
30, 1997:
<TABLE>
<CAPTION>
To Be Well Capitalized Ratio
Required for Under Prompt io
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ------------------ ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Risk-Based Capital..... $30,359 7.52% $16,148 4.00% $24,222 6.00%
Total Risk-Based Capital...... 52,481 12.99% 32,321 8.00% 40,401 10.00%
Leverage...................... 30,359 5.93% 21,379 4.00% 26,724 5.00%
</TABLE>
27
<PAGE>
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
longer maturity than its liabilities, the Company's earnings will tend to be
negatively affected during periods of rising interest rates. Conversely, this
mismatch should benefit the Company during periods of declining interest rates.
Management monitors the relationship between the interest rate sensitivity of
the Company's assets and liabilities. 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 Bank 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%.
At June 30, 1997, the Bank had a negative position with respect to its
exposure to interest rate risk. Management monitors its gap position at monthly
meetings. The Asset/Liability Committee of the Bank's Board of Directors meets
quarterly to discuss the Bank's interest rate risk. The Bank uses simulation
models to measure the impact of potential changes of up to 200 basis points in
interest rates on the net interest income of the Company. As described below,
sudden changes to interest rates should not have a material impact to the Bank's
results of operations. Should the Bank 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 June 30, 1997, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing during the same time period by $73.5 million, representing a negative
cumulative one-year gap ratio of 12.57%. As a result, the yield on
interest-earning assets of the Bank should adjust to changes in interest rates
at a slower rate than the cost of the Bank's interest-bearing liabilities.
Because the Bank had positive gap characteristics in its shorter maturity
periods, the Bank's one-year gap mismatch would have a negligible effect on the
Bank's net interest margin during periods of rising or declining market interest
rates.
The following table summarizes the maturity and repricing
characteristics of the Bank's interest-earning assets and interest-bearing
liabilities as of June 30, 1997. All amounts are categorized by their actual
maturity or repricing date with the exception of interest-bearing demand
deposits and savings deposits. The Bank's historical experience with both
interest-bearing demand deposits and savings
28
<PAGE>
deposits reflects an insignificant change in deposit levels for these core
deposits. As a result, the Bank allocates approximately 35% to the 0-3 month
category and 65% to the 1-5 year category.
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable.................... $123,056 $45,593 $136,438 $58,618 $363,705
Investment securities............... 48,617 12,846 57,031 32,087 150,581
Federal Funds sold.................. 11,500 -- -- -- 11,150
------- --------- --------- --------- -------
Total interest-earning assets..... 182,823 58,439 193,469 90,705 525,436
------- ------- ------- ------- -------
Interest-bearing demand deposits.... 27,001 -- 51,648 -- 78,649
Savings deposits.................... 27,851 -- 43,071 -- 70,922
Time certificates under $100,000.... 61,183 87,602 26,280 -- 175,065
Time certificates $100,000 or more.. 27,834 25,910 2,313 -- 56,057
Federal Home Loan Bank advances..... 48,500 -- -- -- 48,500
Securities sold under agreements
to repurchase..................... 8,926 -- -- -- 8,926
------- -------- -------- -------- ------
Total interest-bearing liabilities 201,295 113,512 123,312 -- 438,119
------- ------- ------- -------- -------
Periodic gap........................ $(18,472) $(55,073) $70,157 $90,705 $87,317
======== ======== ====== ====== ======
Cumulative gap...................... $(18,472) $(73,545) $(3,388) $87,317
======== ======== ======= ======
Cumulative gap ratio................ (3.16)% (12.57)% (0.58)% 14.92%
======= ======== ======= ======
</TABLE>
Impact of Inflation and Changing Prices
The consolidated 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.
Financial Condition
General - The Company has experienced significant growth as a result of
acquisitions and internal growth. Increases were most prevalent in loans,
generally commercial loans, and deposits. The Company's assets increased by
$148.4 million, or 34%, from December 31, 1996, to June 30, 1997, and by $66.9
million, or 18%, from $369.9 million at December 31, 1995, to $436.8 million at
December 31, 1996. These increases in assets primarily reflect the Company's
deployment of proceeds into the loan portfolio, from sales of investment
securities and increased deposit levels. Comparing balances from June 30, 1997,
to December 31, 1996, and from December 31, 1996 to 1995, the Company's net
loans receivable increased $68.2 million and $111.9 million, respectively,
federal funds sold increased $6.4 million and $4.8 million, and investment
securities increased $56.0 million and decreased $51.4 million, respectively.
Total liabilities increased $118.0 million, or 29%, to $527.4
29
<PAGE>
million at June 30, 1997, from $409.4 million at December 31, 1996, and they
increased $64.2 million, or 19%, from $345.2 million at December 31, 1995, to
December 31, 1996. Deposits increased $81.4 million and borrowed funds increased
$36.2 million from December 31, 1996, to June 30, 1997. Deposits increased $50.7
million and borrowed funds increased $13.2 million from December 31, 1995 to
1996. Before the effect of unrealized gains or losses on securities
held-for-sale, shareholders' equity increased $1.5 million, or 6%, to $30.0
million at June 30, 1997, from December 31, 1996, and increased $4.1 million, or
17%, from $24.3 million at December 31, 1995, to $28.4 million at December 31,
1996.
Loans - Net loans receivable increased $68.2 million, or 23%, from December 31,
1996, to June 30, 1997, due primarily to internally-generated commercial loan
growth. Net loans receivable increased $111.9 million, or 61%, from $183.6
million at December 31, 1995, to $295.5 million at December 31, 1996.
Approximately $104.2 million of this increase was in commercial loans --
predominately commercial real estate loans. This significant increase was a
result of a considerably larger commercial lending staff (many with
long-established customer relationships) available to offer competitively priced
loans. Installment loans increased $8.7 million, mostly due to a more active
consumer lending department and an increase in financing of mobile homes.
Residential real estate loans decreased $568,000 as a result of scheduled
principal repayments. During 1996, the Bank used outside loan correspondents to
originate residential mortgages. These loans were originated using the Bank's
underwriting standards, rates and terms, and were approved according to the
Bank's lending policy prior to origination. Prior to closing, the Bank usually
had commitments to sell these loans with servicing released, at par and without
recourse, in the secondary market. Secondary market sales were generally
scheduled to close shortly after the origination of the loan. Set forth below is
selected data relating to the composition of the Bank's loan portfolio by type
of loan on the dates indicated.
30
<PAGE>
Analysis of Loan Portfolio
<TABLE>
<CAPTION>
At June 30,
------------------
1997
------------------
$ %
---
<S> <C> <C>
Type of Loan: (Dollars in thousands)
Commercial......... $284,363 78.19%
Home equity........ 22,151 6.09
Residential
real estate...... 31,200 8.58
Installment........ 29,342 8.07
Less: Loan loss
allowance.......... 3,351 0.92
-------- ----
Net loans.......... $363,705 100.00%
======== ======
Type of Security:
Residential
real estate:
1-4 family....... $84,563 23.25%
Other............ 11,869 3.26
Commercial
real estate...... 189,646 52.14
Commercial
business loans... 58,185 16.00
Consumer........... 19,436 5.34
Other.............. 3,357 0.92
Less: Loan loss
allowance.......... 3,351 0.92
------- -------
Net loans.......... $363,705 100.00%
======== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- -------------------- -------------------- --------------------- -------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan: (Dollars in thousands)
Commercial......... $223,116 75.50% $118,874 64.73% $ 69,249 51.35% $41,642 49.94% $ 34,475 42.00%
Home equity........ 22,070 7.47 25,129 13.68 26,799 19.87 23,510 28.19 22,257 27.12
Residential
real estate...... 31,777 10.75 29,287 15.95 29,633 21.97 19,151 22.97 26,213 31.94
Installment........ 21,133 7.15 12,409 6.76 10,787 8.00 151 0.18 219 0.27
Less: Loan loss
allowance.......... 2,595 0.88 2,065 1.12 1,607 1.19 1,067 1.28 1,084 1.32
------ ------ ------- ------- ------- ------ ------ ------ ------- ------
Net loans.......... $295,501 100.00% $183,634 100.00% $134,861 100.00% $83,387 100.00% $ 82,080 100.00%
========= ====== ======= ====== ======== ====== ======= ====== ======== ======
Type of Security:
Residential
real estate:
1-4 family....... $ 84,036 28.44% $ 68,904 37.52% $ 72,466 53.73% $49,777 59.69% $ 52,532 64.00%
Other............ 11,115 3.76 6,295 3.43 839 0.62 757 0.91 372 0.45
Commercial
real estate...... 166,893 56.48 85,239 46.42 48,845 36.22 28,682 34.40 23,930 29.15
Commercial
business loans... 20,455 6.92 13,822 7.53 6,621 4.91 5,031 6.03 6,099 7.43
Consumer........... 15,229 5.15 11,214 6.11 6,511 4.83 151 0.18 219 0.27
Other.............. 368 0.12 225 0.11 1,186 0.88 56 0.07 12 0.01
Less: Loan loss
allowance.......... 2,595 0.88 2,065 1.12 1,607 1.19 1,067 1.28 1,084 1.32
------- ------ ------- ------ -------- ------ ------ ------ ------- ------
Net loans.......... $295,501 100.00% $183,634 100.00% $134,861 100.00% $83,387 100.00% $ 82,080 100.00%
======== ====== ======= ====== ======== ====== ======= ====== ======== ======
</TABLE>
31
<PAGE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at December 31, 1996. The table does not include prepayments or
scheduled principal prepayments. Adjustable-rate mortgage loans are shown as
maturing based on contractual maturities.
<TABLE>
<CAPTION>
Due Due after Allowance
within 1 through Due after for
1 year 5 years 5 years Loan Loss Total
------ ------- ------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial.. $40,553 $109,168 $73,800 $ (1,301) $ 222,220
Home equity................ -- -- 22,069 (490) 21,579
Residential real estate.... 2,331 1,606 27,805 (139) 31,603
Installment................ 867 6,444 13,453 (167) 20,597
Unassigned reserve......... -- -- -- (498) (498)
------ ------- ------- ------ --------
$43,751 $117,218 $137,127 $(2,595) $ 295,501
====== ======= ======= ====== =========
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1996, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In thousands)
<S> <C> <C> <C>
Commercial and industrial................ $ 97,729 $ 84,885 $182,614
Home equity.............................. 621 21,111 21,732
Residential real estate.................. 23,588 5,237 28,825
Installment.............................. 19,897 -- 19,897
------- ------- -------
$141,835 $111,233 $253,068
======= ======= =======
</TABLE>
Non-Performing and Problem Assets
Loan Delinquencies - The Bank'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, subsequent
efforts are made to contact the borrower. If the loan continues to be delinquent
for 90 days or more, the Bank 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 Bank's lending policy.
Commercial loans and commercial real estate loans are placed on
nonaccrual 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 charged off at 90 days
delinquent. In all cases, loans must be placed on nonaccrual or charged off at
an earlier date if collection of principal or interest is considered doubtful.
32
<PAGE>
Non-Performing Assets - Non-performing assets increased $122,000, or 3.8%, from
$3.2 million at December 31, 1996, to $3.3 million at June 30, 1997. During
1996, the Company experienced a decline in the amount of loans that were on
non-accrual. Total non-performing assets declined by $903,000, or 22%, from $4.1
million at December 31, 1995, to $3.2 million at December 31, 1996. The ratio of
non- performing assets to net loans, including Real Estate Owned, was .91% at
June 30, 1997, compared to .82% at December 31, 1996, and 1.74% at December 31,
1995. In 1995, non-performing assets increased by $563,000, from $3.5 million at
December 31,1994, to $4.1 million at December 31, 1995. Although the dollar
amount increased, the ratio of non-performing assets to net loans plus Real
Estate Owned, decreased, from 1.84% at December 31, 1994, to 1.74% at December
31, 1995. The following table sets forth information regarding loans that are
delinquent 90 days or more. Management of the Bank believes that all loans
accruing interest are adequately secured and in the process of collection. At
the dates shown, the Bank had no restructured loans within the definition of
SFAS No. 15.
Foreclosed Real Estate - Real estate acquired by the Bank as a result 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 estimated disposal
costs. Any write-down of Real Estate Owned is charged to operations. At June 30,
1997, the Bank had $666,000 classified as Real Estate Owned.
33
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------- ----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and industrial..................... $ 352 $ 354 $1,721 $1,178 $1,074 $ 428
Home equity................................... 472 337 295 341 204 33
Residential real estate....................... 273 586 607 342 265 199
Installment................................... -- -- 35 40 -- --
------ ------ ------ ------ ------ ------
Total........................................... $1,097 $1,277 $2,658 $1,901 $1,543 $ 660
====== ====== ====== ====== ====== ======
Accruing loans that are contractually past
due 90 days or more:
Commercial and industrial..................... $ 89 $ 404 $ 135 $ 525 $ -- $ --
Home equity................................... 248 62 279 30 -- --
Residential real estate....................... 1,043 572 64 20 2 183
Installment................................... 155 105 67 7 -- --
------ ------ ------ ------ ------ ------
Total........................................... $1,535 $1,143 $ 545 $582 $ 2 $183
====== ====== ======= ==== ===== ====
Total non-accrual and 90-day past due loans..... $2,632 $2,420 $3,203 $2,483 $1,545 $843
Real estate owned............................... 666 756 876 1,033 359 144
------ ------ ------ ------ ------ ------
Total non-performing assets..................... $3,298 $3,176 $4,079 $3,516 $1,904 $987
====== ====== ====== ====== ====== ====
Total non-accrual and 90-day past due loans
to net loans.................................. 0.72% 0.82% 1.74% 1.84% 1.85% 1.03%
Total non-performing assets to total loans
plus other real estate owned.................. 0.56% 0.73% 1.10% 1.62% 1.70% 0.95%
Total allowance for loan losses to total
non-performing loans.......................... 127.32% 107.26% 64.47% 64.74% 69.10% 128.53%
</TABLE>
34
<PAGE>
Interest income that would have been recorded on loans on non-accrual
status, under the original terms of such loans, would have totaled $66,000 for
the six months ended June 30, 1997.
