SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[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, 1997
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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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(Exact Name of Registrant as Specified 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)
Registrant'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)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES 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. [X]
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 26, 1998 was approximately $116.4 million.
As of March 26, 1998, there were issued and outstanding 6,022,481
shares of the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1997. (Parts I, II and IV)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders for the Fiscal Year ended December 31, 1997.
(Part III)
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PART I
SUN BANCORP, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR
ORAL "FORWARD-LOOKING STATEMENTS," INCLUDING STATEMENTS CONTAINED IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS
ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FORM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.
Item 1. Business
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General
The Company is a one-bank holding company headquartered in Vineland,
New Jersey engaged primarily in commercial and consumer banking services through
its sole bank subsidiary, Sun National Bank (the "Bank"). The Company's
principal business is to serve as a holding company for the Bank and was
incorporated in 1985. The Company's other subsidiary, Sun Capital Trust (the
"Trust"), was formed solely to facilitate the issuance of preferred securities
and the sale of the Company's Junior Subordinated Debentures. In April 1995, the
Company changed its name from Citizens Investments, Inc.
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to its present name. The Bank has one wholly-owned subsidiary, Med-Vine, Inc., a
Delaware corporation, which was formed in 1992 to hold a majority of the
Company's investment portfolio.
The Company is focused on a strategy to expand its franchise throughout
southern and central New Jersey. Continued consolidation of the banking
industry, and a regionalization of decision-making authority by larger banking
institutions resulted in many area businesses and individuals in the Bank's
market being underserved. The opportunities provided in this market prompted the
Board and management to actively pursue strategic acquisitions.
The Bank offers a wide variety of commercial and consumer lending and
deposit services through its 39 branch offices located throughout southern and
central New Jersey. The commercial loans offered by the Bank include short- and
long-term business loans, lines of credit, non-residential mortgage loans, and
real estate construction loans. Consumer loans include home equity loans,
residential real estate loans, and installment loans. The Bank also offers
deposits and personal banking services, including commercial banking services,
retail deposit services such as certificates of deposit, money market accounts,
savings accounts, ATM access, cash management services and individual retirement
accounts, and securities brokerage and investment advisory services through a
third-party arrangement.
Market Area
The Bank has been, and intends to continue to be, a community-oriented
financial institution, offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank conducts its business through 39
branch offices and one loan administration office located in the southern and
central New Jersey counties of Atlantic, Burlington, Camden, Cape May,
Cumberland, Mercer, Middlesex, Monmouth, Ocean, Salem and Somerset ("primary
market area"). The Bank's deposit gathering base and lending area is
concentrated in the communities surrounding its offices.
The Bank is a community-based financial institution headquartered in
Cumberland County, New Jersey. The city of Vineland is approximately 30 miles
southeast of Philadelphia, Pennsylvania, and 30 miles southeast of Camden, New
Jersey. The Philadelphia International Airport is approximately 45 minutes from
Vineland.
The central and southern New Jersey areas are among the fastest growing
population areas in New Jersey and has a significant number of retired residents
who have traditionally provided the Bank with a stable source of deposit funds.
The economy of the Bank's primary market area is based upon a mixture of the
agriculture, transportation, manufacturing and tourism trade. These areas are
also home to commuters working in New Jersey suburban areas around New York and
Philadelphia.
Management considers the Bank's reputation for customer service as its
major competitive advantage in attracting and retaining customers in its market
area. The Bank also believes it benefits from its community orientation, as well
as its established deposit base and level of core deposits.
Lending Activities
General
The principal lending activity of the Bank is the origination of
commercial real estate loans, commercial business and industrial loans, home
equity loans, mortgage loans and, to a much lesser extent, installment loans.
All loans are originated in the Bank's primary market area.
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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 and central parts of New Jersey.
