SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 (No fee required)
For the fiscal year ended December 31, 1996
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to .
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Commission File No. 0-20957
Sun Bancorp, Inc.
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(Name of Small Business Issuer in Its Charter)
New Jersey 52-1382541
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(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
226 Landis Avenue, Vineland, New Jersey 08360
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (609) 691-7700
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Securities registered under to Section 12(b) of the Exchange Act: None
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Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
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(Title of Class)
Indicated by check mark whether the issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price of the registrant's Common Stock on
March 15, 1997 was approximately $22.1 million.
As of March 15, 1997, there were issued and outstanding 1,851,260 shares
of the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended December 31, 1996. (Part II)
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Item 1. Business
General
The Company, a New Jersey corporation, is a bank holding company
headquartered in Vineland, New Jersey with one subsidiary, Sun National Bank
(the "Bank"), a national banking association. At December 31, 1996, the Company
had total assets of $436.8 million, total deposits of $386.0 million and total
stockholders' equity of $27.4 million. The Bank's deposits are federally insured
by the Bank Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The Company's principal business is to serve as
a holding company for the Bank.
The Company was incorporated in, 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 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 two purchase and assumption transactions in which the
Company acquired eight branches with $122 million in deposits. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview." In addition, the Company entered into an agreement to acquire four
branches, with $73 million in deposits, from First Union National Bank,
Avondale, Pennsylvania, and three branches with $33 million in deposits, from
Oritani Savings Bank, SLA, Hackensack, New Jersey. The Company also plans to
establish two de novo branches during 1997. 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 $436.8 million at
December 31, 1996.
At December 31, 1996, the Bank provided community banking services through
eighteen 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 an arrangement with Institutional Marketing Strategies, L.L.C., 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, Cape May, Cumberland, Mercer and Ocean. The Bank's market
area contains a diverse base of customers, including agricultural,
manufacturing, transportation and retail consumer businesses.
In February 1997, the Company created a special purpose subsidiary, Sun
Capital Trust, to issue approximately $25 million of trust preferred securities.
The issuance of these securities was completed on March 17, 1997 and the
proceeds from the sale of these securities were used to purchase approximately
$25 million of junior subordinated notes issued by the Company. The proceeds
received by the Company from the sale of the junior subordinated notes are
expected to be used to increase its capital to support recent and pending
acquisitions and for other general corporate purposes.
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. The
Bank's primary competitors have substantially greater resources and lending
limits than the Bank and may
2
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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.
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 mobility of collateral, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. 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.
3
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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 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.
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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 December 31, 1996, the Bank
had approximately $29.0 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
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 and provides acceptable limits of
safety and liquidity. The Bank's investment goal is to invest available funds in
instruments that meet specific requirements of the Bank's asset and liability
management goals. The investment activities of the Bank consist primarily of
investments in federal funds, securities issued or guaranteed by the United
States Government or its agencies, states and political subdivisions and
corporate bonds. 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.
5
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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 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.
Personnel
At December 31, 1996, the Bank had 158 full-time and 43 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.
Subsidiary Activity
There is no prescribed statutory or regulatory investment limitation on
investments in an operating subsidiary. The Bank has one operating subsidiary,
Med-Vine, Inc., a Delaware corporation that holds and an investment securities
portfolio.
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. Effective June
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1, 1997, the Bank will have the ability, subject to certain restrictions,
including state opt-out provisions, to acquire by acquisition or merger branches
outside its home state. States may affirmatively opt-in to permit these
transactions earlier, which New Jersey, among other states, has done. The
establishment of new interstate branches also will be possible in those states
with laws that expressly permit it. Interstate branches will be 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 Office of
the Comptroller of the Currency (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 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 $7.7 million at December 31, 1996. 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.
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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. Deposits of the Bank are insured by the BIF of
the FDIC and 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 question is
considered "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" or "critically undercapitalized". At December
31, 1996, the Bank exceeded the required ratios for classification as "well
capitalized" and the Company exceeded the required ratios for classification as
adequately 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.
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
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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 December 31, 1996, 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.
In the last Congress, such proposals included legislation to revise the
Glass-Steagall Act and the BHCA to expand permissible activities for banks,
principally to facilitate the 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
reintroduced 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.
Item 2. Properties
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The Company and the Bank operate from their main office and 19 branch
offices. The Bank leases its main office and four branch offices. The remainder
of the branch offices are owned by the Bank. The Bank has entered into Purchase
and Assumption Agreements with First Union to acquire four branch offices and
Oritani to acquire three branch offices. In addition, the Bank opened one de
novo branch office in January, 1997 and plans to open an additional de novo
branch office during 1997.
Item 3. Legal Proceedings
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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 of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
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No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Effective August 29, 1996, the Company's Common Stock trades on the Nasdaq
SmallCap market under the symbol "SNBC." Prior to this date, the Company's
common stock was not publicly traded. At December 31, 1996, there were
approximately 268 shareholders of record. The following table reflects the stock
price as published by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends
------------- ---- --- ---------
<S> <C> <C> <C>
December 1996 $22.25 $20.00 A 5% stock dividend
was paid to holders of
record, as of October
15, 1996. There were
no cash dividends paid
during the year.
</TABLE>
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Selected Results of Operations
Interest income............. $29,270 $ 20,850 $ 12,194 $ 8,164 $ 8,629
Net interest income......... 16,736 13,163 8,256 5,327 4,991
Provision for loan losses... 900 808 383 2 96
Net interest income after
provision for loan losses 15,836 12,355 7,873 5,325 4,895
Non-interest income......... 1,746 1,651 732 472 770
Non-interest expense........ 13,207 10,047 5,991 4,198 4,354
Net Income.................. 3,013 2,819 1,840 1,128 813
Per Share Data
Net Income
Primary.................. 1.58 1.52 1.42 0.88 0.73
Fully diluted............ 1.56 1.52 1.42 0.88 0.73
Book value.................. 15.25 14.34 17.14 11.52 10.48
Selected Balance Sheet Data
Assets...................... 436,795 369,895 217,351 112,015 104,162
Cash and investments........ 117,388 164,251 70,809 24,134 17,670
Loans receivable (net) ..... 295,501 183,634 134,861 83,387 82,080
Deposits.................... 385,987 335,248 196,019 99,099 91,837
Borrowings and securities
sold under agreements to
repurchase................ 21,253 8,000 -- -- --
Shareholders' equity........ 27,415 24,671 20,571 12,306 11,178
Performance Ratios
Return on average assets.... 0.74% 1.03% 1.09% 1.04% 0.74%
Return on average equity.... 11.99% 12.42% 11.74% 9.61% 7.56%
Net yield on interest-
earning assets............ 4.57% 5.30% 5.39% 5.29% 4.96%
Asset Quality Ratios
Non-performing loans to
total loans............... 0.81% 1.72% 1.82% 1.84% 1.02%
Non-performing assets to
total loans and
other real estate owned.. 1.06% 2.19% 2.56% 2.26% 1.19%
Net charge-offs to average
total loans.............. 0.16% 0.23% 0.29% 0.02% 0.14%
Total allowance for loan
losses to total
non-performing loans...... 107.26% 64.47% 64.74% 69.10% 128.53%
Capital Ratios
Equity to assets............ 6.28% 6.67% 9.46% 10.99% 10.73%
Tier 1 risk-based capital ratio 7.44% 8.67% 14.01% 15.59% 12.80%
Total risk-based capital ratio 8.28% 9.64% 15.22% 16.84% 14.05%
Leverage ratio.............. 5.43% 5.74% 8.44% 10.74% 9.31%
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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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 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.