Allowances 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 following
table sets forth information with respect to the Bank's allowance for losses on
loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------- -------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance for losses on
loans, beginning of period... $2,595 $2,065 $1,607 $1,067 $1,084 $1,095
Charge-offs:
Commercial................... -- 307 286 312 -- 132
Mortgage..................... 35 9 73 1 25 --
Installment.................. 47 85 67 37 -- --
------ ------ ------ ------ ------ ------
Total charge-offs.......... 82 401 426 350 25 132
------ ------ ------ ------ ------ ------
Recoveries:
Commercial................... 3 6 33 22 3 --
Mortgage..................... -- 4 28 -- -- 20
Installment.................. 10 21 15 13 3 5
------ ------ ------ ------ ------ ------
Total recoveries........... 13 31 76 35 6 25
------ ------ ------ ------ ------ ------
Net charge-offs................ 69 370 350 315 19 107
Provision for loan losses...... 825 900 808 383 2 96
Allowance on acquired loans.... -- -- -- 472 -- --
------ ------ ------ ------ ------ ------
Allowance for losses on loans,
end of period................ $3,351 $2,595 $2,065 $1,607 $1,067 $1,084
===== ===== ===== ===== ===== =====
Allowance for losses on loans to
total loans.................. 0.91% 0.87% 1.11% 1.18% 1.27% 1.31%
Net loans charged off as
a percent of average
loans outstanding............ 0.02% 0.16% 0.23% 0.29% 0.02% 0.14%
</TABLE>
35
<PAGE>
The following table sets forth the allocation of the Bank'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 June 30, At December 31,
----------------------- ---------------------------------------------------
1997 1996 1995
----------------------- --------------------- ----------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial...... $1,943 77.47% $1,301 74.98 % $1,094 64.02 %
Residential real estate........ 146 6.04 139 10.65 403 15.96
Home equity.................... 548 8.50 490 7.40 319 13.34
Installment.................... 256 7.99 167 6.97 54 6.68
Unallocated.................... 458 -- 498 -- 195 --
------- ------ ------ ------ ------ ------
Total allowance.............. $ 3,351 100.00 % $2,595 100.00 % $2,065 100.00 %
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------
1995 1994 1993 1992
---------------------- ---------------------- --------------------- --------------------
Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial...... $1,094 64.02 % $ 847 50.60% $ 561 50.72 % $ 487 49.28 %
Residential real estate........ 403 15.96 231 21.94 91 23.85 267 23.59
Home equity.................... 319 13.34 155 19.58 122 17.53 111 26.95
Installment.................... 54 6.68 47 7.88 1 7.90 2 0.18
Unallocated.................... 195 -- 327 -- 292 -- 217 --
------ ------ ------ ------ ------ ------ ------ ------
Total allowance.............. $2,065 100.00 % $1,607 100.00% $1,067 100.00 % $1,084 100.00 %
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
36
<PAGE>
Investment Securities - Substantially all of the Company's investment portfolio
is held at the Bank's wholly-owned subsidiary, Med-Vine, Inc. ("Med-Vine").
Total investment securities increased $55.0 million, or 56%, from $95.6 million
at December 31, 1996, to $150.6 million at June 30, 1997. Total investment
securities decreased $51.4 million, or 35.0%, from $147.0 million at December
31, 1995, to December 31, 1996. During 1996, the investment portfolio was
managed by a professional portfolio manager. Under the arrangement with the
manager, the board-approved investment policy of Med-Vine and the Bank was
implemented and every securities transaction was approved by the investment
officers of Med-Vine, the Bank and/or the investment committee of the Board of
Directors. The investment portfolio, in most part, had been acquired in
connection with the Bank's purchase of Tuckahoe and Ocean in 1994, and which
were subsequently contributed to Med-Vine. The portfolios were comprised of
investments which were generally illiquid and of small principal amounts. The
bank acquisitions originally increased investments by approximately $59 million.
The branch acquisitions resulted in cash being converted to investments of
approximately $115 million. During the course of the year, the manager
restructured the portfolio by selling a large number of these investments, then
reinvesting them mostly in larger blocks of government and municipal bonds. Some
of these investments were sold during the year to fund the rapid growth of
commercial loans.
The investment policy of the Bank is established by senior management
and approved by the Board of Directors. Med-Vine's investment policy is
identical to that of the Bank. It is based on asset and liability management
goals and is designed to provide a portfolio of high quality investments that
optimizes interest income and provides acceptable limits of safety and
liquidity. Prior to the fourth quarter of 1995, investment securities were
purchased with the intent to hold them until their maturity. During the fourth
quarter of 1995, in accordance with the implementation of the SFAS No. 115
Guide, the Bank reclassified its entire portfolio of investment securities as
available-for-sale. As a result, the investment securities are carried at their
approximate market value.
During 1997, the Bank has used repurchase agreements from the FHLB of
approximately $48.5 million to match fund or partially match fund short-term
investment securities for an incremental profit in a structured transaction. The
purpose of the structured transaction was to increase net interest income and
partially offset the increase in interest expense resulting from the recent
issuance of trust preferred securities. The structured transaction is expected
to be discontinued upon consummation of the Bank of New York branch purchase.
37
<PAGE>
The following table sets forth the carrying value of the Bank's
investment securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------------- -----------------------------------------------------------------
1997 1996 1995
---------------------------------- -------------------------------- -------------------------------
Net Estimated Net Estimated Net Estimated
Amortized Unrealized Market Amortized Unrealized Market Amortized Unrealized Market
Cost Losses Value Cost Losses Value Cost Gains Value
---- ------ ----- ---- ------ ----- ---- ----- -----
(In thousands)
Available-for-Sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities ... $ 51,076 $ (861) $ 50,215 $ 51,955 $ (921) $ 51,034 $ 41,674 $ 230 $ 41,904
Mortgage-backed securities .. 64,692 (74) 64,618 63 -- 63 41,734 264 41,998
State and political
subdivision
securities ................ 20,737 (264) 20,473 20,168 (329) 19,839 16,667 75 16,742
Other securities ............ 15,388 (113) 15,275 24,877 (232) 24,645 46,304 61 46,365
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities
available-for-sale....... $151,894 $ (1,313) $150,581 $ 97,063 $ (1,482) $ 95,581 $146,379 $ 630 $147,009
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1994
--------------------------------------
Net Estimated
Amortized Unrealized Market
Cost Losses Value
---- ------ -----
(In thousands)
<S> <C> <C> <C>
Held-to-maturity:
U. S. Treasury securities........ $ 20,034 $ (370) $ 19,664
Government agency and
mortgage-backed securities..... 19,335 (505) 18,830
State and political subdivision
securities..................... 13,550 (287) 13,263
Other securities................. 7,406 (178) 7,229
------- ------- -------
Total securities held-to-maturity 60,325 (1,340) 58,985
------- -------- -------
Available-for-sale:
U. S. Treasury securities........ -- -- --
Government agency and
mortgage-backed securities..... -- -- --
State and political subdivision
securities..................... -- -- --
Other securities................. 313 -- 313
-------- --------- ---------
Total securities available-for-sale 313 -- 313
--------- --------- ---------
Total investment securities.. $ 60,638 $ (1,340) 59,298
========== ========= =========
</TABLE>
38
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
portfolio at June 30, 1997. All securities are classified as being
available-for-sale, therefore the carrying value is the estimated market value.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
---------------- ----------------- ----------------- ------------------- -----
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
obligations...... $11,074 5.32% $39,141 5.58% $ -- -- % $ -- -- % $50,215 5.52%
Government
agency and
mortgage-
backed
securities....... 697 5.29 10,921 6.29 2,980 6.77 50,020 6.85 64,618 6.67
Municipal
obligations...... 557 4.09 1,257 4.54 13,389 4.81 5,270 4.94 20,473 4.81
Other securities... 1,164 5.15 5,136 6.03 5 6.00 8,970 6.62 15,275 6.30
------- ---- ------- ---- ------- ---- ------- ----- -------- -----
Total.......... $13,492 5.30% $56,455 5.74% $16,374 5.17% $64,260 6.66% $150,581 6.03%
======= ===== ======= ===== ======= ===== ======= ===== ======== =====
</TABLE>
Deposits - Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market, certificates of deposit 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
Bank regularly evaluates the internal cost of funds, surveys rates offered by
competing institutions, reviews the Bank's cash flow requirements for lending
and liquidity, and executes rate changes when deemed appropriate. The Bank does
not obtain funds through brokers, nor does it solicit funds outside the State of
New Jersey.
Deposits at June 30, 1997, totaled $467.4 million, an increase of $81.4
million or 21%, compared to December 31, 1996, at which date total deposits
amounted to $386.0 million, an increase of $50.8 million, or 15%, over the
December 31, 1995, balance of $335.2 million. Demand deposits, including NOW
accounts and money market accounts, increased $31.7 million, or 24%, at June 30,
1997, to $165.3 million, compared to December 31, 1996, and they increased $4.8
million, from $128.8 million at December 31, 1995, to $133.6 million at December
31, 1996. Savings deposits increased $7.4 million to $70.9 million at June 30,
1997, from $63.5 million at December 31, 1996, and decreased $3.5 million, from
$67.0 million at December 31, 1995, compared to December 31, 1996. Certificates
of deposit under $100,000 increased $25.2 million from December 31, 1996, to
$176.8 million at June 30, 1997, and they increased $35.1 million, from $116.5
million at December 31, 1995, to $151.6 million at December 31, 1996.
Certificates of deposit of $100,000 or more increased $17.1 million to $54.3
million at June 30, 1997, and they increased $14.2 million, from $23.0 million
at December 31, 1995, to $37.2 million at December 31, 1996. The increase in
certificates of deposit during 1997 was due in large part to the acquisition of
certificates of deposit in connection with the First Union branch office
purchase, as well as promotional rates offered on certain certificates of
deposit during the year in response to rates offered by the financial
institutions in the Bank's market areas. The increase in 1996 was primarily due
to promotional rates offered on certain certificates of deposit during the year
in response to rates offered by other financial institutions in the Bank's
market areas, as well as in response to a general increase in overall market
rates for certificates of deposit.
39
<PAGE>
The following table sets forth average deposits by various types of
demand and time deposits:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
------------------- -----------------------------------------------------------------------
1997 Avg. Yield 1996 Avg. Yield 1995 Avg. Yield 1994 Avg. Yield
---- ---------- ---- ---------- ---- ---------- ---- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits..... $71,482 -- % $ 65,556 -- % $ 45,562 -- % $26,949 -- %
Interest-bearing demand
deposits............ 63,231 1.80 62,270 1.78 48,609 2.19 20,186 2.43
Savings deposits...... 63,030 2.21 65,393 2.23 57,470 2.28 44,968 3.10
Time deposits......... 193,089 5.54 170,875 5.49 96,256 5.48 45,611 3.95
-------- ---- --------- ---- --------- ---- --------- ----
Total............... $390,832 3.38% $ 364,094 3.28% $ 247,897 3.09% $ 146,714 3.66%
======== ==== ========= ==== ========= ==== ========= ====
</TABLE>
The following table indicates the amount of certificates of deposit of
$100,000 or more by remaining maturity at June 30, 1997:
(In thousands)
Remaining maturity:
Three months or less............................ $ 27,834
Over three through six months................... 14,255
Over six through twelve months.................. 11,655
Over twelve months.............................. 2,313
-------
$ 56,057
=========
Borrowings - Borrowings increased $36.2 million at June 30, 1997, to $57.4
million, compared to December 31, 1996. Borrowed funds at December 31, 1996, in
turn, reflected an increase of $13.3 million, from $8.0 million at December 31,
1995, to $21.3 million at December 31, 1996. The 1997 increase was a result of
an increase of $38.5 million in borrowings from the Federal Home Loan Bank
("FHLB") and an increase of $3.7 million in securities sold under agreements to
repurchase with customers. This was partially offset by a loan repayment of $6.0
million. Of the 1996 increase, $2 million represents an increase in advances
from the FHLB. For the six months ended June 30, 1997, and for the years ended
December 31, 1996 and 1995 the maximum month-end amount of borrowed funds were
$10.0 million, $10.0 million and $6.0 million, respectively. Beginning in 1996,
the Company sold securities under agreements with customers to repurchase them,
at par, on the next business day. The securities sold were U.S. Treasury Notes.
At June 30, 1997 and December 31, 1996, securities sold under agreements to
repurchase amounted to $8.9 million and $5.3 million, respectively. For the six
months ended June 30, 1997 the maximum month-end amount of securities sold under
agreements to repurchase with customers was $8.9 million. There were no amounts
outstanding for the years ended December 31, 1996 and 1995. At December 30,
1996, the company obtained a $6 million revolving line of credit from a
correspondent bank with a term of 36 months. The floating rate of interest was
the prime rate plus fifty basis points. For the six months ended June 30, 1997,
and for the year ended December 31, 1996 the maximum month-end amount
outstanding from the line of credit was $6.0 million and $6.0 million,
respectively. There was no amount outstanding during 1995. During 1997, the Bank
engaged in structured transactions designed to offset the interest expense
incurred in connection with the issuance of the Preferred Securities. See "--
Investment Securities."
40
<PAGE>
Federal Home Loan Bank Advances and Repurchase Agreements
<TABLE>
<CAPTION>
At June 30, At December 31,
-------------- ------------------------------------------
1997 1996 1995 1994
-------------- --------------- -------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Amount outstanding at period end
Advances.................................... $ -- $10,000 $8,000 $ --
Interest rate............................... --% 7.375% 5.875% --%
Approximate average amount outstanding........ $11,915 $ 5,265 $ 150 $ --
Approximate weighted average rate............. 5.58% 5.44% 5.44% --%
Repurchase agreements outstanding
at end of period............................ $48,500 $ -- $ -- $ --
Interest rate................................. 5.61% --% --% --%
Approximate average amount outstanding........ $17,554 $ -- $ -- $ --
Approximate weighted average rate............. 5.58% --% --% --%
</TABLE>
Deposits are the primary source of funds for the bank's lending
activities, investment activities and general business purposes. Should the need
arise, the Bank has the ability to access lines of credit from various sources
including the Federal Reserve Bank, the Federal Home Loan Bank and various other
correspondent banks. In addition, on an overnight basis, the Bank has the
ability to offer securities sold under agreements to repurchase.
Guaranteed Preferred Beneficial Interest in Subordinated Debt
On March 17, 1997, the Company's subsidiary, Sun Capital Trust (the
"Trust") issued $25 million of 9.85% Preferred Securities with a stated
liquidation preference of $25 per share. The proceeds from the sale of the
Preferred Securities were utilized by the Trust to invest in $25 million of
9.85% Junior Subordinated Debentures (the "Debentures") of the Company, due in
March 2027. On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional $3.75 million of the Preferred
Securities on the same terms as the original issuance to cover over-allotments.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $3.75 million of the Debentures of the Company.