Commercial Real Estate Loans
Loans secured by commercial properties generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans. A
significant portion of the Bank's commercial real estate and commercial and
industrial loan portfolio includes a balloon payment feature. A number of
factors may affect a borrower's ability to make or refinance a balloon payment,
including without limitation the financial condition of the borrower at the
time, the prevailing local economic conditions, and the prevailing interest rate
environment. There can be no assurance that borrowers will be able to make or
refinance balloon payments when due.
Furthermore, the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related real estate
or commercial project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired. This cash flow shortage
may result in the failure to make loan payments. In such cases, the Company may
be compelled to modify the terms of the loan. In addition, the nature of these
loans is such that they are generally less predictable and more difficult to
evaluate and monitor. As a result, repayment of these loans may be subject to a
greater extent than residential loans to adverse conditions in the real estate
market or economy.
Home Equity Loans
The Bank originates home equity loans, secured by first or second
mortgages owned or being purchased by the loan applicant. Home equity loans are
consumer revolving lines of credit. The interest rate charged on such loans is
usually a floating rate related to the prime lending rate. Home equity loans may
provide for interest only payments for the first two years with principal
payments to begin in the third year. A home equity loan is typically originated
as a fifteen-year note that allows the borrower to draw upon the approved line
of credit during the same period as the note. The Bank generally requires a
loan-to-value ratio in the range of 70% to 80% of the appraised value, less any
outstanding mortgage.
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-
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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 a merger in 1994, the Bank
acquired a credit card portfolio which it intends to reduce as current customers
pay off their lines of credit.
Loan Solicitation and Processing
Loan originations are derived from a number of sources such as loan
officers, customers, borrowers and referrals from real estate brokers,
accountants, attorneys and regional advisory boards.
Upon receipt of a loan application, a credit report is ordered and
reviewed to verify specific information relating to the loan applicant's
creditworthiness. For residential mortgage loans, written verifications of
employment and deposit balances are requested by the Bank. The Bank requires
that an appraisal of the real estate intended to secure the proposed loan is
undertaken by a certified independent appraiser approved by the Bank and
licensed by the State. After all of the required information is obtained, the
Bank then makes its credit decision. Depending on the type, collateral and
amount of the credit request, various levels of approval may be necessary. In
general, loans of $100,000 or more must be presented at an Officers' Loan
Committee which has the authority to approve unsecured loans to $750,000 and
secured loans to $1.5 million. The Officers' Loan Committee is comprised of the
Bank's CEO, senior lending officer and regional lending officers. Credit
requests in excess of the approval authority of the Officers' Loan Committee
must also be presented to the Bank's Board of Directors for approval. Loans
under $100,000 are generally approved by various levels of Bank management. All
loans require the approval of at least two lending officers.
Title insurance policies are required on all first mortgage loans.
Hazard insurance coverage is required on all properties securing loans made by
the Bank. Flood insurance is also required, when applicable.
Loan applicants are notified of the credit decision by letter. If the
loan is approved, the loan commitment specifies the terms and conditions of the
proposed loan including the amount, interest rate, amortization term, a brief
description of the required collateral, and the required insurance coverage. 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.
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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, 1997, the Bank had approximately
$84.3 million in commercial loan commitments outstanding.
Credit Risk, Credit Administration and Loan Review
Credit risk represents the possibility that a customer or counterparty
may not perform in accordance with contractual terms. The Bank incurs credit
risk whenever it extends credit to, or enters into other transactions with, its
customers. The risks associated with extensions of credit include general risk,
which is inherent in the lending business, and risk specific to individual
borrowers. Credit administration is responsible for the overall management of
the Bank's credit risk and the development, application and enforcement of
uniform credit policies and procedures the principal purpose of which is to
minimize such risk. One objective of credit administration is to identify and,
to the extent feasible, diversify extensions of credit by industry
concentration, geographic distribution and the type of borrower. Loan review and
other loan monitoring practices provide a means for the Bank's management to
ascertain whether proper credit, underwriting and loan documentation policies,
procedures and practices are being followed by the Bank's loan officers and are
being applied uniformly throughout the Bank. Within the last year, the Bank has
taken a number of steps to enhance its credit administration and loan review
functions in an effort to better manage its credit risk, especially in light of
the Bank's rapid growth. While the Bank continues to review these and other
related functional areas, there can be no assurance that the steps the Bank has
taken to date will be sufficient to enable it to identify, measure, monitor and
control all credit risk.