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 $295.5 million at December 31, 1996. Much of this loan growth is
attributable to the Bank's hiring of a number of experienced loan
12
<PAGE>
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. The Bank also has established a number
of regional advisory boards that were responsible for referring approximately
$50 million in loans to the Bank in 1996, representing one-third of all new
outstanding loans last 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 additional experienced commercial loan officers
(which itself has contributed to much of the rapid growth in the Bank's total
loan portfolio), 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 the 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 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.
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 expense
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
13
<PAGE>
deposits and borrowed funds). Net interest income depends on the volume and rate
earned on interest-earning assets and the volume and interest rate paid on
interest-bearing liabilities.
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>
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 (1) $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
-------- ------ ----- ------ ------ ----- -------- ------ ------
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
Shareholder's equity 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 (2) 3.93 % 4.61% 4.79%
==== ==== ====
Net yield on interest
earning assrts (3) 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) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
14
<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
------ ---- ------ --- ------ ---- ------ ---
Interest income: (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ==== ====== ====== ====== ==== ======
Net change in
interest income $5,930 ($1,654) ($703) $3,573 $4,837 $322 ($252) $4,907
======= ======= ==== ====== ====== ====== ==== ======
</TABLE>
Net interest income increased $3,573,000 or 27% to $16,736,000 in 1996
compared to $13,163,000 in 1995. The increase is due primarily to the growth of
average interest-earning assets from $248,340,000 in 1995 to $366,231,000 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 $117,891,000 reflects
an increase of $80,605,000 in average loans and $43,719,000 in average
investment securities which were funded by an increase of $105,884,000 of
average interest-bearing liabilities and an increase of $25,482,000 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.
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.
The yield on average interest-earning assets declined in 1996 due to a
decline in the yield of 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.
15
<PAGE>
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 $4,907,000, or 59%, to $13,163,000 in 1995
compared to $8,256,000 in 1994. The increase is due primarily to an increase in
average earning assets, from $153,184,000 in 1994 to $248,340,000 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 $95,156,000 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 $46,874,000 in 1995, to
$155,139,000 from $108,265,000 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.
The average balance of investment securities increased from $33,931,000 in
1994 to $85,445,000 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 $122,843,000
in 1994 to $202,276,000 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 $1,202,000 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. 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.
16
<PAGE>
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
economic 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. In addition, the Bank's determination as
to the amount of its allowance for loan losses is subject to review by the OCC,
as part of its examination process, which may result in the establishment of an
additional allowance based upon the judgment of the OCC after a review of the
information available at the time of the OCC examination.
Non-Interest Income. Other operating income increased $95,000, or 5.7%, from
$1,651,000 for the year ended December 31, 1995 to $1,746,000 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 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 $1,057,000 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 $1,651,000 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 operating expenses increased $3,160,000, from
$10,047,000 for the year ended December 31, 1995 to $13,207,000 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
$1,837,000, from $4,689,000 for the year ended December 31, 1995 to $6,526,000
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 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 $1,086,000 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
17
<PAGE>
$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 $4,056,000, from $5,991,000 for the
year ended December 31, 1994 to $10,047,000 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
$2,062,000, from $2,627,000 for the year ended December 31, 1994 to $4,689,000
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 $1,606,000 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 increased $222,000, or 19%, from $1,140,000 for
the year ended December 31, 1995 to $1,362,000 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 $1,140,000 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 loans 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 December 31, 1997 total $169.5 million. The
Company may renew these certificates, attract new replacement deposits, or
replace such funds with 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 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 $21.8 million at December 31, 1996, the
Company has substantial additional secured borrowing capacity with the FHLB and
other sources.
Net cash provided by operating activities for the year ended December 31,
1996 totalled $3.8 million, as compared to $4.1 million for the year ended
December 31, 1995. Net cash provided by
18
<PAGE>
operating activities for the year ended December 31, 1995 totalled $4.1 million
an increase of $2.6 million from the year ended December 31, 1994.
Net cash used in investing activities for the year ended December 31, 1996
totalled $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 million.
Net cash used in investing activities for the year ended December 31, 1995
totalled $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 year ended December 31,
1996 totalled $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.
Net cash provided by financing activities for the year ended December 31,
1995 totalled $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
million. The increase in deposits and net borrowings were used primarily to fund
the increase in loan originations and investment securities.
The Company has a number of sources of liquidity, including distributions
from the Bank, investment securities, cash and amounts due from other banks,
secondary sources of liquidity, which include the ability to borrow funds from
the Federal Reserve discount window of $5.0 million, lines of credit with the
FHLB of $40.2 million, and lines of credit at correspondent banks of $18.0
million.
The Company has experienced a significant increase in commercial loan
demand, and expects such demand to continue into 1997. 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 believes it
has adequate liquidity resources to satisfy its current and anticipated
obligations.
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. During 1996,
in order to maintain the Bank's total risk-based capital level in excess of 10%,
the Company entered into a $6 million line of credit with another bank. At
December 31, 1996, the Company had fully drawn down this line of credit and the
proceeds were invested in the Bank as additional capital.
Due to the pending branch purchases and the Company's anticipated further
growth, the Company intends to raise approximately $25 million of additional
capital through the public offering of the Preferred Securities.
19
<PAGE>
The increase of commercial loans has also had the effect of lowering the
Company's risk-based capital ratios. In general, commercial loans are
categorized as having a 100% risk-weighting using the calculations required by
the Company's regulators. The rate at which commercial loans have grown has
outpaced the growth rate of the Company's capital.
It is the Company's intent to maintain 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 December 31, 1996:
<TABLE>
<CAPTION>
To Be Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
The following table sets forth the Company's risk-based capital levels at
December 31, 1996:
<TABLE>
<CAPTION>
To Be Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Risk-Based
Capital $23,027,487 7.44% $12,385,363 4.00% $18,578,045 6.00%
Total Risk-Based
Capital 25,622,799 8.28% 24,770,727 8.00% 30,963,409 10.00%
Leverage 23,027,487 5.43% 16,978,392 4.00% 21,203,948 25.00%
</TABLE>
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.
20
<PAGE>
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%.
The Bank currently has 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 December 31, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing during the same time period by $38 million, representing a negative
cumulative one-year gap ratio of 8.73%. 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
December 31, 1996. 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 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.