The Preferred Securities represent preferred undivided beneficial
interests in the Trust's assets, which consists solely of the Debentures. The
distributions payable on each Preferred Security is fixed at a rate per annum of
9.85% of the stated liquidation amount per Preferred Security, is cumulative and
is payable quarterly. The Company has guaranteed the payment of distributions
and certain other payments relating to the Preferred Securities, but only in
each case to the extent of funds held by the Trust. The Debentures mature on
March 31, 2027. The Preferred Securities are subject to mandatory redemption (i)
in whole, but not in part, at the maturity upon repayment of the Debentures,
(ii) in whole, but not in part, contemporaneously with the optional redemption
at any time by the Company of the Debentures upon the occurrence of certain
events and (iii) in whole or in part at any time on or after March 31, 2002,
contemporaneously with the optional redemption by the Company of the Debentures
in whole or in part.
41
<PAGE>
BUSINESS OF THE COMPANY
General
The Company is a one-bank holding company headquartered in Vineland,
New Jersey engaged primarily in commercial and consumer banking services through
its sole subsidiary, the Bank. The Company's principal business is to serve as a
holding company for the Bank and was incorporated in 1985. In April 1995, the
Company changed its name from Citizens Investments, Inc. to its present name.
The Bank has one wholly-owned subsidiary, Med-Vine, Inc., a Delaware
corporation, which was formed in 1992 to hold a majority of the Company's
investment portfolio.
As previously discussed, the Company is focused on a strategy to
expand its franchise throughout southern and central New Jersey. Continued
consolidation of the banking industry, and a regionalization of decision-making
authority by larger banking institutions resulted in many area businesses and
individuals in the Bank's market being underserved. The opportunities provided
in this market prompted the Board and management to actively pursue strategic
acquisitions.
The Bank offers a wide variety of commercial and consumer lending and
deposit services through its 28 branch offices located throughout southern New
Jersey. The commercial loans offered by the Bank include short- and long-term
business loans, lines of credit, non-residential mortgage loans, and real estate
construction loans. Consumer loans include home equity loans, residential real
estate loans, and installment loans. The Bank also offers deposits and personal
banking services, including commercial banking services, retail deposit services
such as certificates of deposit, money market accounts, savings accounts and ATM
access and individual retirement accounts, and securities brokerage and
investment advisory services through a third-party arrangement.
Market Area
The Bank has been, and intends to continue to be, a community-oriented
financial institution, offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank conducts its business through 28
branch offices and one loan administration office located in the southern New
Jersey counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Mercer,
Ocean and Salem ("primary market area"). The Bank's deposit gathering base and
lending area is concentrated in the communities surrounding its offices.
The Bank is a community-based financial institution headquartered in
Cumberland County, New Jersey. The city of Vineland is approximately 30 miles
southeast of Philadelphia, Pennsylvania, and 30 miles southeast of Camden, New
Jersey. The Philadelphia International Airport is approximately 45 minutes from
Vineland.
Southern New Jersey is among the fastest growing population areas in
New Jersey and has a significant number of retired residents who have
traditionally provided the Bank with a stable source of deposit funds. The
economy of the Bank's primary market area is based upon a mixture of the
agriculture, transportation, manufacturing and tourism trade. The area is also
home to commuters working in New Jersey suburban areas around New York and
Philadelphia.
42
<PAGE>
Management considers the Bank's reputation for customer service as its
major competitive advantage in attracting and retaining customers in its market
area. The Bank also believes it benefits from its community orientation, as well
as its established deposit base and level of core deposits.
Lending Activities
General. The principal lending activity of the Bank is the origination
of commercial real estate loans, commercial business and industrial loans, home
equity loans, mortgage loans and, to a much lesser extent, installment loans.
All loans are originated in the Bank's primary market area. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
description of the Bank's loan portfolio.
Commercial and Industrial Loans. The Bank 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 Bank is on the
origination of commercial loans secured by real estate. The majority of the
Bank's customers for these loans are small- to medium-sized businesses located
in the southern part of New Jersey.
Commercial Real Estate Loans. Loans secured by commercial properties
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 effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. A significant portion of the Bank's commercial real estate and
commercial and industrial loan portfolio includes a balloon payment feature. A
number of factors may affect a borrower's ability to make or refinance a balloon
payment, including without limitation the financial condition of the borrower at
the time, the prevailing local economic conditions, and the prevailing interest
rate environment. There can be no assurance that borrowers will be able to make
or refinance balloon payments when due.
Furthermore, the repayment of loans secured by commercial real estate
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. This cash flow shortage
may result in the failure to make loan payments. In such cases, the Company may
be compelled to modify the terms of the loan. In addition, the nature of these
loans is such that they are generally less predictable and more difficult to
evaluate and monitor. As a result, repayment of these loans may be subject to a
greater extent than residential loans to adverse conditions in the real estate
market or economy.
Home Equity Loans. The Bank 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 home equity loan is typically
originated as a fifteen-year note that allows the borrower to draw upon the
approved line of credit during the same period as the note. The Bank generally
requires a loan-to-value ratio in the range of 70% to 80% of the appraised
value, less any outstanding mortgage.
43
<PAGE>
Residential Real Estate Loans. The Bank uses outside loan
correspondents to originate residential mortgages. These loans are originated
using the Bank's underwriting standards, rates and terms, and are approved
according to the Bank's lending policy prior to origination. Prior to closing,
the Bank usually has commitments to sell these loans, at par and without
recourse, in the secondary market. Secondary market sales are generally
scheduled to close shortly after the origination of the loan.
The majority of the Bank's residential mortgage loans consist of loans
secured by owner-occupied, single-family residences. The Bank'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.
The Bank's residential mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank 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
Bank's fixed-rate mortgage portfolio. The Bank usually exercises its rights
under these clauses.
Installment Loans. The Bank originates installment or consumer loans
secured by a variety of collateral, such as new and used automobiles. The Bank
makes a very limited number of unsecured installment loans. Through its merger
with Ocean in 1994, the Bank acquired a credit card portfolio which it intends
to reduce as current customers pay off their lines of credit.
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, attorneys and regional advisory boards.
Upon receipt of a loan application, a credit report is ordered and
reviewed to verify specific information relating to the loan applicant's
creditworthiness. For residential mortgage loans, written verifications of
employment and deposit balances are requested by the Bank. The Bank requires
that an appraisal of the real estate intended to secure the proposed loan is
undertaken by a certified independent appraiser approved by the Bank and
licensed by the State. After all of the required information is obtained, the
Bank 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 approval authority 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 Bank management. All
loans require the approval of at least two lending officers.
Title insurance policies are required on all first mortgage loans.
Hazard insurance coverage is required on all properties securing loans made by
the Bank. Flood insurance is also required, when applicable.
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.
44
<PAGE>
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 Commitments. When a commercial loan is approved, the Bank 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 Bank's commitments are accepted or rejected by the
customer before the expiration of the commitment. At June 30, 1997, the Bank had
approximately $58.3 million in commercial loan commitments outstanding.
Credit Risk, Credit Administration and Loan Review. Credit risk
represents the possibility that a customer or counterparty may not perform in
accordance with contractual terms. The Bank incurs credit risk whenever it
extends credit to, or enters into other transactions with, its customers. The
risks associated with extensions of credit include general risk, which is
inherent in the lending business, and risk specific to individual borrowers.
Credit administration is responsible for the overall management of the Bank's
credit risk and the development, application and enforcement of uniform credit
policies and procedures the principal purpose of which is to minimize such risk.
One objective of credit administration is to identify and, to the extent
feasible, diversify extensions of credit by industry concentration, geographic
distribution and the type of borrower. Loan review and other loan monitoring
practices provide a means for the Bank's management to ascertain whether proper
credit, underwriting and loan documentation policies, procedures and practices
are being followed by the Bank's loan officers and are being applied uniformly
throughout the Bank. Within the last year, the Bank has taken a number of steps
to enhance its credit administration and loan review functions in an effort to
better manage its credit risk, especially in light of the Bank's rapid growth.
While the Bank continues to review these and other related functional areas,
there can be no assurance that the steps the Bank has taken to date will be
sufficient to enable it to identify, measure, monitor and control all credit
risk.
Investment Securities Activities
General. The investment policy of the Bank 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 within acceptable limits of
safety and liquidity. The Bank's investments consist primarily of federal funds,
securities issued or guaranteed by the United States Government or its agencies,
states and political subdivisions and corporate bonds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
description of the Bank's investment portfolio.
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the amortization, prepayment or sale of loans, maturities or sale 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a description of the Bank's sources of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank'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
45
<PAGE>
remain on deposit and the interest rate, among other factors. The Bank regularly
evaluates the internal cost of funds, surveys rates offered by competing
institutions, reviews the Bank's cash flow requirements for lending and
liquidity and executes rate changes when deemed appropriate. The Bank does not
obtain funds through brokers, nor does it solicit funds outside the State of New
Jersey.
Competition
The Bank faces substantial competition both in attracting deposits and
in lending funds. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. In order to compete with the many
financial institutions serving its primary market area, the Bank's operating
goal is to continue to provide a broad range of financial services with a strong
emphasis on customer service to individuals and businesses in southern and
central New Jersey.
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional and money center banks in the Bank's market area.
Competition for funds also include a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, multi-state regional and
money center banks, and mortgage-bankers many of whom have far greater resources
then the Bank. Non-bank competition, such as investment brokerage houses, has
intensified in recent years for all banks since non-bank competitors are not
subject to same regulatory burdens as banks.
Properties
The Company and the Bank operate from their main office and 28 branch
offices. The Bank leases its main office and 8 branch offices. The remainder of
the branch offices are owned by the Bank. The Bank has entered into a Branch
Purchase and Deposit Assumption Agreement with The Bank of New York to acquire
eleven branch offices.
Personnel
At June 30, 1997, the Company had 192 full-time and 58 part-time
employees, all of whom were on the payroll of the Bank. The Bank's employees are
not represented by a collective bargaining group. The Bank believes that its
relationship with its employees is good.
Legal Proceedings
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any such pending claims or lawsuits.
46
<PAGE>
MANAGEMENT
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.
The following table sets forth information with respect to the
directors and executive officers of the Company.
Director/Executive Director
Officer Age (1) Position Since
------- ------- -------- -----
Bernard A. Brown (2) 72 Chairman of the Board 1985
Sidney R. Brown (2) 40 Director, Secretary, Treasurer 1990
Adolph F. Calovi 75 Director, President and
Chief Executive Officer 1985
Peter Galetto, Jr. 43 Director 1990
Philip W. Koebig, III 55 Director, Executive 1995
Vice President
Anne E. Koons (2) 44 Director 1990
Robert F. Mack 48 Chief Financial Officer N/A
Bart A. Speziali 47 Senior Lending Officer N/A
James S. Killough 57 Senior Vice President N/A
- ----------------
(1) At June 30, 1997
(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
Directors and Executive Officers of the Company. 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 was named Secretary of the Company in March 1997.
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.
47
<PAGE>
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 the Bank and, from 1985 to 1994, was its President and Chief
Executive Officer.
Peter Galetto, Jr. has been a director of the Company since April 1990. Mr.
Galetto also served as Secretary of the Company from April 1990 until March
1997. Mr. Galetto is the President/Sales for Stanker & Galetto, Inc., an
industrial and building contractor located in Vineland, New Jersey. He is also
the President of the Cumberland Technology Enterprise Center, a small business
incubator. Mr. Galetto has been the Secretary/Treasurer of Trimark Building
Contractors. He is also an officer and director of several other corporations
and organizations.
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 the 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. Ms.
Koons is 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.
Robert F. Mack has been with the Bank since 1992 and serves as its Senior
Vice President and Chief Financial Officer. Mr. Mack has twenty-five years of
extensive banking experience and has worked for several commercial banks in New
Jersey.
Bart A. Speziali has been with the Bank since 1992 as the Senior Lending
Officer and Senior Vice President. Mr. Speziali has over twenty years of banking
experience in southern New Jersey.
James S. Killough joined the Bank in February 1997 as Senior Vice President
of Administrations, Operations and Retail Banking. Before joining the Bank, Mr.
Killough was president and chief professional officer for the United Way of
Camden County, New Jersey for two years. Prior to that, Mr. Killough was
executive vice president for Central Jersey Bank and Trust and Midlantic
National Bank/South.
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, 1996, received total salary and
bonus payments from the Bank in excess of $100,000 ("Named Executive Officer").
Except as set forth below, no executive officer of the Company had a salary and
bonus during the year ended December 31, 1996, that exceeded $100,000 for
services rendered in all capacities to the Company.
48
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options(#) Compensation
------------------ ---- ------ ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Adolph F. Calovi 1996 $ 131,000 $ -- -- $ --
President and Chief 1995 131,000 -- -- --
Executive Officer 1994 130,500 -- -- 2,743(1)
Philip W. Koebig, III 1996 174,044 22,500 10,500 10,583(2)
Executive Vice 1995 150,000 -- 52,499 10,383(3)
President 1994 25,965 -- -- 240(4)
</TABLE>
- --------------------
(1) Constitutes life insurance premiums.
(2) Constitutes life and disability insurance premiums of $7,253 and $3,330 in
country club dues.
(3) Constitutes life and disability insurance premiums of $7,253 and $3,130 in
country club dues.
(4) Constitutes life and disability insurance premiums.
Stock Option Plans. The Company has adopted the 1985 Stock Option Plan
and the 1995 Stock Option Plan (the "Option Plans"). Officers 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.
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.
In August 1997, the Board of Directors of the Company adopted, subject
to shareholder approval, the 1997 Stock Option Plan (the "1997 Option Plan").
Officers, directors and employees are eligible to receive, at no cost to them,
options under the 1997 Option Plan. Options granted under the 1997 Option Plan
may be either incentive stock options 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 grant and are exercisable for ten years after the date of grant.
Option Shares may be paid in cash, shares of the common stock, or a combination
of both. There are 300,000 shares of common stock reserved under the 1997 Option
Plan.