Investment Securities Activities
General
The investment policy of the Bank is established by senior management
and approved by the Board of Directors. It is based on asset and liability
management goals and is designed to provide a portfolio of high quality
investments that optimize interest income within acceptable limits of safety and
liquidity. The Bank's investments consist primarily of federal funds, securities
issued or guaranteed by the United States Government or its agencies, states and
political subdivisions and corporate bonds.
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.
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
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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.
Cash Management Services
The Company now offers a menu of cash management services designed to
meet the more sophisticated needs of its commercial customers. Headed by an
experienced cash management executive, the Cash Management Department offers
products such as electronic banking, sweep accounts, lockbox services, PC
banking and controlled disbursement services. Many of these services are
provided through third-party vendors with links to the Company's data center.
Competition
The Bank faces substantial competition both in attracting deposits and
in lending funds. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. In order to compete with the many
financial institutions serving its primary market area, the Bank's operating
goal is to continue to provide a broad range of financial services with a strong
emphasis on customer service to individuals and businesses in southern and
central New Jersey.
The competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional and money center banks in the Bank's market area.
Competition for funds also include a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, multi-state regional and
money center banks, and mortgage-bankers many of whom have far greater resources
then the Bank. Non-bank competition, such as investment brokerage houses, has
intensified in recent years for all banks since non-bank competitors are not
subject to same regulatory burdens as banks.
Personnel
At December 31, 1997, the Company had 281 full-time and 68 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.
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.
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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 Bank Holding Company Act of 1956, as amended ("BHCA") and is subject
to supervision and regular inspection by the Federal Reserve. The BHCA requires,
among other things, the prior approval of the Board of Governors of the Federal
Reserve System ("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% of the voting shares of any
bank, or (iii) merge or consolidate with any other bank holding company.
Acquisitions/Permissible Business Activities. The Bank has the ability,
subject to certain restrictions, including state opt-out provisions, to acquire
by acquisition or merger branches outside its home state. The establishment of
new interstate branches is possible in those states with laws that expressly
permit it. Interstate branches are subject to certain laws of the states in
which they are located. Competition may increase further as banks branch across
state lines and enter new markets.
Under the BHCA, the Company is prohibited, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% 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.
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.
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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 $10.0 million at December 31, 1997. In addition, the OCC has
the authority to prohibit the Bank from paying dividends, depending upon the
Bank's financial condition, if such payment is deemed to constitute an unsafe or
unsound practice. The ability of the Bank to pay dividends in the future is
presently, and could be further, influenced by bank regulatory and supervisory
policies.
Affiliate Transaction Restrictions. The Bank is subject to federal laws
that limit the transactions by subsidiary banks to or on behalf of their parent
company and to or on behalf of any nonbank subsidiaries. Such transactions by a
subsidiary bank to its parent company or to any nonbank subsidiary are limited
to 10% 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% of such
bank subsidiary's capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also prohibits banks from purchasing "low-quality" assets
from affiliates.
FDIC Insurance Assessments. Substantially all of the deposits of the
Bank are insured by the Bank Insurance Fund ("BIF") and the remaining deposits
are insured by the Savings Association Insurance Fund ("SAIF"), all of which are
subject to Federal Deposit Insurance Corporation ("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, 1997, the Company and the Bank exceeded the
required ratios for classification as "well capitalized." The classification of
depository institutions is primarily for the purpose of applying the federal
banking agencies' prompt corrective action and other supervisory powers and is
not intended to be, and should not be interpreted as, a representation of the
overall financial condition or prospects of any financial institution.