21
<PAGE>
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
(Amounts in Thousands)
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Loans Receivable $ 141,565 $ 38,460 $ 88,388 $ 29,683 $298,096
Investment Securities - 8,730 61,168 25,683 95,581
Federal Funds Sold 4,800 - - - 4,800
------- ------- ------- -------- --------
Total interest-
earning assets 146,365 47,190 149,556 55,366 398,477
------- ------- ------- -------- --------
Interest-bearing demand
deposits 21,173 - 35,951 - 57,124
Savings deposits 25,769 - 37,738 - 63,507
Time certificates under
$100,000 41,529 93,339 16,747 - 151,615
Time certificates $100,000
or more 18,805 15,810 2,626 - 37,241
Federal Home Loan Bank
advances 10,000 - - - 10,000
Securities sold under
agreements to repurchase 5,253 - - - 5,253
------- ------- ------- -------- --------
Total interest-bearing
liabilities 122,529 109,149 93,062 - 324,740
------- ------- ------- -------- --------
Periodic Gap $ 23,836 $(61,959) $ 56,494 $ 55,366 $ 73,737
======= ======= ======= ======= ========
Cumulative Gap $ 23,836 $(38,123) $ 18,371 $ 73,737
======= ======= ====== =======
Cumulative Gap Ratio 5.46% -8.73% 4.21% 16.88%
===== ===== ==== =====
</TABLE>
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which requires the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Nearly all the assets and liabilities of the Company are monetary.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
FINANCIAL CONDITION
General - The Company has experienced significant growth in its statement of
financial condition. The increase has been the result of acquisitions and
internal growth. Increases were most prevalent in loans, generally commercial
loans, and deposits. The Company's assets increased by $66.9 million, or 18%,
from $369.9 million at December 31, 1995 to $436.8 million at December 31, 1996.
The increase in assets primarily reflects the Company's deployment of proceeds
into the loan portfolio, from sales of investment securities and increased
deposit levels. Comparing balances from December 31, 1996 to 1995, the Company's
net loans receivable increased $111.9 million, federal funds sold increased $4.8
million and investment securities decreased $51.4 million. Total liabilities
increased $64.2 million, or 19%, from $345.2 million at December 31, 1995 to
$409.4 million at December 31, 1996. Deposits increased $50.7 million and
borrowed funds increased $13.2 million. Before the effect of unrealized gains or
losses on securities held for sale, shareholders' equity increased $4.1 million,
or 17%, from $24.3 million at December 31, 1995 to $28.4 million at December 31,
1996.
22
<PAGE>
Loans - 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.
ANALYSIS OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- -------------------- ------------------- --------------- ------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
Type of Loan: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
23
<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, 1997, 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 $l97,729 $ 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 ninety 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.
Non-Performing Assets - 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 $4,079,000 at
24
<PAGE>
December 31, 1995 to $3,176,000 at December 31, 1996. The ratio of
non-performing assets to net loans was .82% at December 31, 1996 compared to
1.74% at December 31, 1995. In 1995, non-performing assets increased by
$563,000, from $3,516,000 at December 31,1994 to $4,079,000 at December 31,
1995. Although the dollar amount increased, the ratio of non-performing assets
to net loans 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 ninety 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 disposal costs. Any
write-down of Real Estate Owned is charged to operations. At December 31, 1996,
the Bank had $755,628 classified as Real Estate Owned.
Non-Performing Assets
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and industrial $ 354 $ 1,721 $ 1,178 $ 1,074 $ 428
Home equity 337 295 341 204 33
Residential real estate 586 607 342 265 199
Installment - 35 40 - -
------- -------- ------- ------- ------
Total $ 1,277 $ 2,658 $ 1,901 $ 1,543 $ 660
======= ======== ======= ======= ======
Accruing loans that are contractually past
due 90 days or more:
Commercial and industrial $ 404 $ 135 $ 525 $ - -
Home equity 62 279 30 - -
Residential real estate 572 64 20 2 183
Installment 105 67 7 - -
------- -------- ------- ------- ------
Total $ 1,143 $ 545 $ 582 $ 2 $ 183
======= ======== ======= ======= ======
Total non-accrual and 90-day past due loan $ 2,420 $ 3,203 $ 2,483 $ 1,545 $ 843
Real estate owned 756 876 1,033 359 144
------- -------- ------- ------- ------
Total non-performing assets $ 3,176 $ 4,079 $ 3,516 $ 1,904 $ 987
======= ======== ======= ======= ======
Total non-accrual and 90-day past due loans to net loans 0.82% 1.74% 1.84% 1.85% 1.03%
Total non-accrual and 90-day past due loans total assets 0.55% 0.87% 1.14% 1.38% 0.81%
Total non-performing assets to total assets 0.73% 1.10% 1.62% 1.70% 0.95%
Total allowance for loan losses to total non-performing
loans 107.26% 64.47% 64.74% 69.10% 128.53%
</TABLE>
Interest income that would have been recorded on loans on non-accrual
status, under the original terms of such loans, would have totaled $151,614 for
the year ended December 31, 1996.
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.
25
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994
------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for losses on loans, beginning of period $ 2,065 $ 1,607 $ 1,067
Charge-offs:
Commercial 307 286 312
Mortgage 9 73 1
Installment 85 67 37
------- --------- --------
Total charge-offs 401 426 350
------- --------- --------
Recoveries
Commercial 6 33 22
Mortgage 4 28
Installment 21 15 13
------- --------- --------
Total recoveries 31 76 35
------- --------- --------
Net charge-offs 370 350 315
Provision for loan losses 900 808 383
Allowance on acquired loans - - 472
------- --------- --------
Allowance for losses on loans, end of period $ 2,595 $ 2,065 $ 1,607
======= ========= ========
Net loans charged off as a percent of average
loans outstanding 0.16% 0.23% 0.29%
</TABLE>
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 December 31,
1996 1995 1994
-------------------- ----------------------- -------------------
Percent of Percent of Percent
Loans to Loans to Loans
Amount Total Loans Amount Total Loans Amount Total
------ ----------- ------ ----------- ------ -----
(Dollars in thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 1,301 74.98% $ 1,094 64.02 % $ 847 50.60 %
Residential real estate 139 10.65 403 15.96 231 21.94
Home equity 490 7.40 319 13.34 155 19.58
Installment 167 6.97 54 6.68 47 7.88
Unallocated 498 - 195 - 327 -
---------- ------ --------- ------ ------- ------
Total allowance $ 2,595 100.00% $ 2,065 100.00 % $ 1,607 100.00 %
========== ====== ========= ====== ======= ======
</TABLE>
26
<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 decreased $51.4 million, or 35.0%, from $147.0
million at December 31, 1995 to $95.6 million at 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.