49
<PAGE>
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>
Philip W. Koebig, III 10,500 8.34 16.67 July 16, 2006 87,518 175,035
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
-----------------------------------------------
Value of
Number of Unexercised
Unexercised 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 101,346 $953,152 -- --
</TABLE>
Directors' Compensation. Each member of the Board of Directors, except
for the Chairman and employee directors, received a fee of $300 for each meeting
attended for the year ended December 31, 1996. For the year ended December 31,
1996, director fees totaled $26,700. Beginning in 1997, directors receive their
fees in shares of common stock.
Employment Agreement. The Company has an employment agreement, dated
January 2, 1995, with Adolph F. Calovi, its President and CEO. Under the terms
of the agreement, Mr. Calovi will receive an annual salary of $131,000 for each
of the four years of the agreement. In addition, he will receive all benefits
offered officers of the Company and will have the use of a Company-owned
automobile.
If, during the term of the agreement, Mr. Calovi's employment
terminates for any reason except voluntary resignation, embezzlement, fraud, or
due to a material default by Mr. Calovi of his employment obligations, the
Company will be fully liable for all remaining salary payments under the
agreement.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee of the Company during the year ended December 31, 1996,
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.
50
<PAGE>
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 $361,731 to Vineland Construction during the year ended
December 31, 1996, and has paid $179,102 to Vineland Construction for the six
months ended June 30, 1997.
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. See Note 5 to the
Consolidated Financial Statements.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of _______________, 1997, the shares
of common stock beneficially owned by (i) each person who was a beneficial owner
of more than five percent of the outstanding Common Shares; (ii) each director
of the Company; (iii) each Named Executive Officer of the Company and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Class Percent of Class
Beneficial Owner Beneficial Ownership (1) Before Offering After Offering
- ------------------- ------------------------ ---------------- --------------
<S> <C> <C> <C>
Bernard A. Brown
71 West Park Avenue
Vineland, New Jersey 08360 971,831 41.96% (2)
Adolph F. Calovi 228 0.01%
Sidney R. Brown 47,903 2.07%
Peter Galetto, Jr. 19,533 0.84%
Philip W. Koebig, III 99,304 4.29%
Anne E. Koons 41,188 1.78%
All directors and officers
as a group (____ persons) %
</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 _______________, 1997, pursuant to the exercise of stock
options.
(2) Assumes Mr. Brown purchases ______ shares pursuant to the Offering.
51
<PAGE>
SUPERVISION AND REGULATION
Introduction
Bank holding companies and banks are extensively regulated under both
federal and state law. The following information describes certain aspects of
that regulation applicable to the Company and the Bank, and does not purport to
be complete. The discussion is qualified in its entirety by reference to all
particular statutory or regulatory provisions.
The Company is a legal entity separate and distinct from the Bank.
Accordingly, the right of the Company, and consequently the right of creditors
and shareholders of the Company, to participate in any distribution of the
assets or earnings of the Bank is necessarily subject to the prior claims of
creditors of the Bank, except to the extent that claims of the Company in its
capacity as creditor may be recognized. The principal source of the Company's
revenue and cash flow is dividends from the Bank. There are legal limitations on
the extent to which a subsidiary bank can finance or otherwise supply funds to
its parent holding company.
The Company
General. As a registered holding company, the Company is regulated
under the BHCA and is subject to supervision and regular inspection by the
Federal Reserve. The BHCA requires, among other things, the prior approval of
the Federal Reserve in any case where the Company proposes to (i) acquire all or
substantially all of the assets of any bank, (ii) acquire direct or indirect
ownership or control of more than 5 percent of the voting shares of any bank, or
(iii) merge or consolidate with any other bank holding company.
Acquisitions/Permissible Business Activities. The BHCA currently
permits bank holding companies from any state to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
certain nationwide- and state-imposed concentration limits. The Bank has the
ability, subject to certain restrictions, to acquire by acquisition or merger
branches outside its home state. The establishment of new interstate branches is
also possible in those states with laws that expressly permit it. Interstate
branches are subject to certain laws of the states in which they are located.
Competition may increase further as banks branch across state lines and enter
new markets.
Under the BHCA, the Company is prohibited, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5 percent of
any class of voting shares of any nonbanking corporation. Further, the Company
may not engage in any business other than managing and controlling banks or
furnishing certain specified services to subsidiaries, and may not acquire
voting control of nonbanking corporations except those corporations engaged in
businesses or furnishing services that the Federal Reserve deems to be closely
related to banking.
Community Reinvestment. Bank holding companies and their subsidiary
banks are subject to the provisions of the Community Reinvestment Act of 1977,
as amended ("CRA"). Under the terms of the CRA, the Bank's record in meeting the
credit needs of the community served by the Bank, including low- and
moderate-income neighborhoods, is generally annually assessed by the OCC. When a
bank holding company applies for approval to acquire a bank or other bank
holding company, the Federal Reserve will review the assessment of each
subsidiary bank of the applicant bank holding company, and
52
<PAGE>
such records may be the basis for denying the application. At December 31, 1996,
the Bank was rated "Satisfactory" with respect to CRA.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
company is expected to serve as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength" policy for subsidiary banks, the Federal Reserve
has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fund fully the
dividends, and the prospective rate of earnings retention appears to be
consistent with the corporation's capital needs, asset quality and overall
financial condition.
The Bank
General. The Bank is subject to supervision and examination by the OCC.
In addition, the Bank is insured by and subject to certain regulations of the
FDIC and is a member of the FHLB. The Bank is also subject to various
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types,
amount and terms and conditions of loans that may be granted 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 operations of the
Bank.
Dividend Restrictions. Dividends from the Bank constitute the principal
source of income to the Company. The Bank is subject to various statutory and
regulatory restrictions on its ability to pay dividends to the Company. Under
such restrictions, the amount available for payment of dividends to the Company
by the Bank totaled $8.3 million at June 30, 1997. In addition, the OCC has the
authority to prohibit the Bank from paying dividends, depending upon the Bank's
financial condition, if such payment is deemed to constitute an unsafe or
unsound practice. The ability of the Bank to pay dividends in the future is
presently, and could be further, influenced by bank regulatory and supervisory
policies.
Affiliate Transaction Restrictions. The Bank is subject to federal laws
that limit the transactions by subsidiary banks to or on behalf of their parent
company and to or on behalf of any nonbank subsidiaries. Such transactions by a
subsidiary bank to its parent company or to any nonbank subsidiary are limited
to 10 percent of a bank subsidiary's capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20
percent of such bank subsidiary's capital and surplus. Further, loans and
extensions of credit generally are required to be secured by eligible collateral
in specified amounts. Federal law also prohibits banks from purchasing
"low-quality" assets from affiliates.
FDIC Insurance Assessments. Substantially all of deposits of the Bank
are insured by the BIF and the remaining deposits are insured by the SAIF, all
of which are subject to FDIC insurance assessments. The amount of FDIC
assessments paid by individual insured depository institutions is based on their
relative risk as measured by regulatory capital ratios and certain other
factors. During 1995, the FDIC's Board of Directors significantly reduced
premium rates assessed on deposits insured by the BIF. Under the current
regulations, the Company is assessed a premium on BIF-insured deposits.
Enforcement Powers of Federal Banking Agencies. Federal banking
agencies possess broad powers to take corrective and other supervisory action as
deemed appropriate for an insured depository institution and its holding
company. The extent of these powers depends on whether the institution in
53
<PAGE>
question is considered "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". At June 30, 1997, the Bank and the Company exceeded the
required ratios for classification as "well capitalized." On a pro forma basis,
giving effect to the sale of the Common Shares, the Oritani and Bank of New York
branch purchases, both the Bank and the Company will be well capitalized. The
classification of depository institutions is primarily for the purpose of
applying the federal banking agencies' prompt corrective action and other
supervisory powers and is not intended to be, and should not be interpreted as,
a representation of the overall financial condition or prospects of any
financial institution.
The agencies' prompt corrective action powers can include, among other
things, requiring an insured depository institution to adopt a capital
restoration plan which cannot be approved unless guaranteed by the institution's
parent company; placing limits on asset growth and restrictions on activities;
including restrictions on transactions with affiliates; restricting the interest
rate the institution may pay on deposits; prohibiting the payment of principal
or interest on subordinated debt; prohibiting the holding company from making
capital distributions without prior regulatory approval and, ultimately,
appointing a receiver for the institution. Among other things, only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and only an "adequately capitalized" depository institution
may accept brokered deposits with prior regulatory approval.
Capital Guidelines. Under the risk-based capital guidelines applicable
to the Company and the Bank, the minimum guideline for the ratio of total
capital to risk-weighted assets (including certain off- balance-sheet
activities) is 8.00 percent. At least half of the total capital must be "Tier 1"
or core capital, which primarily includes common shareholders' equity and
qualifying preferred stock, less goodwill and other disallowed tangibles. "Tier
2" or supplementary capital includes, among other items, certain cumulative and
limited-life preferred stock, qualifying subordinated debt and the allowance for
credit losses, subject to certain limitations, less required deductions as
prescribed by regulation. The proceeds received by the Company from the sale of
the Debentures in connection with the issuance of the Preferred Securities by
the Trust presently qualify as Tier 1 capital of the Company to the extent that
such proceeds do not exceed 25% of the Company's Tier 1 capital and otherwise
qualify as Tier 2 capital.
In addition, the federal bank regulators established leverage ratio
(Tier 1 capital to total adjusted average assets) guidelines providing for a
minimum leverage ratio of 3 percent for bank holding companies and banks meeting
certain specified criteria, including that such institutions have the highest
regulatory examination rating and are not contemplating significant growth or
expansion. Institutions not meeting these criteria are expected to maintain a
ratio which exceeds the 3 percent minimum by at least 100 to 200 basis points.
The federal bank regulatory agencies may, however, set higher capital
requirements when particular circumstances warrant. Under the federal banking
laws, failure to meet the minimum regulatory capital requirements could subject
a bank to a variety of enforcement remedies available to federal bank regulatory
agencies.
At June 30, 1997, the Bank's and the Company's respective total and
Tier 1 risk-based capital ratios and leverage ratios exceeded the minimum
regulatory capital requirements.
Legislative Proposals and Reforms
In recent years, significant legislative proposals and reforms
affecting the financial services industry have been discussed and evaluated by
Congress. Such proposals include legislation to revise the Glass-Steagall Act
and the BHCA to expand permissible activities for banks, principally to
facilitate the
54
<PAGE>
convergence of commercial and investment banking. Certain proposals also sought
to expand insurance activities of banks. It is unclear whether any of these
proposals, or any form of them, will be introduced in the current Congress and
become law. Consequently, it is not possible to determine what effect, if any,
they may have on the Company and the Bank.
DESCRIPTION OF THE CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock,
$1.00 par value per share, and 1,000,000 shares of serial preferred stock, $1.00
par value per share. There were 1,945,417 shares of Common Stock outstanding on
June 30, 1997. The capital stock of the Company represents non-withdrawable
capital and is not insured by the FDIC.
Common Stock
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Risk Factors -- Limitations on Payment of
Dividends" and "Supervision and Regulation." The holders of Common Stock of the
Company will be entitled to receive and share equally in such dividends as may
be declared by the Board of Directors of the Company out of funds legally
available therefor. If the Company issues Preferred Stock, the holders thereof
may have a priority over the holders of the Common Shares with respect to
dividends.
The Company has the right to defer payment of interest on the
Debentures at any time or from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each deferred period (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
maturity of the Debentures. If interest payments on the Debentures are so
deferred, the Company will be prohibited from paying cash dividends on its
Common Shares until such time as the payment of all amounts due on the
Debentures are paid and the Extension Period is terminated.
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.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Company, the holders of its Common
Shares would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Company available for
distribution. If Preferred Stock is issued, the holders thereof may have a
priority over the holders of the Common Shares in the event of liquidation or
dissolution.
Preemptive Rights; Redemption. 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
55
<PAGE>
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.
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.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of Common Stock. Upon completion of the Offering, there will
be outstanding __________ shares of Common Stock (__________ shares if the
Underwriter's over-allotment option is exercised in full).
All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company (in
general, any person who has a control relationship with the Company) which
shares will be subject to the resale limitations of Rule 144 under the
Securities Act. After the Offering, shares of Common Stock held by affiliates
will be considered to be "control shares", and are eligible for sale in the
public market in compliance with Rule 144. All officers and directors of the
Company have agreed, subject to certain exceptions, that they will not offer,
sell or otherwise dispose of any shares of Common Stock owned by them for a
period of 180 days after the date of this Prospectus without the prior written
consent of Advest, Inc. The Company has agreed subject to certain exceptions,
that it will not offer, sell or otherwise dispose of any shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Advest, Inc.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of restricted shares
as to which at least one year has elapsed from the later of the acquisition of
such shares from the Company or an affiliate of the Company in an amount that
does not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (__________ shares based upon __________ shares to be outstanding
immediately after the Offering), or (ii) if the Common Shares are quoted on the
Nasdaq National Market or a stock exchange, the average weekly trading volume of
the Common Shares during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner of
sale, notice, and the availability of current public information about the
Company. However, a person who is not deemed to have been an affiliate of the
Company during the 90 days preceding a sale by such person and who has
beneficially owned shares as to which at least two years has elapsed from the
later of the acquisition of such shares from the Company or an affiliate of the
Company is entitled to sell them without regard to the volume, manner of sale,
or notice requirements of Rule 144.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated __________ ____, 1997, between the Company and
Advest, Inc., as representative (the "Representative") of the several
underwriters named therein (the "Underwriters"), the Company has agreed to sell
to the Underwriters, and the Underwriters have severally agreed to purchase from
the Company the following respective amount of Common Shares at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
Underwriter: Number of Shares:
- ------------ -----------------
Advest, Inc...............................................
----------
Total..................................................... ==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Common Shares offered hereby if any of
such Common Shares are purchased.
The Company has been advised by the Representative that the
Underwriters propose to offer the Common Shares (excluding the shares to be
purchased by directors, officers and employees of the Company and the Bank and
certain other persons) to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $_____ per Common Share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $_____ per Common
Share to certain other dealers. After the public offering, the offering price
and other selling terms may be changed by the Underwriters. In addition, the
Company has agreed to pay a financial advisory fee of $100,000 to the
Representative.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional __________ Common Shares at the public offering price. To the extent
that the Underwriter exercises such option, the Company will be obligated,
pursuant to the option, to sell such Common Shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Shares offered hereby. If purchased, the
Underwriters will offer such additional Common Shares on the same terms as those
on which the __________ Common Shares are being offered.