The agencies' prompt corrective action powers can include, among other
things, requiring an insured depository institution to adopt a capital
restoration plan which cannot be approved unless guaranteed by the institution's
parent company; placing limits on asset growth and restrictions on activities;
including restrictions on transactions with affiliates; restricting the interest
rate the institution may pay on deposits; prohibiting the payment of principal
or interest on subordinated debt; prohibiting the holding company from making
capital distributions without prior regulatory approval and, ultimately,
appointing a receiver for the institution. Among other things, only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and only an "adequately capitalized" depository institution
may accept brokered deposits with prior regulatory approval.
Capital Guidelines. Under the risk-based capital guidelines applicable
to the Company and the Bank, the minimum guideline for the ratio of total
capital to risk-weighted assets (including certain off- balance-sheet
activities) is 8.00%. 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
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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% for bank holding companies and banks meeting
certain specified criteria, including that such institutions have the highest
regulatory examination rating and are not contemplating significant growth or
expansion. Institutions not meeting these criteria are expected to maintain a
ratio which exceeds the 3% 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, 1997, the Bank's and the Company's respective total and
Tier 1 risk-based capital ratios and leverage ratios exceeded the minimum
regulatory capital requirements.
Legislative Proposals and Reforms
In recent years, significant legislative proposals and reforms
affecting the financial services industry have been discussed and evaluated by
Congress. Such proposals include legislation to revise the Glass-Steagall Act
and the BHCA to expand permissible activities for banks, principally to
facilitate the 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 39 branch
offices. The Bank leases its main office and 13 branch offices. The remainder of
the branch offices are owned by the Bank.
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
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Information relating to the market for the Company's Common Stock and
related shareholder matters appears under "Letter to Shareholders" in the
Company's 1997 Annual Report to Shareholders on pages 3 and 4, Note 2 to the
Consolidated Financial Statements on Page 33 and Note 25 to the Consolidated
Financial Statements on page 50 and is incorporated herein by reference.
Item 6. Selected Financial Data
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The above-captioned information appears under "Selected Financial and
Other Data" in the Company's 1997 Annual Report to Shareholders on page 2, and
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1997 Annual Report to Shareholders on pages 8 through 24, and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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The above-captioned information appears under "GAP Analysis" in the
Company's 1997 Annual Report to Shareholders on pages 16 and 17, and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
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The Consolidated Financial Statements of Sun Bancorp, Inc. and its
subsidiaries are included in the Registrant's 1997 Annual Report to Shareholders
on pages 25 through 50, and are incorporated herein by reference.
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 - Election of
Directors - General Information and Nominees" 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.
11
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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 "Voting
Securities and Principal Holders Thereof" 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 - Election of Directors" 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 "Additional Information About Directors and
Executive Officers - Certain Relationships and Related Transactions" in the
Proxy Statement.
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.................................25
Consolidated Statements of Financial Condition.................26
Consolidated Statements of Income..............................27
Consolidated Statements of Shareholders' Equity................28
Consolidated Statements of Cash Flows..........................29-30
Notes to Consolidated Financial Statements.....................31-50
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 November 10, 1997 in connection with
branch acquisitions by the Bank.
A Form 8-K was filed on December 5, 1997 in connection with
branch acquisitions by the Bank.
12
<PAGE>
(c) Exhibits
The following Exhibits are filed as part of this report:
3(i) Certificate of Incorporation of Sun Bancorp, Inc. *
3(ii) Amended and Restated Bylaws of Sun Bancorp, Inc.
10.1 1995 Stock Option Plan *
10.2 Employment Agreement with Adolph F. Calovi**
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Deliotte & Touche, LLP
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)
13
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
March 31, 1998
SUN BANCORP, INC.
By: /s/ 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 31, 1998.