27
<PAGE>
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1996 1995
--------------------------------------------- -------------------------------------
Net Estimated Net Estimated
Amortized Unrealized Market Amortized Unrealized Market
Available for Sale: Cost Losses Value Cost Gains Value
- ------------------- ---- ------ ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury securities $ 51,954,682 $ (920,871) $51,033,811 $ 41,674,$19 $ 230,269 $ 41,904,488
Mortgage-backed securities 63,061 - 63,061 41,734,347 263,520 41,997,867
State and political
subdivision securities 20,168,222 (328,816) 19,839,406 16,666,509 75,082 16,741,591
Other securities 24,877,433 (232,327) 24,645,106 46,304,169 60,781 46,364,950
------------ ----------- ----------- ------------- --------- ------------
Total securities
available for sale $ 97,063,398 $(1,482,014) $95,581,384 $ 146,379,244 $ 629,652 $147,008,896
============ =========== =========== ============= ========= ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------
Net Estimated
Amortized Unrealized Market
Cost Losses Value
------------ ---------- -------------
Held to maturity:
<S> <C> <C> <C>
U. S. Treasury securities $ 20,033,886 $ (369,712) $ 19,664,174
Government agency and
mortgage-backed securities 19,334,650 (504,981) 18,829,669
State and political subdivision securities 13,550,137 (287,346) 13,262,791
Other securities 7,406,062 (177,500) 7,228,562
------------ ---------- -------------
Total securities held to maturity 60,324,735 (1,339,539) 58,985,196
------------ ---------- -------------
Available for sale:
U. S. Treasury securities
Government agency and
mortgage-backed securities
State and political subdivision securities
Other securities 313,250 313,250
------------ ---------- -------------
Total securities available for sale 313,250 - 313,250
------------ ---------- -------------
Total investment securities $ 60,637,985 (1,339,539) $ 59,298,446
============ ========== =============
</TABLE>
28
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at December 31, 1996. 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 Aver
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 $ 7,960 5.40% $ 43,074 5.55% $ 51,034 5.53%
Government agency and
mortgage-backed securities 11,632 6.22 $ 2,976 6.78% $ 51 8.50% 14,659 6.34
Municipal obligations 716 4.27 250 4.34 12,714 4.75 6,159 4.87 19,839 4.77
Other securities 110 5.00 5,107 6.03 30 7.35 4,802 6.36 10,049 6.18
------- ----- -------- ----- ------- ----- -------- ---- -------- ----
Total $ 8,786 5.30% $ 60,063 5.71% $ 15,720 5.14 $ 11,012 5.53% $ 95,581 5.56%
======= ==== ======== ===== ======== ==== ======== ===== ======== ====
</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 December 31, 1996 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
$4.8 million, from $128.8 million at December 31, 1995 to $133.6 million at
December 31, 1996. Savings deposits decreased $3.5 million, from $67.0 million
at December 31, 1995 to $63.5 million at December 31, 1996. Certificates of
deposit under $100,000 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 $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 was due in large part 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.
The following table sets forth average deposits by various types of demand
and time deposits:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------
1996 Avg. Yield 1995 Avg. Yield 1994 Avg. Yield
---- ---------- ---- ---------- ---- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 65,556 $ 45,562 $ 26,949
Interest bearing demand deposits 62,270 1.78 % 48,609 2.19 % 29,186 2.43 %
Savings deposits 65,393 2.23 57,470 2.28 44,968 3.10
Time deposits 170,875 5.49 96,256 5.48 45,611 3.95
---------- ---- ---------- ---- --------- ----
Total $ 364,094 3.28 % $ 247,897 3.09 % $ 146,714 3.66 %
========= ==== ========= ==== ========= ====
</TABLE>
29
<PAGE>
The following table indicates the amount of certificates of deposit of
$100,000 or more by remaining maturity at December 31, 1996:
(In thousands)
Remaining maturity:
Three months or less $ 18,805
Over three through six months 6,389
Over six through twelve months 9,421
Over twelve months 2,626
--------
$ 37,241
========
Borrowings - Borrowed funds increased $13.3 million, from $8 million at December
31, 1995 to $21.3 million at December 31, 1996. Of the increase, $2 million
represents an increase in advances from the FHLB. 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 December
31, 1996, securities sold under agreements to repurchase amounted to $5.3
million. 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 is the prime rate plus fifty basis points. At December 31, 1996,
there was $6 million outstanding at an interest rate of 8.75%. The proceeds of
the loan were contributed to the bank as capital.
Federal Home Loan Bank Advances
1996 1995
---- ----
Amount outstanding at December 31, (Dollars in thousands)
Advances $10,000 $8,000
Interest rate 7.375% 5.875%
Approximate average amount outstanding $ 5,265 $ 150
Approximate weighted average rate 5.44% 5.44%
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.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Sun Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 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.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 31, 1997
31
<PAGE>
SUN BANCORP, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 17,006,758 $ 17,242,366
Federal funds sold 4,800,000
------------- -------------
Cash and cash equivalents 21,806,758 17,242,366
Investment securities available for sale (amortized cost -
$97,063,398; 1996 and $146,379,244; 1995) 95,581,384 147,008,896
Loans receivable (net of allowance for loan losses - $2,595,312;
1996 and $2,064,640; 1995) 295,500,668 183,633,631
Bank properties and equipment 12,222,507 11,419,175
Real estate owned 755,628 876,302
Accrued interest receivable 2,850,399 2,564,921
Excess of cost over fair value of net assets acquired 5,365,218 6,191,919
Deferred taxes 1,070,535 205,169
Other assets 1,641,959 752,257
------------- -------------
TOTAL $ 436,795,056 $ 369,894,636
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 385,986,905 $ 335,247,796
Advances from the Federal Home Loan Bank 10,000,000 8,000,000
Loan payable 6,000,000
Securities sold under agreements to repurchase 5,253,048
Other liabilities 2,140,527 1,976,044
------------- -------------
Total liabilities 409,380,480 345,223,840
------------- -------------
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; 1,848,929 shares; 1996 and 1,651,175 shares; 1995 1,848,929 1,651,175
Surplus 18,124,359 17,197,275
Retained earnings 8,419,417 5,406,774
Unrealized (loss) gain on securities available for sale, net of income taxes . (978,129) 415,572
------------- -------------
Total shareholders' equity 27,414,576 24,670,796
------------- -------------
TOTAL $ 436,795,056 $ 369,894,636
============= =============
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
SUN BANCORP, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $22,073,767 $15,100,885 $ 9,590,994
Interest on investment securities 7,127,393 5,285,877 2,151,351
Interest on federal funds sold 68,366 463,001 452,117
----------- ----------- -----------
Total interest income 29,269,526 20,849,763 12,194,462
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 11,953,591 7,639,933 3,844,753
Interest on borrowed funds 580,412 47,158 93,796
----------- ----------- -----------
Total interest expense 12,534,003 7,687,091 3,938,549
----------- ----------- -----------
Net interest income 16,735,523 13,162,672 8,255,913
PROVISION FOR LOAN LOSSES 900,000 807,660 382,671
----------- ----------- -----------
Net interest income after provision for loan losses 15,835,523 12,355,012 7,873,242
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 1,057,139 659,811 419,363
Other service charges 115,999 28,068 17,224
Gain on sale of fixed assets 45,207 46,487 21,164
Gain on sale of loans 207,984
Gain on sale of investment securities 206,538 377,126
Other 320,890 331,513 274,533
----------- ----------- -----------
Total other income 1,745,773 1,650,989 732,284
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 6,525,903 4,689,269 2,626,679
Occupancy expense 1,407,875 1,269,514 1,090,833
Equipment expense 817,696 459,460 249,951
Provision for losses on real estate owned 78,000 120,000
Professional fees and services 352,970 249,760 164,770
Data processing expense 1,085,874 634,753 318,552
Amortization of excess cost over fair value of assets acquired 826,701 342,562 134,435
Postage and supplies 420,120 335,055 173,823
Insurance 196,110 382,554 397,961
Other 1,573,404 1,606,404 713,733
----------- ----------- -----------