57
<PAGE>
The Underwriters have reserved ________ Common Shares offered in the
Offering for sale at the public offering price to directors, officers and
employees of the Company and the Bank and to certain other persons.
The Underwriters and dealers may engage in passive market making
transactions in the Common Shares in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase Common Shares at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Shares during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market making
may stabilize or maintain the market price of the Common Shares above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
In connection with this Offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares. Specifically, the Underwriters may overallot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Shares in the open market to cover syndicate short positions
or to stabilize the price of the Common Shares. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Shares in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Shares above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representative and certain of the other Underwriters have in the
past and may in the future perform various services for the Company, including
investment banking services, for which they have or may receive customary fees.
The Representative also served as managing underwriter in the Company's sale of
the Preferred Securities and the Debentures, and advised the Company in its Bank
of New York branch purchase.
VALIDITY OF SECURITIES
The validity of the Common Shares offered hereby will be passed upon
for the Company by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.,
counsel to the Company. Certain legal matters will be passed upon and for the
Underwriters by Arnold & Porter, Washington, D.C. and New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995, and for the three years ended December 31, 1996, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing in this Prospectus, and have been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
58
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov. This Prospectus does not contain all the
information set forth in the Registration Statement and exhibits thereto, which
the Company has filed with the Commission under the Securities Act and to which
reference is hereby made.
59
<PAGE>
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, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 31, 1997, except for Note 19, as to which the
date is April 9, 1997.
F-1
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks..................................................... $ 26,687,834 $ 17,006,758 $ 17,242,366
Federal funds sold.......................................................... 11,150,000 4,800,000 --
----------- ------------ -----------
Cash and cash equivalents................................................. 37,837,834 21,806,758 17,242,366
Investment securities available for sale (amortized cost - $151,893,592;
1997 and $97,063,398; 1996, and $146,379,244; 1995)...................... 150,580,632 95,581,384 147,008,896
Loans receivable (net of allowance for loan losses - $3,350,989; 1997,
$2,595,312; 1996, and $2,064,640; 1995).................................. 363,705,188 295,500,668 183,633,631
Bank properties and equipment............................................... 14,211,001 12,222,507 11,419,175
Real estate owned, net...................................................... 665,544 755,628 876,302
Accrued interest receivable................................................. 4,587,432 2,850,399 2,564,921
Excess of cost over fair value of assets acquired........................... 9,557,830 5,365,218 6,191,919
Deferred taxes.............................................................. 1,411,529 1,070,535 205,169
Other assets................................................................ 2,661,982 1,641,959 752,257
----------- ----------- -------------
TOTAL....................................................................... $585,218,972 $436,795,056 $369,894,636
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits.................................................................... $467,393,739 $385,986,905 $335,247,796
Advances from the Federal Home Loan Bank.................................... 48,500,000 10,000,000 8,000,000
Loans payable............................................................... -- 6,000,000 --
Securities sold under agreements to repurchase.............................. 8,925,585 5,253,048 --
Other liabilities........................................................... 2,578,771 2,140,527 1,976,044
----------- ----------- -----------
Total liabilities......................................................... 527,398,095 409,380,480 345,223,840
----------- ----------- ------------
Guaranteed preferred beneficial interest in subordinated debt............... 28,750,000 -- --
COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued..... -- -- --
Common stock, $1 par value, 10,000,000 shares authorized, issued and
outstanding: 1,945,417 in 1997; 1,848,929 in 1996; and 1,651,175 in 1995). 1,945,417 1,848,929 1,651,175
Surplus..................................................................... 18,090,101 18,124,359 17,197,275
Retained earnings........................................................... 9,901,912 8,419,417 5,406,774
Unrealized (loss) gain on securities available for sale, net of income taxes (866,553) (978,129) 415,572
--------- ---------- -------------
Total shareholders' equity................................................ 29,070,877 27,414,576 24,670,796
------------ ------------ ------------
TOTAL....................................................................... $585,218,972 $436,795,056 $369,894,636
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
----------------------------- ----------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................ $14,788,616 $9,596,375 $22,073,767 $15,100,885 $ 9,590,994
Interest on investment securities..................... 3,292,619 3,709,481 7,127,393 5,285,877 2,151,351
Interest on federal funds sold........................ 64,229 65,023 68,366 463,001 452,117
----------- ----------- ----------- ----------- -----------
Total interest income............................... 18,145,464 13,370,879 29,269,526 20,849,763 12,194,462
---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits ................................. 6,556,216 5,511,184 11,953,591 7,639,933 3,844,753
Interest on funds borrowed............................ 1,310,436 87,068 580,412 47,158 93,796
Interest on guaranteed preferred beneficial interest
in subordinated debt................................ 825,232 -- -- -- --
--------- ------------- ---------------------------------------
Total interest expense.............................. 8,691,884 5,598,252 12,534,003 7,687,091 3,938,549
---------- ---------- ---------- ---------- ----------
Net interest income................................. 9,453,580 7,772,627 16,735,523 13,162,672 8,255,913
PROVISION FOR LOAN LOSSES............................... 825,000 450,000 900,000 807,660 382,671
---------- ---------- ----------- ----------- -----------
Net interest income after provision for loan losses. 8,628,580 7,322,627 15,835,523 12,355,012 7,873,242
--------- ---------- ---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts................... 585,479 488,272 1,057,139 659,811 419,363
Other service charges................................. 19,834 44,747 115,999 28,068 17,224
Gain on sale of fixed assets.......................... 1,200 14,529 45,207 46,487 21,164
Gain on sale of loans................................. -- -- -- 207,984 --
Gain on sale of investment securities................. 15,592 191,288 206,538 377,126 --
Other................................................. 154,223 119,654 320,890 331,513 274,533
--------- ---------- --------- ----------- ----------
Total other income.................................. 776,328 858,490 1,745,773 1,650,989 732,284
--------- ---------- --------- ----------- ----------
OTHER EXPENSES:
Salaries and employee benefits........................ 3,596,992 2,867,345 6,525,903 4,689,269 2,626,679
Occupancy expense..................................... 708,593 770,045 1,407,875 1,269,514 1,090,833
Equipment expense..................................... 532,925 349,785 817,696 459,460 249,951
Provision for losses in real estate owned............. 15,000 -- -- 78,000 120,000
Professional fees and services........................ 138,295 154,147 352,970 249,760 164,770
Data processing expense............................... 692,458 515,259 1,085,874 634,753 318,552
Amortization of excess cost over fair value of
assets acquired..................................... 468,820 413,420 826,701 342,562 134,435
Postage and supplies.................................. 190,030 242,538 420,120 335,055 173,823
Insurance............................................. 151,211 73,964 196,110 382,554 397,961
Other................................................. 838,089 734,143 1,573,404 1,606,404 713,733
---------- ---------- ---------- ---------- -----------
Total other expenses ............................... 7,332,413 6,120,646 13,206,653 10,047,331 5,990,737
--------- --------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 2,072,495 2,060,471 4,374,643 3,958,670 2,614,789
INCOME TAXES............................................ 590,000 668,000 1,362,000 1,140,000 775,134
---------- ---------- ---------- ---------- -----------
NET INCOME.......................................... $1,482,495 $ 1,392,471 $ 3,012,643 $ 2,818,670 $1,839,655
========= ========== ========== ========== =========
Earnings per common and common equivalent share
Net income............................................ $ 0.47 $ 0.48 $ 1.00 $ 0.97 $ 0.90
=========== ============ =========== ============ ==========
Earnings per common share - assuming full dilution
Net income............................................ $ 0.47 $ 0.48 $ 0.99 $ 0.97 $ 0.90
=========== ============ ============ ============ ==========
Weighted average shares................................. 2,915,789 2,763,513 2,831,693 2,709,464 1,890,792
========= ========== ========== ========== =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<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, 1994........................... $ 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........ $ 415,572 415,572
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
Stock dividend................................... 87,892 (87,892)
Cash paid for fractional interest
resulting from stock dividend.................. (2,146) (2,146)
Exercise of stock options........................ 109,862 1,017,122 1,126,984
Unrealized loss on securities
available for sale,
net of income taxes............................ (1,393,701) (1,393,701)
Net income....................................... 3,012,643 3,012,643
--------- ---------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1996......................... 1,848,929 18,124,359 8,419,417 (978,129) 27,414,576
Exercise of stock options (unaudited)............ 2,331 27,229 29,560
Sale of common stock (unaudited)................. 1,646 34,147 35,793
Stock dividend (unaudited)....................... 92,511 (92,511)
Cash paid for fractional interest
resulting from stock dividend (unaudited)...... (3,123) (3,123)
Change in unrealized loss on securities
available for sale, net of income taxes (unaudited) 111,576 111,576
Net income (unaudited)........................... 1,482,495 1,482,495
---------- ---------- --------- ---------- ---------
BALANCE, JUNE 30, 1997
(UNAUDITED)...................................... $1,945,417 $18,090,101 $9,901,912 $ (866,553) $29,070,877
========= ========== ========= ========= ==========
</TABLE>
See notes to consolidated statements.
F-4
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
--------------------------- -----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ...............................................$ 1,482,495 $ 1,392,471 $ 3,012,643 $ 2,818,670 $ 1,839,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses .............................. 825,000 450,000 900,000 807,660 382,671
Provision for loss on real estate owned ................ 15,000 -- -- 78,000 120,000
Depreciation and amortization .......................... 300,846 233,192 484,059 325,913 215,381
Amortization of excess cost over fair value of
assets acquired ...................................... 468,820 413,420 826,701 342,562 134,435
Gain on sale of loans .................................. -- -- -- (207,984) --
Gain on sale of investment securities available for sale (15,592) (191,288) (206,538) (246,129) --
Gain on sale of mortgage-backed securities available
for sale.............................................. -- -- -- (130,997) --
Gain on sale of bank properties and equipment .......... (1,200) (14,529) (29,298) (46,487) (21,164)
Deferred income taxes .................................. (398,472) 516,413 (147,401) (27,398) (193,836)
Changes in assets and liabilities which provided
(used) cash:
Accrued interest and other assets .................... (2,757,056) (2,567,387) (1,175,180) (838,246) 196,972
Accounts payable and accrued expenses ................ 438,244 470,449 164,483 1,215,343 (1,145,147)
------------ ------------- ------------- ------------- -------------
Net cash provided by operating activities ....... 358,085 702,741 3,829,469 4,090,907 1,528,967
------------ ------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of investment securities held to maturity ...... -- -- -- (30,094,922) (6,056,403)
Purchases of investment securities available for sale .... (68,259,460) (125,543,579 (194,220,677) (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 ............................................ -- -- -- 65,280,038 8,141,545
Proceeds from maturities of investment securities
available for sale ..................................... 1,055,674 47,965,005 99,213,685 10,344,666 --
Proceeds from maturities of mortgage-backed securities
held to maturity ....................................... -- -- -- 19,908,185 176,542
Proceeds from maturities of mortgage-backed securities
available for sale ..................................... -- -- 125,716 -- --
Proceeds from sale of investment securities available
for sale................................................ 12,389,184 33,899,410 16,880,505 - 93,679,375
Proceeds from sale of mortgage-backed securities available
for sale ............................................... -- 50,850,000 50,782,081 7,359,934 --
Proceeds from sale of loans .............................. -- -- -- 1,870,608 --
Net increase in loans .................................... (66,716,228) (51,485,050) (112,767,037) (50,605,944) (2,845,797)
Increase in loans resulting from branch acquisitions ..... (2,313,292) -- -- (636,714) --
Purchase of bank properties and equipment ................ (534,516) (302,228) (1,359,295) (825,912) (481,895)
Increase in bank properties and equipment resulting from
branch acquisitions .................................... (1,754,824) -- -- (5,430,744) --
Proceeds from sale of bank properties and equipment ...... 1,200 14,529 42,606 250,824 21,164
Proceeds from guaranteed preferred beneficial interest in
subordinated debt ...................................... 28,750,000 -- -- -- --
Excess of cost over fair value of branch assets acquired . (4,661,432) -- -- -- (4,450,145)
Decrease (increase) in real estate owned ................. 75,084 85,924 120,674 (244,249) 78,578
Purchase price of acquisitions, net of cash received ..... -- -- -- -- (5,410,572)
------------ ----------- ------------- ------------- -------------
Net cash used in investing activities ........... (101,968,610) (44,515,989) (64,382,072) (145,113,582) (7,477,825)
------------ ----------- ------------- ------------- -------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
--------------------------- -----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits..................... 14,855,165 35,767,281 50,739,109 16,685,101 (6,638,004)
Increase in deposits resulting from branch acquisitions. 66,551,669 -- -- 122,543,875 --
Borrowings and repurchase agreements.................... 42,172,537 6,236,197 21,253,048 12,500,000 4,500,000
Repayment of borrowings and repurchase agreements....... (6,000,000) -- (8,000,000) (4,500,000) (5,750,000)
Proceeds from exercise of stock options................. 29,560 1,009,446 1,126,984 605,368 3,393
Payments for fractional interests resulting from
stock dividend........................................ (3,123) -- (2,146) -- --
Proceeds from issuance of common stock.................. 35,793 -- -- 260,000 6,421,877
------------ ----------- ------------- ------------- ---------
Net cash provided by (used in) financing
activities................................... 117,641,601 43,012,924 65,116,995 148,094,344 (1,462,734)
----------- ---------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 16,031,076 (800,324) 4,564,392 7,071,669 (7,411,592)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 21,806,758 17,242,366 17,242,366 10,170,697 17,582,289
---------- ---------- ----------- ------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $37,837,834 $16,442,042 $ 21,806,758 $ 17,242,366 $10,170,697
========== ========== =========== ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
Interest paid........................................... $ 8,470,898 $5,563,571 $ 12,743,696 $ 6,100,954 $ 3,827,301
========== ========= =========== ============ ===========
Income taxes paid....................................... $ 575,000 $520,000 $ 1,577,757 $ 994,516 $ 1,115,000
========== ======= =========== ============ ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ITEMS -
Transfer of loans to real estate owned ................. $ 276,409 $124,878 $ 424,644 $ 196,181 $ 449,478
========== ======= =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. NATURE OF OPERATIONS
Sun Bancorp, 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 subsidiaries, Sun Capital Trust (the "Trust"), 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. At June 30, 1997, the Bank had twenty-five 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. The Trust is a Delaware business trust which holds the Debentures
issued by the Company. Med-Vine, Inc. is a Delaware holding company which
holds the majority of the Bank's investment portfolio. 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.