/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 Executive Officer)
/s/ Bernard A. Brown /s/ Sidney R. Brown
- ---------------------------------- --------------------------------------
Bernard A. Brown Sidney R. Brown
Chairman of the Board and Director Vice Chairman, Secretary and Treasurer
/s/ Peter Galetto, Jr. /s/ Anne E. Koons
- --------------------------------- --------------------------------------
Peter Galetto, Jr. Anne E. Koons
Director Director
/s/ Ike Brown /s/ Robert F. Mack
- -------------------------------- --------------------------------------
Ike Brown Robert F. Mack
Director Executive Vice President
(Principal Financial and Accounting Officer)
AMENDED AND RESTATED BYLAWS
OF
SUN BANCORP, INC.
AS ADOPTED BY THE BOARD OF DIRECTORS ON
MARCH 3, 1998
ARTICLE I - Home Office
The home office of Sun Bancorp, Inc. (the "Corporation") shall be
located at 226 Landis Avenue, in the City of Vineland, in the County of
Cumberland, in the State of New Jersey. The Corporation may also have offices at
such other places within or without the State of New Jersey as the board of
directors shall from time to time determine.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Corporation or at such
other place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine. The board of directors may postpone an annual
meeting by providing public notice at any time before such annual meeting date.
Section 3. Special Meetings. Unless otherwise required by law, special
meetings of the shareholders of the Corporation for any purpose or purposes may
be called at any time by the board of directors of the Corporation.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules and procedures adopted by the board of
directors.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is so called
shall be delivered not fewer than ten (10) nor more than sixty (60) days before
the date of the meeting, either personally or by mail, by or at the direction of
the chairman of the board, the vice chairman, or the secretary, or the directors
calling the meeting, to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the mail, addressed to the shareholder at the address as it appears on the
stock transfer books or records of the Corporation as of the record date
prescribed in Section 6 of this Article II with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned, notice of the
adjourned meeting shall not be necessary unless the board fixes a new record
date for the adjourned meeting.
Section 6. Fixing of Record Date. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or the shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of shareholders. Such date in any case shall be
not more than 60 days and, in the case of a meeting of shareholders, not fewer
than 10 days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken.
<PAGE>
Section 7. Quorum. The quorum requirements for meetings of shareholders
shall be as set forth in the Certificate of Incorporation. The Chairman of the
meeting may adjourn the meeting from time to time whether or not a quorum is
present. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 8. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed by the shareholder in the manner provided by law. Proxies
solicited on behalf of the management shall be voted as directed by the
shareholder or, in the absence of such direction, as determined by a majority of
the board of directors. No proxy shall be valid after eleven months from the
date of its execution unless otherwise provided in the proxy.
Section 9. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, at any meeting of
the shareholders of the Corporation, any one or more of such shareholders may
cast, in person or by proxy, all votes to which such ownership is entitled. In
the event an attempt is made to cast conflicting votes, in person or by proxy,
by the several persons in whose names shares of stock stand, the vote or votes
to which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting. If there
is no such majority, the shares shall, for the purpose of voting, be divided
equally among such holders present.
Section 10. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer into his or her name if authority to do so is
contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter, the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 11. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for director as inspectors of election to act at such meeting or any
adjournment. The number of inspectors shall be either one or three. Any such
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
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<PAGE>
Unless otherwise prescribed by regulation of the board, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 12. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by shareholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of Article II, Section 13 of these Bylaws.
Section 13. Notice for Nominations and Proposals. (a) Nominations of
candidates for election as directors at any annual meeting of shareholders may
be made (i) by, or at the direction of the board of directors or (ii) by any
shareholder of the Corporation who is a shareholder of record at the time of
giving of notice provided for in this Section 13, who shall be entitled to vote
for the election of directors at the meeting and who complies with the notice
procedures set forth in this Section 13. Only persons nominated in accordance
with the procedures set forth in this Section 13 shall be eligible for election
as directors at an annual meeting.