Total other expenses 13,206,653 10,047,331 5,990,737
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,374,643 3,958,670 2,614,789
INCOME TAXES 1,362,000 1,140,000 775,134
----------- ----------- -----------
NET INCOME $ 3,012,643 $ 2,818,670 $ 1,839,655
============= =========== ===========
Earnings per common and common equivalent share
Net income $ 1.58 $ 1.52 $ 1.42
=========== =========== ===========
Earnings per common share - assuming full dilution
Net income $ 1.56 $ 1.52 $ 1.42
=========== =========== ===========
Weighted average shares 1,797,900 1,720,295 1,200,503
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
SUN BANCORP, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------------------------------------
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
============= ============ ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
SUN BANCORP, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 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 900,000 807,660 382,671
Provision for loss on real estate owned 78,000 120,000
Depreciation and amortization 484,059 325,913 215,381
Amortization of excess cost over fair value of assets acquired 826,701 342,562 134,435
Gain on sale of loans (207,984)
Gain on sale of investment securities available for sale (206,538) (246,129)
Gain on sale of mortgage-backed securities available for sale (130,997)
Gain on sale of bank properties and equipment (29,298) (46,487) (21,164)
Deferred income taxes (147,401) (27,398) (193,836)
Changes in assets and liabilities which provided (used) cash:
Accrued interest and other assets (1,175,180) (838,246) 196,972
Accounts payable and accrued expenses 164,483 1,215,343 (1,145,147)
------------- ------------- -------------
Net cash provided by operating activities 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 (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 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 93,679,375 16,880,505
Proceeds from sale of mortgage-backed securities available for sale 50,782,881 7,359,934
Proceeds from sale of loans 1,870,608
Net increase in loans (112,767,037) (50,605,944) (2,845,797)
Increase in loans resulting from branch acquisitions (636,714)
Purchase of bank properties and equipment (1,359,295) (825,912) (481,895)
Increase in bank properties and equipment resulting from branch acquisitions (5,430,744)
Proceeds from sale of bank properties and equipment 42,606 250,824 21,164
Excess of cost over fair value of branch assets acquired (4,450,145)
Decrease (increase) in real estate owned 120,674 78,578 (244,249)
Purchase price of acquisitions, net of cash received (5,410,572)
------------- ------------- -------------
Net cash used in investing activities (64,382,072) (145,113,582) (7,477,825)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 50,739,109 16,685,101 (6,638,004)
Increase in deposits resulting from branch acquisitions 122,543,875
Borrowings and repurchase agreements 21,253,048 12,500,000 4,500,000
Repayment of borrowings and repurchase agreements (8,000,000) (4,500,000) (5,750,000)
Proceeds from exercise of stock options 1,126,984 605,368 3,393
Payments for fractional interests resulting from stock dividend (2,146)
Proceeds from issuance of common stock 260,000 6,421,877
------------- ------------- -------------
Net cash provided by (used in) financing activities 65,116,995 148,094,344 (1,462,734)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,564,392 7,071,669 (7,411,592)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,242,366 10,170,697 17,582,289
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 21,806,758 $ 17,242,366 $ 10,170,697
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 12,743,696 $ 6,100,954 $ 3,827,301
============= ============= =============
Income taxes paid $ 1,577,757 $ 994,516 $ 1,115,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH ITEMS -
Transfer of loans to real estate owned $ 424,644 $ 196,181 $ 449,478
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
subsidiary, Sun National Bank (the "Bank"), and the Bank's wholly owned
subsidiary, Med-Vine, Inc. All significant inter-company balances and
transactions have been eliminated.
The Company and the Bank have their administrative offices in Vineland, New
Jersey. The Bank has nineteen financial service centers located throughout
central and southern New Jersey. The Company's principal business is to serve
as a holding company for the Bank. The Bank is in the business of attracting
customer deposits and using these funds to originate loans, primarily
commercial real estate and non-real estate loans. Med-Vine, Inc. is a
Delaware holding company which holds the majority of the Bank's investment
portfolio. 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
income and determined using the adjusted cost of the specific security
sold.
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.
36
<PAGE>
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
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
$2,037,866 and $1,211,165 at 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 September 17, 1996, the Company's Board of Directors
declared a special 5% stock dividend which was paid on October 30, 1996 to
stockholders of record on October 15, 1996. Accordingly, earnings per share
for the years ended December 31, 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 ending 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.
37
<PAGE>
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 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 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 1995 and
1994 consolidated financial statements to conform to those classifications
used in 1996.
3. ACQUISITIONS
On July 14, 1995, the Bank purchased four branches from NatWest Bank. The
Bank acquired approximately $52,317,000 of deposit liabilities plus $479,000
of accrued interest, $1,755,000 of real estate and equipment, $588,000 of
loans plus related accrued interest and $610,000 in cash. The Bank paid a
premium of approximately $2,082,000, which is being amortized over seven
years.
On November 24, 1995, the Bank purchased four branches from New Jersey
National Bank. The Bank acquired approximately $70,227,000 of deposit
liabilities plus $492,000 of accrued interest, $3,675,000 of real estate and
equipment, $48,000 of loans plus related accrued interest and $1,009,000 in
cash. The Bank paid a premium of approximately $2,368,000, which is being
amortized over seven years.
On June 29, 1994, the Company acquired 100% of the outstanding shares of The
First National Bank of Tuckahoe ("Tuckahoe") for approximately $7,070,000.
The purchase method of accounting was used to record the acquisition. Under
the purchase method of accounting, all assets and liabilities acquired were
adjusted to fair value as of the acquisition date, and the resultant premiums
and discounts are amortized to income over the expected economic lives of the
related assets and liabilities. Excess cost over fair value of assets
acquired resulting from this acquisition amounted to approximately $612,000
and is being amortized over 15 years using the straight-line method.
A summary statement of the cash used to purchase Tuckahoe is set forth below:
Fair value of assets purchased $50,782,529
Liabilities assumed 43,073,874
-----------
Cssh paid 7,708,655
Cash acquired 7,270,791
-----------
Net cash used for purchase $ 437,864
===========
38
<PAGE>
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.
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 December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale: Cost Gains Losses Value
<S> <C> <C> <C> <C>
Debt Securities
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>
39
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale: Cost Gains Losses Value
<S> <C> <C> <C> <C>
Debt Securities
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 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 December 31, 1996 the Bank was required to maintain an average reserve
balance of $3,579,000 with the Federal Reserve Bank.
The maturity schedule of the investment in debt securities available for sale
at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
<S> <C> <C>
Due in one year or less $ 8,828,772 $ 8,786,619
Due after one year through five years 61,132,578 60,063,074
Due after five years through ten years 15,890,087 15,708,094
Due after ten years 6,346,950 6,158,586
------------- -------------
92,198,387 90,716,373
Mortgage-backed securities 63,061 63,061
------------- -------------
$ 92,261,448 $ 90,779,434
============= =============
</TABLE>
At December 31, 1996, $4,000,000 of U.S. Treasury Notes were pledged to
secure public deposits.