Investment Securities - The Bank accounts for debt and equity securities as
follows:
Held to Maturity - Debt 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 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. Realized gains and losses on the sale of investment
securities are reported in the consolidated statement of
F-7
<PAGE>
income and determined using the adjusted cost of the specific security
sold. Unrealized losses, net of taxes, amounting to $866,553 are reported
as a component of shareholders' equity at June 30, 1997. Unrealized losses,
net of taxes, amounting to $978,129 are reported as a component of
shareholders' equity at December 31, 1996. Unrealized gains, net of taxes,
amounting to $415,572 are reported as a component of shareholders' equity
at December 31, 1995.
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.
The Bank adopted the requirements of Statement of Financial Accounting
Standard ("SFAS") No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures, 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.
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
F-8
<PAGE>
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 net assets acquired is net of accumulated amortization
of $2,506,686, $2,037,866 and $1,211,165 at June 30, 1997, December 31,
1996 and 1995, 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 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 equivalent
shares outstanding during the period.
Stock Dividend - On May 20, 1997, and September 17, 1996, the Company's
Board of Directors declared special 5% stock dividends which were paid on
June 25, 1997 and October 30, 1996, respectively, to stockholders of record
on June 2, 1997 and October 15, 1996, respectively. Accordingly, earnings
per share for the years ended December 31, 1996, 1995 and 1994 have been
restated to reflect the increased number of shares outstanding.
Stock Split - On August 28, 1997, the Company's Board of Directors declared
a three-for-two stock split effected in the form of a 50% stock dividend
payable on September 25, 1997, to shareholders of record on September 11,
1997. Accordingly, earnings per share for the six months ended June 30,
1997 and for the years ended December 31, 1996, 1995 and 1994 have been
restated to reflect the increased number of shares outstanding.
Accounting for Stock Options - The Company accounts for stock-based
compensation in accordance with the Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees. This method
calculates compensation expense using the intrinsic value method which
recognizes as expense the difference between the market value of the stock
and the exercise price at grant date. The Company has not recognized any
compensation expense under this method. In the year ended December 31,
1996, the Company adopted the reporting disclosure requirements of SFAS No.
123, Accounting for Stock-Based Compensation which requires the Company to
disclose the pro forma effects of accounting for stock-based compensation
using the fair value method as described in the accounting requirements of
SFAS No. 123. As permitted by SFAS No. 123, the Company will continue to
account for stock-based compensation under APB Opinion No. 25.
Accounting Principles Issued and Not Adopted - In June 1996, the FASB
issued SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. The statement which is effective
for transactions occurring after December 31, 1996, requires an entity
F-9
<PAGE>
to recognize, prospectively, the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when
extinguished. It requires that servicing assets and other retained
interests in transferred assets be measured by allocating the previous
carrying amount between the asset sold, if any, and retained interest, if
any, based on their relative fair values at the date of transfer. It also
provides implementation guidance for servicing of financial assets,
securitizations, loan syndications, and participations and transfers of
loan receivables with recourse. The Statement supersedes SFAS No. 122,
Accounting for Mortgage Servicing Rights, which was adopted by the Company
on January 1, 1996, and which management of the Company determined had no
material impact on the Company's results of operations or financial
position. In December 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No.
127 defers for one year the effective date of Statement No. 125 as it
relates to transactions involving secured borrowings and collateral and
transfers and servicing of financial assets. This Statement also provides
additional guidance on these types of transactions. Management of the
Company does not believe the Statements will have a material impact on the
Company's results of operations or financial position when adopted.
Reclassifications - Certain reclassifications have been made in the 1996,
1995 and 1994 consolidated financial statements to conform to those
classifications used in 1997.
3. ACQUISITIONS
On June 5, 1997, the Bank purchased four branches from First Union National
Bank, Avondale, Pennsylvania ("First Union"). The Bank acquired
approximately $66,552,000 of deposit liabilities plus $222,000 of accrued
interest, $1,755,000 of real estate and equipment, $2,313,000 of loans plus
related accrued interest and $1,203,000 in cash. The Bank paid a premium of
approximately $4,661,000, which is being amortized over seven years.
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.
F-10
<PAGE>
A summary statement of the cash used to purchase Tuckahoe is set forth
below:
Fair value of assets purchased........................ $ 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.
F-11
<PAGE>
4. INVESTMENT SECURITIES
During 1995, in accordance with the implementation of the SFAS No. 115
Guide, the Company reclassified its portfolio of investment securities as
available for sale. The carrying amounts of investment securities and the
approximate market values at June 30, 1997, December 31, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale: Cost Gains Losses Value
---- ----- ------ -----
Debt Securities (Unaudited)
<S> <C> <C> <C> <C>
U.S. Treasury Obligations............. $ 51,075,981 $ 61,895 $ (923,115) $ 50,214,761
State and Municipal Obligations....... 20,736,907 16,688 (280,956) 20,472,639
Other bonds........................... 21,444,997 3,510 (235,975) 21,212,532
Mortgage-backed securities............ 49,986,456 71,875 26,881 50,031,450
--------------- ----------- ------------ --------------
Total debt securities............... 143,244,341 153,968 (1,446,927) 141,931,382
--------------- ----------- ------------ --------------
Equity Securities
Federal Reserve Bank stock............ 801,100 -- -- 801,100
Federal Home Loan Bank stock.......... 6,564,900 -- -- 6,564,900
Atlantic Central Bankers Bank stock... 83,250 -- -- 83,250
Trust Preferred Securities............ 1,200,000 -- -- 1,2000,000
--------------- ------------- ------------ --------------
Total equity securities............. 8,649,250 -- -- 4,801,950
--------------- ------------- ------------ --------------
Total............................. $ 151,893,591 $ 153,968 $ (1,466,927) $ 150,580,632
=============== ============= ============ ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale: Cost Gains Losses Value
---- ----- ------ -----
Debt Securities
<S> <C> <C> <C> <C>
U. S. Treasury Obligations............ $ 51,954,682 $ 12,086 $ (932,957) $ 51,033,811
State and Municipal Obligations....... 20,168,222 28,006 (356,822) 19,839,406
Other bonds........................... 20,075,483 7,635 (239,962) 19,843,156
Mortgage-backed securities............ 63,061 -- -- 63,061
-------------- ----------- ------------- ---------------
Total debt securities............... 92,261,448 47,727 (1,529,741) 90,779,434
-------------- ----------- ------------- ---------------
Equity Securities
Federal Reserve Bank stock............ 617,800 -- -- 617,800
Federal Home Loan Bank stock.......... 4,100,900 -- -- 4,100,900
Atlantic Central Bankers Bank stock... 83,250 -- -- 83,250
--------------- ------------ ------------- ---------------
Total equity securities............. 4,801,950 -- -- 4,801,950
--------------- ------------ ------------- ---------------
Total............................. $ 97,063,398 $ 47,727 $ (1,529,741) $ 95,581,384
============== ============ ============ ================
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale: Cost Gains Losses Value
---- ----- ------ -----
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) 41,997,867
----------- ----------- ---------- -----------
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 Bankers Bank 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>
During the six months ended June 30, 1997, the Company sold $12,389,184 of
securities available for sale resulting in a gross gain of $15,592. During
1996, the Bank sold $144,529,374 of securities available for sale resulting
in a gross gain of $206,538. 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.
At June 30, 1997 and December 31, 1996 the Bank was required to maintain an
average reserve balance with the Federal Reserve of $5,424,000 and
$3,579,000, respectively.
The maturity schedule of the investment in debt securities available for
sale at June 30, 1997 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------- ------------------
Amortized Estimated Amortized Estimated
Cost Market Cost Market
---- Value ---- Value
----- -----
<S> <C> <C> <C> <C>
Due in one year or less................................ $ 13,509,484 $ 13,491,428 $ 8,828,772 $ 8,786,619
Due after one year through five years.................. 57,496,366 56,454,636 61,132,578 60,063,074
Due after five years through ten years................. 16,286,313 16,062,435 15,890,087 15,708,094
Due after ten years.................................... 5,965,722 5,891,433 6,346,950 6,158,586
----------- ----------- ----------- -----------
93,257,885 91,899,932 92,198,387 90,716,373
Mortgage-backed securities............................. 49,986,455 50,031,450 63,061 63,061
----------- ---------- ----------- -----------
$143,244,340 $ 141,931,381 $92,261,448 $90,779,434
=========== =========== ========== ===========
</TABLE>
At June 30, 1997 and December 31, 1996, $4,000,000 of U.S. Treasury Notes
were pledged to secure public deposits.
F-13
<PAGE>
5. LOANS
The components of loans for the periods indicated were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
----------- -----------------------------------
1997 1996 1995
------------ ----------------- --------------
(Unaudited)
<S> <C> <C> <C>
Commercial and industrial............. $284,363,026 $ 223,116,474 $ 118,874,150
Real estate-residential mortgages..... 53,351,319 53,846,436 54,414,800
Installment........................... 29,341,831 21,133,070 12,409,321
---------- -------------- -------------
Total gross loans................... 367,056,176 298,095,980 185,698,217
Allowance for loan losses ............ (3,350,989) (2,595,312) (2,064,640)
---------- ------------- -------------
Net loans............................. $363,705,187 $ 295,500,668 $ 183,633,631
=========== =============== =============
Non-accrual loans..................... $ 1,096,792 $ 1,277,208 $ 2,658,118
=========== ============== =============
</TABLE>
There were no irrevocable commitments to lend additional funds on
nonaccrual loans at June 30, 1997 and December 31, 1996. The reduction in
interest income resulting from nonaccrual loans was $66,264 for the six
months ended June 30, 1997; and $151,614, $276,955 and $146,308 for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest income
recognized on these loans for the six months ended June 30, 1997 was
$36,857; and during the years ended December 31, 1996, 1995 and 1994 was
$15,414, $24,989 and $18,907, respectively.
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 nonrelated party
transactions. The aggregate dollar amount of these loans to related parties
as of June 30, 1997, December 31, 1996 and 1995, along with an analysis of
the activity for the first six months of 1997 and the years ended December
31, 1996 and 1995, is summarized as follows:
<TABLE>
<CAPTION>
For the Six
Months Ended For the Years Ended
June 30, December 31,
------------ -----------------------------------
1997 1996 1995
------------ ----------------- ------------
(Unaudited)
<S> <C> <C> <C>
Balance, beginning of year............................. $11,437,134 $ 8,621,460 $ 6,132,256
Additions.............................................. 948,884 7,306,997 4,272,121
Repayments............................................. (1,186,751) (4,491,323) (1,782,917)
---------- --------------- -----------
Balance, end of year................................... $11,199,267 $ 11,437,134 $ 8,621,460
========== ============== ===========
</TABLE>
Under approved lending decisions, the Company has commitments to lend
additional funds totaling approximately $58,324,485, $58,635,413 and
$67,928,316 at June 30, 1997, December 31, 1996 and 1995, 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 creditworthiness 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.
F-14
<PAGE>
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.
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30, For the Years Ended December 31,
---------------------- ------------------------------------------------------------
1997 1996 1995 1994
---------------------- -------------------- ----------------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance, beginning of period $2,595,312 $2,064,640 $1,607,375 $1,067,402
Charge-offs................. (81,975) (400,387) (426,289) (349,439)
Recoveries.................. 12,652 31,059 75,894 34,829
--------- --------- --------- ---------
Net charge-offs............ (69,323) (369,328) (350,395) (314,610)
Allowance on acquired loans. -- -- -- 471,912
Provision for loan losses... 825,000 900,000 807,660 382,671
---------- ---------- --------- ---------
Balance, end of period...... $3,350,989 $2,595,312 $2,064,640 $1,607,375
========= ========= ========= =========
</TABLE>
The provision for loan losses charged to expense is based upon past loan
and loss experience and an evaluation of estimated 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>
June 30, December 31,
--------------------- ----------------------------------------
1997 1996 1995
--------------------- ------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Impaired loans with related reserve for
loan losses ($296,307) calculated
under SFAS No. 114....................... $ -- $ -- $ 454,489
Impaired loans with no related reserve for
loan losses calculated.....................
under SFAS No. 114....................... 454,170 584,114 527,908
---------------- -------------- ---------------
Total impaired loans..................... $ 454,170 $ 584,114 $ 982,397
================ ============== ===============
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
-------- --------------------------------
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Average impaired loans....................... $459,319 $596,519 $411,289
======= ======= =======
Interest income recognized on impaired loans. $ 5,242 $ 18,284 $ 18,561
===== ======= =======
Cash basis interest income recognized on
impaired loans............................. $ 31,615 $ 15,414 $ --
======= ======= =======
</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 nonaccrual
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 nonaccrual 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 nonaccrual 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 at June 30, 1997, December 31, 1996 and 1995
consist of the following major classifications:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
------ ------ ------
(Unaudited)
<S> <C> <C> <C>
Land.............................................................. $ 3,312,395 $ 3,084,395 $ 2,873,500
Buildings......................................................... 8,316,949 6,982,449 6,861,123
Leasehold improvements and equipment.............................. 4,699,987 3,991,723 3,090,188
------------ ------------ --------------
16,329,331 14,058,567 12,824,811
Accumulated depreciation and amortization......................... (2,118,330) (1,836,060) (1,405,636)
---------- ----------- --------------
Total............................................................. $ 14,211,001 $ 12,222,507 $ 11,419,175
=========== ============ ==============
</TABLE>
F-16
<PAGE>
8. REAL ESTATE OWNED
Real estate owned consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
------------- ---------------------------
1997 1996 1995
------------- ----------- ----------
(Unaudited)
<S> <C> <C> <C>
Commercial properties........................................... $ 412,527 $ 435,765 $ 492,501
Residential properties.......................................... 291,017 360,863 471,801
------- ----------- ---------
703,544 796,628 964,302
Allowance....................................................... (38,000) (41,000) (88,000)
-------- --------- --------
Total........................................................... $ 665,544 $ 755,628 $ 876,302
======== ======== ========
</TABLE>
For the first six months of 1997, $15,000 was charged against operations to
adjust real estate owned for declines in value. During 1996, 1995 and 1994,
$0, $78,000 and $120,000, 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>
June 30, December 31,
------------ -----------------------------------
1997 1996 1995
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Demand Deposits....................... $165,349,497 $133,624,391 $128,802,293
Savings Deposits...................... 70,922,212 63,506,894 66,970,293
Time Certificates under $100,000...... 175,065,374 151,615,202 116,462,390
Time Certificates $100,000 or more.... 56,056,656 37,240,418 23,012,820
---------- ----------- ------------
Total................................. $467,393,739 $385,986,905 $335,247,796
=========== =========== ===========
</TABLE>
Of the total demand deposits, approximately $86,700,000, $76,500,000 and
$62,700,000 are non-interest bearing at June 30, 1997, December 31, 1996
and 1995, respectively.