Nominations, other than those made by or at the direction of the board
of directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 13. To be timely, a
shareholder's notice shall be delivered to, or mailed and received at, the
principal executive offices of the Corporation (i) in the case of an annual
meeting, not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is changed by more than 30 days
from such anniversary date, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure was made, and (ii) in the case of a special meeting at which
directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public disclosure was made. Such shareholder's notice shall set
forth (i) as to each person whom the shareholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) as to the shareholder giving the notice
(A) the name and address, as they appear on the Corporation's books, of such
shareholder and (B) the class and number of shares of the Corporation which are
beneficially owned by such shareholder and also which are owned of record by
such shareholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Corporation which are beneficially owned by
such person. At the request of the board of directors, any person nominated by,
or at the direction of, the Board for election as a director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
shareholder's notice of nomination which pertains to the nominee.
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<PAGE>
No person shall be eligible to serve as a director of the Corporation
unless nominated in accordance with the procedures set forth in this By-law. The
Chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by these By-laws, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also
comply with all applicable requirements of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder with respect to the matters
set forth in this Section 13.
(b) (i) At an annual meeting of the shareholders, only such business
shall be conducted as shall have been brought before the meeting (A) pursuant to
the Corporation's notice of meeting, (B) by or at the direction of the Board of
Directors or (C) by any shareholder of the Corporation who is a shareholder of
record at the time of giving of the notice provided for in this By-law, who
shall be entitled to vote at such meeting and who complies with the notice
procedures set forth in this By-law.
(ii) For business to be properly brought before an annual
meeting by a shareholder pursuant to clause (C) of paragraph (b) (i) of this
By-law, the shareholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the meeting is changed by more than 30 days from such
anniversary date, notice by the shareholder to be timely must be received no
later than the close of business on the 10th day following the earlier of the
day on which notice of the date of the meeting was mailed or public disclosure
was made. A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the meeting (A) a brief
description of the business desired to brought before the meeting and the
reasons for conducting such business at the meeting, (B) the name and address,
as they appear on the Corporation's books, of the shareholder proposing such
business, and the name and address of the beneficial owner, if any, on whose
behalf the proposal is made, (C) the class and number of shares of the
Corporation which are owned beneficially and of record by such shareholder of
record and by the beneficial owner, if any, on whose behalf the proposal is made
and (D) any material interest of such shareholder of record and the beneficial
owner, if any, on whose behalf the proposal is made in such business.
(iii) Notwithstanding anything in these By-laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this By-law. The Chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with the
procedures prescribed by these By-laws, and if he should so determine, he shall
so declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this By-law, a shareholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this By-law.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
may annually elect a chairman of the board and one or more vice chairmen from
among its members and shall designate, when present, either the
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chairman of the board or in his or her absence, one of the vice chairmen to
preside at its meetings. The Board of Directors may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute,
regulation, the Certificate of Incorporation or these Bylaws directed or
required to be exercised or done by the shareholders.
Section 2. Number, Term and Election. The board of directors shall
consist of not fewer than two (2) nor more than twenty-five (25) directors.
Directors are to be elected by a plurality of votes cast by the shares entitled
to vote in the election at a meeting of shareholders at which a quorum is
present. The number of directors to be elected, subject to the foregoing limits,
shall be determined from time to time by the Board of Directors.
Section 3. Place of Meeting. All annual and special meetings of the
board of directors shall be held on such day, at such hour, and at such place,
consistent with applicable law, as the Board shall from time to time designate
or as may be designated in any notice from the Secretary calling the meeting.
Members of the board of directors may participate in meetings by means of
conference telephone or similar communications equipment by which all persons
participating in the meeting can hear each other. Such participation shall
constitute presence in person.
Section 4. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this Bylaw at such time and
date as the board of directors may determine.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the vice
chairman, or one-third of the directors. The persons authorized to call special
meetings of the board of directors may fix any place, within or outside the
State of New Jersey, as the place for holding any special meeting of the board
of directors called by such persons.