40
<PAGE>
5. LOANS
The components of loans as of December 31, 1996 and 1995 were as follows:
1996 1995
Commercial and industrial $ 223,116,474 $ 118,874,150
Real estate-residential mortgages 53,846,436 54,414,800
Installment 21,133,070 12,409,321
------------- -------------
Total gross loans 298,095,980 185,698,271
Allowance for loan losses (2,595,312) (2,064,640)
------------- -------------
Net loans $ 295,500,668 $ 183,633,631
============= =============
Nonaccrual loans $ 1,277,208 $ 2,658,118
============= =============
There were no irrevocable commitments to lend additional funds on nonaccrual
loans at December 31, 1996. The reduction in interest income resulting from
nonaccrual loans was $151,614, $276,955 and $146,308 for the years ended
December 31, 1996, 1995 and 1994, respectively. Interest income recognized on
these loans 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 December 31,
1996, along with an analysis of the activity for 1996, is summarized as
follows:
1996 1995
Balance, beginning of year $ 8,621,460 $ 6,132,256
Additions 7,306,997 4,272,121
Repayments (4,491,323) (1,782,917)
------------ ------------
Balance, end of year $ 11,437,134 $ 8,621,460
============ ============
Under approved lending decisions, the Company has commitments to lend
additional funds totaling approximately $58,635,413 and $67,928,316 at
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.
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.
41
<PAGE>
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses is as follows:
1996 1995 1994
Balance, January 1 $ 2,064,640 $ 1,607,375 $ 1,067,402
Charge-offs (400,387) (426,289) (349,439)
Recoveries 31,059 75,894 34,829
----------- ----------- -----------
Net charge-offs (369,328) (350,395) (314,610)
Allowance on acquired loans 0 0 471,912
Provision for loan losses 900,000 807,660 382,671
----------- ----------- -----------
Balance, December 31 $ 2,595,312 $ 2,064,640 $ 1,607,375
=========== =========== ===========
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>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <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 $ 584,114 527,908
------------ ------------
Total impaired loans $ 584,114 $ 982,397
============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
<S> <C> <C>
Average impaired loans $ 596,519 $ 411,289
================= =================
Interest income recognized on impaired loans $ 18,284 $ 18,561
================= =================
Cash basis interest income recognized on impaired loans $ 15,414 $ 0
================= =================
</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.
42
<PAGE>
7. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment at December 31 consist of the following major
classifications:
1996 1995
Land $ 3,084,395 $ 2,873,500
Buildings 6,982,449 6,861,123
Leasehold improvements and equipment 3,991,723 3,090,188
------------ ------------
14,058,567 12,824,811
Accumulated depreciation and amortization (1,836,060) (1,405,636)
------------ ------------
Total $ 12,222,507 $ 11,419,175
============ ============
8. REAL ESTATE OWNED
Real estate owned consisted of the following:
December 31,
----------------------
1996 1995
Commercial properties $ 435,765 $ 492,501
Residential properties 360,863 471,801
--------- ---------
796,628 964,302
Allowance (41,000) (88,000)
--------- ---------
Total $ 755,628 $ 876,302
========= =========
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:
December 31,
---------------------------
1996 1995
Demand Deposits $133,624,391 $128,802,293
Savings Deposits 63,506,894 66,970,293
Time Certificates under $100,000 151,615,202 116,462,390
Time Certificates $100,000 or more 37,240,418 23,012,820
------------ ------------
Total $385,986,905 $335,247,796
============ ============
43
<PAGE>
Of the total demand deposits, approximately $76,500,000 and $62,700,000 are
non-interest bearing at December 31, 1996 and 1995, respectively.
A summary of certificates by year of maturity is as follows:
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:
Year Ended December 31,
---------------------------------------
1996 1995 1994
Savings Deposits $ 1,455,043 $ 1,394,849 $ 1,334,432
Time Certificates 9,382,920 5,274,045 1,802,296
Interest-Bearing Checking 1,115,628 971,039 708,025
----------- ----------- -----------
Total $11,953,591 $ 7,639,933 $ 3,844,753
=========== =========== ===========
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Federal Home Loan Bank advances at December 31, 1996 and 1995 were
$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.
At December 30, 1996, the Company obtained a $6,000,000 revolving line of
credit from a correspondant 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%.
During 1996, the Bank entered into various retail transactions with
securities sold under agreements to repurchase with approved customers. At
December 31, 1996 the total of such repurchase agreements is $5,253,048 with
an average interest rate of 5.01%. Interest expense on repurchase agreements
was $122,788 during 1996.
11. STOCK OPTION PLAN
On April 18, 1995, the Company adopted a Stock Option Plan (the "1995 Plan").
Options granted under the 1995 Plan may be either qualified incentive stock
options or 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 100,000 shares of stock reserved for issuance under
the 1995 Plan.
On May 31, 1985, the Company adopted a Stock Option Plan (the "1985 Plan").
During 1995, options were no longer eligible to be granted under the 1985
Plan. Options granted under the 1985 Plan were either qualified incentive
stock options or nonqualified options as determined by the Executive
Compensation Committee.
44
<PAGE>
Options granted under the 1985 Plan were at the estimated fair value at the
date of grant and are exercisable at the time of the grant and until the year
2001. There were 313,826 shares of stock reserved for issuance under the 1985
Plan.
Options granted under the 1995 and 1985 Plans, adjusted for the 5% stock
dividend granted in 1996, are as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
<S> <C> <C>
Options granted and outstanding:
December 31, 1996 at prices ranging from $7.18 to $16.67 per share 290,722 50,674
=============== ===============
December 31, 1995 at prices ranging from $7.18 to $15.42 per share 186,153 157,087
=============== ===============
December 31, 1994 at prices ranging from $7.18 to $15.42 per share 91,581 201,577
=============== ===============
</TABLE>
Activity in the stock option plans for the three-year period ended December
31, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Number Price Price
of Shares Per Share Per Share
--------- --------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1994 295,730 $7.18 - $15.42 $ 8.49
1994:
Exercised (472) $7.18 7.18
Expired (2,100) $12.38 12.38
--------
Outstanding at December 31, 1994 293,158 8.46
1995:
Granted 131,250 $12.38 12.38
Exercised (78,478) $7.18 - $ 9.98 7.71
Expired (2,690) $7.18 - $15.42 13.81
--------
Outstanding at December 31, 1995 343,240 10.12
1996:
Granted 113,925 $16.67 16.67
Exercised (115,303) $7.18 - $ 9.07 8.82
Expired (466) $15.42 15.42
--------
Outstanding at December 31, 1996 341,396 $7.18 - $16.67 12.73
========
</TABLE>
The following table summarizes stock options outstanding at December 31,
1996:
<TABLE>
<CAPTION>
Number of Options Weighted Average Remaining Weighted Average
Range of Exercise Price Outstanding Contractural Life Exercise Price
----------------------- ----------- ----------------- --------------
<S> <C> <C> <C> <C>
7.18 - 7.90 76,464 5 7.35
12.38 - 16.67 264,932 9 14.28
------- - -----
341,396 8 12.73
======= = =====
</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. All options are exercisable at December 31, 1996.