F-17
<PAGE>
A summary of certificates by year of maturity is as follows:
Year Ended June 30,
(Unaudited)
1998.................................. $200,833,019
1999.................................. 22,984,056
2000.................................. 4,551,396
Thereafter............................ 2,753,560
-----------
Total................................. $231,122,031
===========
Year Ended December 31,
1997................................ $169,482,951
1998................................ 12,828,611
1999................................ 4,032,751
Thereafter.......................... 2,511,307
-----------
Total............................... $188,855,620
===========
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
----------- -----------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Savings deposits.............................................. $ 684,319 $ 1,455,043 $1,394,849 $1,334,432
Time certificates............................................ 5,308,870 9,382,920 5,274,045 1,802,296
Interest-bearing checking..................................... 563,027 1,115,628 971,039 708,025
--------- ---------- --------- ---------
Total......................................................... $6,556,216 $11,953,591 $7,639,933 $3,844,753
========= ========== ========= =========
</TABLE>
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Federal Home Loan Bank ("FHLB") advances at June 30, 1997, December 31,
1996 and 1995 were $0, $10,000,000 and $8,000,000, respectively.
Advances are collateralized under a blanket collateral lien agreement.
The amounts outstanding at December 31, 1996 and 1995 were borrowed
under overnight lines of credit at interest rates of 7.375% and 5.875%,
respectively. Interest expense on advances was $286,316 and $6,733 for
the years ended December 31, 1996 and 1995, respectively. There were no
such borrowings during 1994.
F-18
<PAGE>
In 1997, the Company entered into repurchase agreements with the FHLB.
At June 30, 1997, the amount outstanding was $48,500,000, maturing July
15, 1997 and bearing an interest rate of 5.62%. Interest expense on
FHLB repurchase agreements was $485,972 for the six months ended June
30, 1997. There were no such repurchase agreements during 1996 or 1995.
At December 30, 1996, the Company obtained a $6,000,000 revolving line
of credit from a correspondent bank with a term of 36 months. The
floating rate of interest is the prime rate plus fifty basis points. At
December 31, 1996, there was $6,000,000 outstanding at an interest rate
of 8.75%. At June 30, 1997, there were no amounts outstanding under the
line of credit.
11. STOCK OPTION PLANS
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 nonqualified 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 496,125 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 nonqualified 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. At June 30, 1997, there were 208,285 shares of
stock reserved for issuance under the 1985 Plan.
Options granted under the 1995 and 1985 Plans, adjusted for the 5%
stock dividends granted in 1996 and 1997 and the three for two stock
split granted in 1997, are as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
--------- ------------
Options granted and outstanding:
<S> <C> <C>
June 30, 1997 at prices ranging from $4.56 to $15.00 per share................. 240,662 312,273
================= ===============
December 31, 1996 at prices ranging from $4.78 to $11.11 per share............. 436,083 76,011
================= ===============
December 31, 1995 at prices ranging from $4.78 to $10.28 per share............. 279,229 235,630
================= ===============
December 31, 1994 at prices ranging from $4.78 to $10.28 per share............. 137,371 302,365
================== ===============
</TABLE>
F-19
<PAGE>
Activity in the stock option plans for the period beginning January 1,
1994 and ending June 30, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Number Price Price
of Shares Per Share Per Share
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1994........ 465,776 $4.56 - $9.79 $ 5.39
1994:
Exercised........................... (744) $4.56 4.56
Expired............................. (3,308) $7.86 7.86
----------
Outstanding at December 31, 1994...... 461,724 5.37
1995:
Granted............................. 206,720 $ 7.86 7.86
Exercised........................... (123,603) $4.56 - $6.33 4.89
Expired............................. (4,238) $4.56 - $9.79 8.77
----------
Outstanding at December 31, 1995...... 540,603 6.43
1996:
Granted............................. 179,432 $10.59 10.59
Exercised........................... (181,602) $4.56 - $ 5.76 5.60
Expired............................. (734) $9.79 9.79
----------
Outstanding at December 31, 1996...... 537,699 $4.56 - $10.59 8.08
1997:
Granted............................. 18,900 $13.33 13.33
Exercised........................... (3,664) $7.86 - $9.79 8.05
Expired............................. --
----------
Outstanding at June 30, 1997.......... 552,935 $4.56 - $13.33 8.31
==========
</TABLE>
The following table summarizes stock options outstanding at June 30,
1997:
<TABLE>
<CAPTION>
Number of Options Weighted Average Remaining Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price
----------------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$ 4.56 - $ 5.01 120,431 4 $ 4.67
7.86 - 9.79 234,165 6 8.00
10.59 - 11.65 179,439 9 10.64
15.00 18,900 10 13.33
------- ----- -----
552,935 7 $ 8.31
======= ===== =====
</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.
The Company accounts for stock-based compensation in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees. This
method calculates compensation expense using
F-20
<PAGE>
the intrinsic value method which recognizes as expense the difference
between the market value of the stock and the exercise price at grant
date. The Company has not recognized any compensation expense under
this method. In the year ended December 31, 1996, the Company adopted
the reporting disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation which requires the Company to disclose the pro
forma effects of accounting for stock-based compensation using the fair
value method as described in the accounting requirements of SFAS No.
123. As permitted by SFAS No. 123, the Company will continue to account
for stock-based compensation under APB Opinion No. 25.
Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the dates of awards under those
plans consistent with the method of SFAS No. 123, the Company's net
income and income per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
For the Six
Months Ended For the Years Ended
June 30, December 31,
------------ ---------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C> <C>
Net income: As reported........ $ 1,482,495 $ 3,012,643 $ 2,818,670
Pro forma.......... $ 1,444,742 $ 2,461,089 $ 2,370,020
Net income per common and common equivalent share:
Primary As reported........ $ 0.47 $ 1.00 $ 0.97
Pro forma.......... $ 0.46 $ 0.82 $ 0.81
Fully diluted As reported........ $ 0.47 $ 0.99 $ 0.97
Pro forma.......... $ 0.45 $ 0.81 $ 0.81
</TABLE>
Significant assumptions used to calculate the above fair alue of the awards are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Risk free interest rate of return... 6.28% 6.44% 5.65%
Expected option life................ 60 months 60 months 60 months
Expected volatility................. 16% 14% 15%
Expected dividends.................. 0 0 0
</TABLE>
F-21
<PAGE>
12. BENEFITS
During 1996, the Company established a 401(k) Savings Plan (the "401(k)
Plan") for all qualified employees. Substantially all employees are
eligible to participate in the 401(k) Plan following completion of one
year of service and attaining age 21. Vesting in the Company's
contribution accrues over four years at 25% each year. Pursuant to the
401(k) Plan, employees can contribute up to 15% of their compensation
to a maximum of $9,500 in 1996 and 1997. The Company contributes 50% of
the employee contribution, up to 6% of compensation. The Company's
contribution to the 401(k) Plan was $38,113 for the six months ended
June 30, 1997 and $85,722 for the year ended December 31, 1996. The
Company paid $5,350 for the first six months of 1997 and $4,861 during
1996 to administer the 401(k) Plan.
13. 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 $10,155,000, $9,663,853 and $6,196,871 at
June 30, 1997, December 31, 1996 and 1995, 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 $296,109 with annual increases based on increases in the
Consumer Price Index.
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.
F-22
<PAGE>
Future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at June
30, 1997.
<TABLE>
<CAPTION>
<S> <C>
1997............................................................................... $ 296,766
1998............................................................................... 515,797
1999............................................................................... 504,596
2000............................................................................... 408,260
2001............................................................................... 389,860
Thereafter......................................................................... 3,667,405
------------------
$ 5,782,684
==================
</TABLE>
Rental expense included in occupancy expense for all operating leases
was $270,940 for the six months ended June 30, 1997 and $516,526,
$510,285 and $390,157 for 1996, 1995 and 1994, respectively.
14. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
--------------- -------------------------------------------------------------
1997 1996 1995 1994
--------------- ------------------- -------------------- --------------------
(Unaudited)
<S> <C> <C> <C> <C>
Current........................... $ 973,175 $ 1,504,874 $ 1,167,398 $ 968,970
Deferred.......................... (383,175) (142,874) (27,398) (193,836)
--------- --------------- ------------- ------------
Total............................. $ 590,000 $ 1,362,000 $ 1,140,000 $ 775,134
========= =============== ============ ============
</TABLE>
Items that gave rise to significant portions of the deferred tax
accounts at June 30, 1997, December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
June 30, December, 31
---------- ----------------------------------
1997 1996 1995
------ ------ -----
Deferred tax asset: (Unaudited)
<S> <C> <C> <C>
Allowance for loan losses............. $ 847,297 $ 590,257 $ 427,997
Deferred loan fees.................... 63,900 63,900 89,012
Other real estate..................... 73,344 73,344 89,324
Goodwill amortization................. 171,266 72,150 20,358
Unrealized loss on investment securities 446,406 503,885 --
Other................................. 76,641 51,274 62,229
--------- ----------------- -----------
Total deferred tax asset................ 1,678,804 1,354,810 688,920
Deferred tax liability:
Property.............................. (267,275) (284,275) (269,671)
Unrealized gain on investment securities -- -- (214,080)
--------- ----------------- -----------
Total deferred tax liability............ (267,275) (284,275) (483,751)
--------- ---------------- -----------
Net deferred tax asset.................. $ 1,411,529 $ 1,070,535 $ 205,169
========= =============== ===========
</TABLE>
F-23
<PAGE>
The provision for federal income taxes for the six months ended June
30, 1997 and for the years ended December 31, 1996, 1995 and 1994,
differs from that completed at the statutory rate as follows:
<TABLE>
<CAPTION>
June 30, Years Ended December 31,
---------- ----------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Tax computed at the statutory rate.................. $ 704,648 $ 1,487,379 $ 1,345,948 $ 889,028
Increase in charge resulting from:
State tax, net of federal benefit................. -- -- -- 33,785
Goodwill amortization............................. 28,664 57,327 57,160 43,464
Tax exempt interest (net)......................... (122,678) (340,896) (157,940) (72,009)
Other, net........................................ (20,634) 158,190 (105,168) (119,134)
---------- ------------- ------------ -----------
$ 590,000 $ 1,362,000 $ 1,140,000 $ 775,134
======== =========== ============ ===========
</TABLE>
F-24
<PAGE>
15. EARNINGS PER SHARE
Earnings per common share and common equivalent share is computed by
dividing the 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. The number of
common shares was increased 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. 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. Retroactive recognition has been given to market
values, common stock and common stock equivalents outstanding for
periods prior to the date of the Company's stock dividend and stock
split.
<TABLE>
<CAPTION>
For the Six
Months Ended For the Years Ended
June 30, December 31,
---------------- ----------------------------------------------
1997 1996 1995 1994
---------------- ------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Assumptions:
Net income for the period............................ $ 1,482,495 $ 3,012,643 $ 2,818,670 $ 1,839,655
Average common shares outstanding.................... 2,915,789 2,831,693 2,709,464 1,890,792
Dilutive options outstanding to purchase equivalent shares 552,935 537,699 540,604 428,052
Average exercise price per share..................... $ 8.31 $ 8.08 $ 6.42 $ 5.13
Estimated average market value per common share -
for primary computation............................ $ 14.19 $ 11.96 $ 10.28 $ 7.86
Estimated period-end market value per common share -
for fully diluted computation...................... $ 15.67 $ 13.33 $ 10.28 7.86
Computation:
Application of assumed proceeds:
Towards repurchase of outstanding common
shares at applicable market value................ $ 4,596,913 $ 4,346,654 $ 3,471,962 $ 2,196,232
Adjustment of shares outstanding - primary:
Actual average shares.............................. 2,915,789 2,831,693 2,709,464 1,890,792
Net additional shares issuable..................... 228,987 174,283 202,854 148,666
----------- --------------- ----------- -----------
Adjusted shares outstanding........................ 3,144,776 3,005,976 2,912,318 2,039,458
=========== =============== =========== ===========
Adjustment of shares outstanding - fully diluted:
Actual average shares.............................. 2,915,789 2,831,693 2,709,464 2,196,232
Net additional shares issuable..................... 259,515 211,700 202,854 148,666
----------- --------------- ----------- -----------
Adjusted shares outstanding........................ 3,175,304 3,043,393 2,912,318 2,039,458
=========== =============== =========== ===========
Earnings per common and common equivalent share
Primary............................................ $ 0.47 $ 1.00 $ 0.97 $ 0.90
Fully diluted...................................... $ 0.47 $ 0.99 $ 0.97 $ 0.90
</TABLE>
F-25
<PAGE>
16. REGULATORY MATTERS
The ability of the Bank to pay dividends to the Company is controlled
by certain regulatory restrictions. Permission from the Office of the
Comptroller of the Currency ("OCC") 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 subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory --and possibly
additional discretionary -- actions by regulators, that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications
are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of capital (as defined in the regulations) to
total adjusted assets (as defined), and of risk-based capital (as
defined) to risk- weighted assets (as defined). Management believes, as
of June 30, 1997, that the Bank meets all applicable capital adequacy
requirements.
As of June 30, 1997, the most recent notification from the OCC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately
capitalized, the Bank must maintain minimum Tier 1 Capital, Total
Risk-Based Capital and Leverage Ratios as set forth in the table.