Section 6. Notice of Special Meeting. Written notice of at least 24
hours regarding any special meeting of the board of directors or of any
committee designated thereby shall be given to each director in accordance with
these Bylaws, although such notice may be waived by the director. The attendance
of such director at a meeting, without protesting prior to the conclusion of the
meeting the lack of notice of such meeting, shall constitute a waiver of notice
of such meeting. Neither the business to be transacted at, nor the purpose of,
any meeting need be specified in the notice of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given to the extent required by New Jersey law.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation or the laws of New Jersey.
Section 9. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if, prior or subsequent to the action, a consent in writing, setting
forth the action so taken, shall be signed by all of the directors.
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<PAGE>
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified, such resignation shall take effect upon receipt by the chairman of
the board or the president.
Section 11. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors,
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation as the board of directors may determine.
Section 13. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any
Corporation matter is taken shall be presumed to have assented to the action
taken unless his dissent or abstention shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the secretary of the
Corporation within five days after the date a copy of the minutes of the meeting
is received. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 14. Directors Must Be Shareholders. Every director of the
Corporation must be a shareholder of the Corporation and shall own in his or her
own right the number of shares (if any) required by law in order to qualify as a
director. Any director shall forthwith cease to be a director when he or she no
longer holds such shares, which fact shall be reported to the board of directors
by the secretary, whereupon the board of directors shall declare the seat of
such director vacated.
ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The board of directors, by resolution adopted
by a majority of the full board, may designate one or more of the directors to
constitute an executive committee. The designation of any committee pursuant to
this Article IV and the delegation of authority shall not operate to relieve the
board of directors, or any director, of any responsibility imposed by law or
regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent provided by law, and if any, the
extent that such authority shall be limited by the resolution appointing the
executive committee.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
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<PAGE>
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date and hour of the meeting. Any member of the executive committee may
waive notice of any meeting and no notice of any meeting need be given to any
member thereof who attends in person. The notice of a meeting of the executive
committee need not state the business proposed to be transacted at the meeting.
Section 5. Quorum. One-third of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if, prior or subsequent to the action, a consent in writing, setting
forth the action so taken, shall be signed by all of the members of the
executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the Corporation. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these Bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish any other committee composed of directors as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation and
may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - Officers
Section 1. Positions. The officers of the Corporation shall be a Chief
Executive Officer, a President, a Chairman of the Board, one or more Vice
Presidents, a Secretary, a Treasurer, and such other officers and assistant
officers as the Board of Directors may from time to time deem advisable. Except
for the Chief Executive Officer, President, Secretary and Treasurer, the Board
may refrain from filling any of the said offices at any time and from time to
time. The same individual may hold any two or more offices. Any officer may be
removed at any time, with our without cause, and regardless of the term for
which such officer was elected, but without prejudice to any contract right of
such officer.
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<PAGE>
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the shareholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly elected
and qualified or until the officer's death, resignation, or removal in the
manner hereinafter provided. Election or appointment of an officer, employee, or
agent shall not of itself create contractual rights. The board of directors may
authorize the Corporation to enter into an employment contract with any officer,
but no such contract shall impair the right of the board of directors to remove
any officer at any time in accordance with Section 1 of this Article V.
Section 3. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 4. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors, by employment contracts or
otherwise.
ARTICLE VI - Indemnification
Section 1. Mandatory Indemnification. The Corporation shall indemnify
to the full extent permitted by Section 14A:3-5 of the New Jersey Business
Corporation Act every person who is or was a director or officer of: (a) the
Corporation; (b) any other enterprise, if serving as such at the request of the
Corporation; or (c) the legal representative of any officer or director
described in clause (a) or (b) hereof.
Section 2. Discretionary Indemnification. In all situations in which
indemnification is not mandatory under Section 1 of this Article VI, the
Corporation may to the full extent permitted by Section 14A:3-5 of the New
Jersey Business Corporation Act, as amended from time to time, indemnify all
persons whom it is empowered to indemnify pursuant thereto provided, however,
that the Corporation's exercise of indemnification powers under this Section 2
is limited by and conditioned upon the Board of Directors' determination that to
provide such indemnification would be in the best interests of the Corporation.