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 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
45
<PAGE>
recognized any compensation expense under this method. In the year ending
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>
1996 1995
---- ----
<S> <C> <C> <C>
Net income: As reported $ 3,012,643 $ 2,818,670
Pro forma $ 2,461,089 $ 2,370,020
Net income per common and common equivalent share:
Primary As reported $ 1.58 $ 1.52
Pro forma $ 1.29 $ 1.28
Fully diluted As reported $ 1.56 $ 1.52
Pro forma $ 1.27 $ 1.28
</TABLE>
Significant assumptions used to calculate the above fair value of the awards
are as follows:
1996 1995
---- ----
Risk free interest rate of return 6.44% 5.65%
Expected option life 60 months 60 months
Expected volatility 14% 15%
Expected dividends 0 0
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. The Company
contributes 50% of the employee contribution, up to 6% of compensation. The
Company's contribution to the 401(k) Plan was $85,722 for the year ended
December 31, 1996. The Company paid $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 $9,663,853 and $6,196,871 at 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 $286,641
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.
46
<PAGE>
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consisted of the following at December 31, 1996:
1997 $ 455,966
1998 421,371
1999 415,041
2000 327,041
2001 319,041
Thereafter 3,214,623
--------------------
$ 5,153,083
====================
Rental expense included in occupancy expense for all operating leases was
$516,526, $510,285 and $390,157 for 1996, 1995 and 1994, respectively.
14. INCOME TAXES
The income tax provision consists of the following:
1996 1995 1994
Current $ 1,509,401 $ 1,167,398 $ 968,970
Deferred (147,401) (27,398) (193,836)
----------- ----------- -----------
Total $ 1,362,000 $ 1,140,000 $ 775,134
=========== =========== ===========
Items that gave rise to significant portions of the deferred tax accounts at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses $ 590,257 $ 427,997
Deferred loan fees 63,900 89,012
Other real estate 73,344 89,324
Goodwill amortization 72,150 20,358
Unrealized loss on investment securities 503,885
Other 51,274 62,229
----------- -----------
Total deferred tax asset 1,354,810 688,920
Deferred tax liability:
Property (284,275) (269,671)
Unrealized gain on investment securities (214,080)
----------- -----------
Total deferred tax liability (284,275) (483,751)
----------- -----------
Net deferred tax asset $ 1,070,535 $ 205,169
=========== ===========
</TABLE>
The provision for federal income taxes in 1996, 1995 and 1994, differs from
that completed at the statutory rate as follows:
Year Ended December 31,
------------------------------------------
1996 1995 1994
Tax computed at the statutory rate $ 1,487,379 $ 1,345,948 $ 889,028
Increase in charge resulting from:
State tax, net of federal benefit 33,785
Goodwill amortization 57,327 57,160 43,464
Tax exempt interest (net) (340,896) (157,940) (72,009)
Other, net 158,190 (105,168) (119,134)
----------- ----------- -----------
$ 1,362,000 $ 1,140,000 $ 775,134
=========== =========== ===========
47
<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.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Assumptions:
Net income for the period $3,012,643 $2,818,670 $1,839,655
Average common shares outstanding 1,797,900 1,720,295 1,200,503
Dilutive options outstanding to purchase equivalent shares 341,396 343,241 271,779
Average exercise price per share $ 12.73 $ 10.12 $ 8.08
Estimated average market value per common share - for primary computation $ 18.84 $ 16.19 $ 12.38
Estimated period-end market value per common share - for fully diluted computation $ 21.00 $ 16.19 $ 12.38
Computation:
Application of assumed proceeds:
Towards repurchase of outstanding common shares of applicable market value $4,346,654 $3,471,962 $2,196,232
Adjustment of shares outstanding - primary:
Actual average shares 1,797,900 1,720,295 1,200,503
Net additional shares issuable 110,656 128,796 94,391
--------- --------- ---------
Adjusted shares outstanding 1,908,556 1,849,091 1,294,894
========= ========= =========
Adjustment of shares outstanding - fully diluted:
Actual average shares 1,797,900 1,720,295 1,200,503
Net additional shares issuable 134,412 128,796 94,391
--------- --------- ---------
Adjusted shares outstanding 1,932,312 1,849,091 1,294,894
========= ========= =========
Earnings per common and common equivalent share
Primary $ 1.58 $ 1.52 $ 1.42
Fully diluted $ 1.56 $ 1.52 $ 1.42
</TABLE>
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. At December 31, 1996 such amounts are
$7,670,968.
48
<PAGE>
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 December 31, 1996, that the
Bank meets all applicable capital adequacy requirements.
The most recent notification from the OCC (as of March 31, 1996) categorized
the Bank as adequately 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. Since the most recent notification from the OCC,
the Bank received additional capital from the Company. As a result,
management believes that the Bank would be considered well-capitalized by the
OCC at December 31, 1996. The Bank's actual capital amounts and ratios are
also in the table below:
<TABLE>
<CAPTION>
To Be
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1996
Tier 1 Risk-Based Capital $ 28,907,862 9.34% $ 12,380,480 8.00% $ 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>
The Company's tier 1 risk-based capital, total risk-based capital, and
leverage capital are 7.44%, 8.28%, and 5.43% at December 31, 1996 and 8.67%,
9.64%, and 5.74% at December 31, 1995.
Under the framework, an adequately capitalized bank's capital levels will not
allow the Bank to accept brokered deposits without prior approval from
regulators.
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.
49
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 December 31,1995
-----------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 21,806,758 $ 21,806,758 $ 17,242,366 $ 17,242,366
Investment securities 95,581,384 95,581,384 147,008,896 147,008,896
Loans receivable 295,500,668 293,777,592 183,633,631 187,037,088
Liabilities:
Demand deposits 133,624,391 133,624,391 128,802,293 128,802,293
Savings deposits 63,506,894 63,506,894 66,970,293 66,970,293
Certificates of deposit 188,855,620 191,448,487 139,475,210 140,877,573
Federal Home Loan Bank 10,000,000 10,000,000 8,000,000 8,000,000
Advances
Loan payable 6,000,000 6,000,000 0 0
Repurchase agreements 5,253,048 5,253,048 0 0
</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.
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 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 December 31, 1996
and 1995, and therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
50
<PAGE>
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. PENDING ACQUISITIONS (UNAUDITED)
On December 19, 1996, the Bank entered into a purchase and assumption
agreement with First Union National Bank ("First Union"), whereby the Bank
will assume certain deposits liabilities of four branch offices from First
Union. At December 31, 1996, the branches had deposits of approximately $73
million. In addition, the Bank will acquire approximately $2.5 million of
loans as well as property and equipment pertaining to the branches. The Bank
has agreed to pay First Union a premium of approximately $5.9 million. The
transaction is expected to be completed in the second quarter of 1997. The
agreement is subject to regulatory approval.
In addition, the Bank entered into a purchase and assumption agreement with
Oritani Savings Bank, SLA ("Oritani"), whereby the Bank will assume certain
deposit liabilities of three branch offices from Oritani. At December 31,
1996, the branches had deposits of approximately $33 million. In addition,
the Bank will acquire property and equipment pertaining to the branches. The
Bank has agreed to pay Oritani a premium of approximately $2.1 million. The
transaction is expected to be completed in the third quarter of 1997. The
agreement is subject to regulatory approval.
20. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Statements of Financial Condition December 31,
------------------------------
1996 1995
Assets
Cash $ 27,187 $ 159,205
Investments in subsidiaries 33,294,851 24,463,659
Office property and equipment 9,756
Accrued interest and other assets 95,417 38,176
------------ ------------
Total $ 33,417,455 $ 24,670,796
============ ============
Liabilities and Shareholders' Equity
Loans Payable $ 6,000,000
Accrued interest payable 2,879
Shareholders' Equity 27,414,576 $ 24,670,796
------------ ------------
Total $ 33,417,455 $ 24,670,796
============ ============
<TABLE>
<CAPTION>
Condensed Statements of Income Years Ended December 31,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net interest (expense) $ (1,888) $ (27,045)
Other income 15,909 $ 12,278 7,200
Expenses (16,271) (27,025) (8,090)
------------ ------------ ------------
(Loss) before equity in undistributed
income of subsidiaries and income tax expense (2,250) (14,747) (27,935)
Equity in undistributed income of subsidiaries 3,014,893 2,833,417 1,877,590
Income tax expense (10,000)
------------ ------------ ------------
Net income $ 3,012,643 $ 2,818,670 $ 1,839,655
============ ============ ============
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Year Ended December 31,
---------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Operating activities:
Net income $ 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 9,756 8,360 4,486
Undistributed income of subsidiaries (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 (57,241) 9,665 (9,701)
Accounts payable and accrued expenses 2,879
------------- ------------- -------------
Net cash provided by (used in) operating activities (156,856) 3,278 (43,150)
------------- ------------- -------------
Investing activities:
Proceeds from maturities of investment securities 2,000,000
Purchase price of acquisitions, net of cash received (7,801,950)
Exercise of stock options 1,126,984 605,358 3,393
Payment for fractional interest resulting from stock dividend (2,146)
Purchase of bank properties and equipment (20,904)
Dividend from subsidiary 1,400,000
Advances to subsidiary (7,100,000) (1,700,000) (1,200,000)
------------- ------------- -------------
Net cash used in investing activities (5,975,162) (1,094,642) (5,619,461)
------------- ------------- -------------
Financing activities:
Net borrowings under line of credit agreement 6,000,000 4,500,000
Repayments of short-term borrowings (4,500,000)
Proceeds from issuance of common stock 260,000 6,421,877
------------- ------------- -------------
Net cash provided by financing activities 6,000,000 260,000 6,421,877
------------- ------------- -------------
(Decrease) increase in cash (132,018) (831,364) 759,266
Cash, beginning of year 159,205 990,569 231,303
------------- ------------- -------------
Cash, end of year $ 27,187 $ 159,205 $ 990,569
============== ============= =============
</TABLE>
21. SUBSEQUENT EVENT
In February 1997, the Company intends to create a special purpose subsidiary
to issue approximately $25 million of trust preferred securities. The
proceeds from the sale of these securities are intended to purchase junior
subordinated notes issued by the Company. The proceeds received by the
Company from the sale of the junior subordinated notes are expected to be
used to increase its capital to support recent and pending acquisitions and
for other general corporate purposes.
52
<PAGE>
Item 9. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I - Information with
Respect to Nominees for Director, Directors Continuing in Office, and Executive
Officers - Election of Directors" and " - Biographical Information" in the
"Proxy Statement".
Item 11. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "Proposal I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "Proposal I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change in control of
the Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
53
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following audited consolidated financial statements and
related documents are set forth in this Annual Report on Form 10-K on the
following pages:
Report of Independent Auditors.....................................30
Consolidated Statements of Financial Condition.....................32
Consolidated Statements of Income..................................33
Consolidated Statements of Stockholders' Equity....................34
Consolidated Statements of Cash Flows..............................35
Notes to Consolidated Financial Statements.........................36
There are no financial statements schedules that are required to be
included in Part II, Item 8.
(b) A Form 8-K was filed on December 31, 1996 in connection with
a Purchase and Assumption Agreement with First Union National
Bank, Avondale, Pennsylvania.
A Form 8-K was filed on February 27, 1997 in connection with
a Purchase and Deposit Assumption Agreement with Oritani
Savings Bank, SLA, Hackensack, New Jersey.
(c) Exhibits
The following Exhibits are filed as part of this report:
3(i) Certificate of Incorporation of Sun Bancorp, Inc. *
3(ii) Bylaws of Sun Bancorp, Inc. *
10.1 1995 Stock Option Plan *
10.2 Employment Agreement with Adolph F. Calovi**
21 Subsidiaries of the Registrant
27 Financial Data Schedule ***
_____________________
* Incorporated by reference to the Form 10 (File No. 0-20957).
** Incorporated by reference to the Form S-1/A (File No. 333-21903)
*** Electronic data filing only.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of
March 25, 1997.
SUN BANCORP, INC.
By: Adolph F. Calovi
-----------------------------------------------
Adolph F. Calovi
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 25, 1997.
/s/Adolph F. Calovi /s/Philip W. Koebig, III
- ---------------------------------- --------------------------------------
Adolph F. Calovi Philip W. Koebig, III
President, Chief Executive Officer Executive Vice President and Director
and Director (Principal Financial Officer)
(Principal Executive Officer)
/s/Bernard A. Brown /s/Sidney R. Brown
- ---------------------------------- --------------------------------------
Bernard A. Brown Sidney R. Brown
Chairman of the Board and Director Secretary, Treasurer 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
(Principal Accounting Officer)
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
Percentage Jurisdiction of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
Sun National Bank 100% United States
Med-Vine, Inc. (1) 100% Delaware
(1) Med-Vine, Inc. is a wholly owned subsidiary of Sun National Bank
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,007
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 97,063
<INVESTMENTS-MARKET> 95,581
<LOANS> 297,565
<ALLOWANCE> 2,595
<TOTAL-ASSETS> 436,795
<DEPOSITS> 385,987
<SHORT-TERM> 15,253
<LIABILITIES-OTHER> 2,141
<LONG-TERM> 6,000
0
0
<COMMON> 1,849
<OTHER-SE> 25,566
<TOTAL-LIABILITIES-AND-EQUITY> 436,795
<INTEREST-LOAN> 22,074
<INTEREST-INVEST> 7,127
<INTEREST-OTHER> 68
<INTEREST-TOTAL> 29,270
<INTEREST-DEPOSIT> 11,954
<INTEREST-EXPENSE> 12,534
<INTEREST-INCOME-NET> 16,736
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 206
<EXPENSE-OTHER> 13,207
<INCOME-PRETAX> 4,375
<INCOME-PRE-EXTRAORDINARY> 3,013
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,013
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 4.28
<LOANS-NON> 1,277
<LOANS-PAST> 1,143
<LOANS-TROUBLED> 973
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,065
<CHARGE-OFFS> 400
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 2,595
<ALLOWANCE-DOMESTIC> 2,595
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,595
</TABLE>