<TABLE>
<CAPTION>
To Be
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
At June 30, 1997
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Risk-Based Capital............... $ 48,876,324 11.44 % $ 16,040,672 4.00 % $ 24,061,009 6.00 %
Total Risk-Based Capital................ 49,227,313 12.27 32,096,047 8.00 40,120,059 10.00
Leverage................................ 45,876,324 8.63 21,263,650 4.00 26,579,562 5.00
At December 31, 1996
Tier 1 Risk-Based Capital............... $ 28,907,862 9.34 % $ 12,380,480 4.00 % $ 18,570,720 6.00 %
Total Risk-Based Capital................ 31,503,174 10.18 24,760,960 8.00 30,951,200 10.00
Leverage................................ 28,907,862 6.81 16,974,791 4.00 21,218,489 5.00
At December 31, 1995
Tier 1 Risk-Based Capital............... $ 18,063,305 8.26 % $ 8,750,160 4.00 % $ 13,125,240 6.00 %
Total Risk-Based Capital................ 20,127,945 9.20 17,500,320 8.00 21,875,400 10.00
Leverage................................ 18,063,305 5.61 12,869,123 4.00 16,086,404 5.00
</TABLE>
F-26
<PAGE>
17. 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.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
---------------------------- --------------------------- --------------------------
Estimated Estimated Estimated
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
Assets: (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ 37,837,834 $ 37,837,834 $21,806,758 $21,806,758 $ 17,242,366 $ 17,242,366
Investment securities.......... 150,580,632 150,580,632 95,581,384 95,581,384 147,008,896 147,008,896
Loans receivable............... 367,066,177 364,593,216 295,500,668 293,777,592 183,633,631 187,037,088
Liabilities:
Demand deposits................ 165,349,497 165,349,497 133,624,391 133,624,391 128,802,293 128,802,293
Savings deposits............... 70,922,212 70,922,212 63,506,894 63,506,894 66,970,293 66,970,293
Certificates of deposit........ 231,122,030 231,156,590 188,855,620 191,448,487 139,475,210 140,877,573
Federal Home Loan Bank
advances..................... -- -- 10,000,000 10,000,000 8,000,000 8,000,000
Loans payable.................. -- -- 6,000,000 6,000,000 -- --
Repurchase agreements.......... 48,500,000 48,500,000 5,253,048 5,253,048 -- --
</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.
Loan payable - The fair value of the loan payable is estimated to be
the amount outstanding at the reporting date. The interest rate on the
loan adjusts with changes in the prime lending rate.
Repurchase agreements - Securities sold under agreements to repurchase
are overnight transactions, therefore the carrying amount is a
reasonable estimate of fair value.
F-27
<PAGE>
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 estimated fair value approximates the
recorded deferred fee amounts, which are not significant.
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 June 30, 1997, December 31,
1996 and 1995. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since June 30, 1997, December 31,
1996 and 1995, and therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
18. 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.
19. GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT
On March 17, 1997, Sun Capital Trust (the "Trust"), a statutory
business trust created under Delaware law, that is a subsidiary of the
Company, issued $25 million, 9.85% Preferred Securities ("Preferred
Securities") with a stated value and liquidation preference of $25 per
share. This Trust's obligations under the Preferred Securities issued
are fully and unconditionally guaranteed by the Company. The proceeds
from the sale of the Preferred Securities of the Trust were utilized by
the Trust to invest in $25 million of 9.85% Junior Subordinated
Debentures (the "Debentures") of the Company. The Debentures are
unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The
Debentures represent the sole assets of the Trust. Interest on the
Preferred Securities is cumulative and payable quarterly in arrears.
The Company has the right to optionally redeem the Debentures prior to
the maturity date of March 31, 2027, on or after March 31, 2002, at
100% of the stated liquidation amount, plus accrued and unpaid
distributions, if any, to the redemption date. Upon the occurrence of
certain events, the Company may redeem in whole, but not in part, the
Debentures prior to March 31, 2002. Proceeds from any redemption of the
Debentures would cause a mandatory redemption of the Preferred
Securities and the common securities having an aggregate liquidation
amount equal to the principal amount of the Debentures redeemed.
F-28
<PAGE>
On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional $3,750,000 of the
Preferred Securities on the same terms as the original issuance to
cover over-allotments. The proceeds from the sale of the Preferred
Securities were utilized by the Trust to invest in $3,750,000 of
Debentures of the Company.
On behalf of the Trust, the Company requested relief from the Office of
Chief Counsel of the Division of Corporation Finance of the Securities
and Exchange Commission, exempting the Trust from the reporting
requirements of the Securities Exchange Act of 1934. The Trust is a
wholly-owned subsidiary of the Company, has no independent operations
and issued securities that contained a full and unconditional guarantee
of its parent, the Company.
20. ACQUISITIONS (UNAUDITED)
On July 24, 1997, the Bank purchased three branches from Oritani
Savings Bank. The Bank acquired approximately $33,922,000 of deposit
liabilities plus $144,000 of accrued interest, $547,000 of real estate
and equipment and $180,000 in cash. The Bank paid a premium of
$2,151,000, which is being amortized over seven years.
On June 5, 1997, the Bank entered into a branch purchase and deposit
assumption agreement with The Bank of New York ("BNY"), whereby the
Bank will assume certain deposits liabilities of eleven branch offices
from BNY. At June 30, 1997, the branches had deposits of approximately
$177 million. In addition, the Bank will acquire approximately $29
million of loans as well as property and equipment pertaining to the
branches. The transaction is expected to be completed in the fourth
quarter of 1997. The agreement is subject to raising additional capital
and regulatory approval.
F-29
<PAGE>
21. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition June 30 December 31,
-------------- ---------------------------------
1997 1996 1995
------ ------ -----
(Unaudited)
Assets
<S> <C> <C> <C>
Cash.......................................................... $ 498,887 $ 27,187 $ 159,205
Investments................................................... 1,200,000 -- --
Investments in subsidiaries................................... 54,537,905 33,294,851 24,463,659
Office property and equipment................................. -- -- 9,756
Accrued interest and other assets............................. 1,554,389 95,417 38,176
--------- ----------- ------------
Total......................................................... $ 57,791,181 $ 33,417,455 $ 24,670,796
=========== ============ ============
Liabilities and Shareholders' Equity
Loans payable................................................. $ -- $ 6,000,000 $ --
Accrued interest payable...................................... -- 2,879 --
Guaranteed preferred beneficial interest in subordinated debt. 28,750,000 -- --
Shareholders' equity.......................................... 29,041,181 27,414,576 24,670,796
---------- ------------ ------------
Total......................................................... $ 57,791,181 $ 33,417,455 $ 24,670,796
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Six Months Ended
June 30, Years Ended December 31,
-------------------------- -------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net interest (expense) ........................................ $ (111,295) $ 498 $ (1,888) $ -- $(27,045)
Other income................................................... -- -- 15,909 12,278 7,200
Expenses....................................................... ( 851,384) (11,043) (16,271) (27,025) (8,090)
-------- ------ --------- -------- -------
(Loss) before equity in undistributed
income of subsidiaries and income tax expense................ (962,679) (10,545) (2,250) (14,747) (27,935)
Equity in undistributed income of subsidiaries................. 2,445,174 1,403,016 3,014,893 2,833,417 1,877,590
Income tax expense............................................. -- -- -- -- (10,000)
--------- --------- ---------- --------- -------
Net income..................................................... $1,482,495 $1,392,471 $ 3,012,643 $2,818,670 $1,839,655
========= ========= ========== ========== =========
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Six Months Ended
June 30, Years Ended December 31,
------------------------- ----------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
Operating activities: (Unaudited)
<S> <C> <C> <C> <C> <C>
Net income....................................... $ 1,482,495 $ 1,392,470 $ 3,012,643 $ 2,818,670 $ 1,839,655
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization.................. -- 4,181 9,756 8,360 4,486
Undistributed income of subsidiaries........... (2,445,174) (1,403,016) (3,014,893) (2,833,417) (1,877,590)
Tax benefit from exercise of non-qualified stock
options (net)................................ -- -- (110,000) -- --
Changes in assets and liabilities which provided
(used) cash:
Accrued interest and other assets............ (1,458,974) 6,782 (57,241) 9,665 (9,701)
Accounts payable and accrued expenses........ 2,877 -- 2,879 -- --
---------- ---------- --------- --------- ---------
Net cash provided by (used in) operating
activities........................... (2,424,530) 417 (156,856) 3,278 (43,150)
---------- ---------- --------- --------- ---------
Investing activities:
Purchases of investment securities available
for sale....................................... (1,200,000) -- -- -- --
Proceeds from maturities of investment securities -- -- -- -- 2,000,000
Purchase price of acquisitions, net of cash
received....................................... -- -- -- -- (7,801,950)
Purchase of bank properties and equipment........ -- -- -- -- (20,904)
Dividend from subsidiary......................... 150,000 -- -- -- 1,400,000
Advances to subsidiary........................... (18,866,000) (1,100,000) (7,100,000) (1,700,000) (1,200,000)
---------- ---------- --------- --------- ---------
Net cash used in investing activities... (19,916,000) (1,100,000) (7,100,000) (1,700,000) (5,622,854)
---------- ---------- --------- --------- ---------
Financing activities:
Net borrowings under line of credit agreement.... -- -- 6,000,000 -- 4,500,000
Repayments of short-term borrowings.............. (6,000,000) -- -- -- (4,500,000)
Exercise of stock options........................ 29,560 1,009,446 1,126,984 605,358 3,393
Proceeds from issuance of guaranteed beneficial
interest in subordinated debt................... 28,750,000 -- -- -- --
Proceeds from issuance of common stock........... 35,793 -- -- 260,000 6,421,877
Payment for fractional interests resulting from
stock dividend................................ (3,123) -- (2,146) -- --
---------- ---------- --------- --------- ---------
Net cash provided by financing activities 22,812,230 1,009,446 7,124,838 865,358 6,425,270
---------- ---------- --------- --------- ---------
(Decrease) increase in cash ....................... 471,700 (90,137) (132,018) (831,364) 759,266
Cash, beginning of period.......................... 27,187 159,205 159,205 990,569 231,303
---------- ---------- --------- --------- ---------
Cash, end of period................................ $ 498,887 $ 69,068 $ 27,187 $ 159,205 $ 990,569
=========== =========== ============= ============= ===========
</TABLE>
F-31
<PAGE>
=================================================== ============================
No person has been authorized in connection
with the offering made hereby to give any
information or to make any representation not
contained in this prospectus and, if given or
made, such information or representation must ________ Shares
not be relied upon as having been authorized by
the company or any underwriter. This
prospectus does not constitute an offer to sell or
a solicitation of any offer to buy any of the [Logo]
securities offered hereby to any person or by
anyone in any jurisdiction in which it is
unlawful to make such offer or solicitation. SUN BANCORP, INC.
Neither the delivery of this prospectus nor any
sale made hereunder shall, under any
circumstances, create any implication that the Common Stock
information contained herein is correct as of
any date subsequent to the date hereof.
---------------
TABLE OF CONTENTS
Page
----
Summary.................................... __________________
Selected Consolidated Financial Data.......
Risk Factors...............................
Use of Proceeds............................ PROSPECTUS
Oritani and Bank of New York
Branch Purchases........................ __________________
Capitalization.............................
Price Range of Common Shares;
Dividends................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................ Advest, Inc.
Business of the Company....................
Management.................................
Security Ownership of Certain
Beneficial Owners and Management.........
Supervision and Regulation.................
Description of the Capital Stock........... _________ ____, 1997
Shares Eligible for Future Sale............
Underwriting...............................
Validity of Securities.....................
Experts....................................
Available Information......................
Financial Statements....................... F-1
=================================================== ============================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
* Registration Fees................................ $ 6,000
* Legal Services................................... 100,000
* Printing and Engraving........................... 25,000
* Nasdaq Listing Fees.............................. 20,000
* Accounting Fees.................................. 75,000
* Miscellaneous.................................... 4,000
-------
* TOTAL............................................ $230,000
=======
Item 14. 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 against expenses and liabilities actually and reasonably incurred in
connection with any threatened, pending or completed "proceeding" (including
civil, criminal, administrative or investigative proceedings or arbitrative
action) in which such person is involved by reason of such person's position
with the Company, provided that a determination has been made (by the Board of
Directors or a committee thereof, acting by a majority vote of a quorum
consisting of directors who were not parties to such proceeding, or by
independent legal counsel in a written opinion, or by the shareholders) 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 to be in breach of
his duty of loyalty to the corporation or its shareholders, or if his/her
conduct were determined not to be in good faith or to have involved a knowing
violation of law, or to have resulted in receipt by the officer, director,
employee or agent of an improper personal benefit.
Provisions regarding indemnification of directors, officers, employees
or agents of the Company are contained in Article Eighth of the Company's
Articles 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, as amended.
<PAGE>
Item 15. 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 pursuant to Section 4(2) as each
such issuance did not involve a public offering.
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits:
1.1 Form of Underwriting Agreement. **
3.1 Articles of Incorporation of Sun Bancorp, Inc. *
3.2 Bylaws of Sun Bancorp, Inc. *
4.1 Common Security Specimen.*
5.1 Opinion of Malizia, Spidi, Sloane, & Fisch, P.C.**
10.1 Employment Agreement with Adolph F. Calovi. ***
11.1 Statement re Computation of Per Share Earnings **
23.1 Consent of Deloitte & Touche LLP.**
23.2 Consent of Malizia, Spidi, Sloane & Fisch, P.C.
(included in Exhibit 5.1).
(b) Financial Statements Schedules****
- -----------------------
* Incorporated by reference to the registrant's Registration Statement on
Form 10, file no. 0-20957.
** To be filed by amendment
*** Incorporated by reference to the registrant's Registration Statement on
Form S-1, file no. 333- 21903
**** All schedules are omitted because they are not required or applicable or
the required information is shown in the financial statements or the notes
thereto.
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the
Securities Act, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Vineland, New Jersey,
on September 12, 1997.
SUN BANCORP, INC.
By: /s/ Adolph F. Calovi
-------------------------------------
Adolph F. Calovi
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on September 12, 1997.
<TABLE>
<CAPTION>
<S> <C>
/s/ Adolph F. Calovi /s/ Bernard A. Brown
- ------------------------------------------------- -------------------------------------
Adolph F. Calovi Bernard A. Brown
President, Chief Executive Officer and Director Chairman of the Board
(Principal Executive Officer)
/s/ Sidney R. Brown /s/ Philip W. Koebig, III
- ------------------------------------------------- -------------------------------------
Sidney R. Brown Philip W. Koebig, III
Treasurer, Secretary and Director Executive Vice President and Director
/s/ Peter Galetto, Jr. /s/ Anne E. Koons
- ------------------------------------------------- -------------------------------------
Peter Galetto, Jr. Anne E. Koons
Director Director
/s/ Robert F. Mack
- -------------------------------------------------
Robert F. Mack
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