The Board of Directors' determination whether to provide indemnification shall
be conclusive in the absence of clear and convincing evidence of bad faith.
ARTICLE VII - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. Except as otherwise prescribed by these Bylaws
with respect to certificates for shares, the board of directors may authorize
any officer, employee, or agent of the Corporation to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
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Section 3. Checks, Drafts, Etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees, or
agents of the Corporation, which may include facsimile signatures, in such
manner as shall from time to time be determined by the board of directors.
Section 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any duly authorized depositories as the board of directors may select.
ARTICLE VIII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Corporation shall be in such form as shall be determined by
the board of directors. Such certificates shall be signed by the chief executive
officer or by any other officer of the Corporation authorized by the board of
directors, attested by the secretary or an assistant secretary, and sealed with
the corporate seal or a facsimile thereof. The signatures of such officers upon
a certificate may be facsimiles if the certificate is manually signed on behalf
of a transfer agent or a registrar other than the Corporation itself or one of
its employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares has been surrendered and canceled, except that in the case of a
lost or destroyed certificate, a new certificate may be issued upon such terms
and indemnity to the Corporation as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the Corporation. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner for all purposes.
Section 3. Payment for Shares. No certificate shall be issued for any
shares until such share is fully paid.
Section 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of New Jersey
law.
Section 5. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the shareholders entitled to examine the stock
ledger, or the books of the Corporation, or to vote in person or by proxy at any
meeting of shareholders.
Section 6. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost,
-9-
<PAGE>
stolen, or destroyed certificate, or his or her legal representative, to give
the Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen, or destroyed.
Section 7. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE IX - Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the 31st day of
December of each year. The Corporation shall be subject to an annual audit as of
the end of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE X - Dividends
Subject only to the terms of the Corporation's Certificate of
Incorporation and applicable law, the board of directors may, from time to time,
declare and the Corporation may pay, dividends on its outstanding classes of
capital stock which are eligible for dividends.
ARTICLE XI - Corporate Seal
The board of directors shall provide a Corporate seal which shall be
two concentric circles between which shall be the name of the Corporation. The
year of incorporation or an emblem may appear in the center.
ARTICLE XII - Amendments
These Bylaws may be amended or repealed, in whole or in part, by a
majority vote of members of the Board of Directors at any regular or special
meeting of the Board duly convened or as otherwise specified in the
Corporation's Certificate of Incorporation. Notice need not be given of the
purpose of the meeting of the Board of Directors at which the amendment or
repeal is to be considered.
-10-
Table of Contents
Page
1 Mission Statement
2 Selected Financial Data
3 Letter to Shareholders
5 Board of Directors
6 The Sun Story
8 Management's Discussion and Analysis
of Financial Condition and Results of Operations
25 Independent Auditors' Report
26 Consolidated Financial Statements
31 Notes to Consolidated Financial Statements
51 Corporate Directory
54 Advisory Boards
56 Financial Service Centers
58 Products and Services
1
<PAGE>
Mission Statement
. People are the source of our success. We will provide superior financial
products and a dedicated working environment that creates long-term value
for our customers, our employees, our shareholders and our communities.
. We have a "Customer-First" attitude. We will deliver our products in
anticipation of, and in response to, the needs of our customers and the
communities that we serve.
. Our employees are our most valued asset. We will offer a challenging and
rewarding work environment that provides career advancement opportunities
to attract and retain quality personnel.
. Effective use of current technology will help deliver high-quality
services that are important to our customers. We will focus on the
implementation and efficient use of the most recent technology to provide
high levels of personalized service and products that are competitive with
any financial service provider in our market area.
. We respect the industry we serve. We will be diligent in compliance with
the letter and spirit of all federal, state and local laws and
regulations.
. Our shareholders provide us the capital we need to exist. We will
consistently achieve above-average financial results to provide value to
the our shareholders.
1
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Selected Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Assets $ 1,099,973 $ 436,795 $ 369,895 $ 217,351 $ 112,015
Cash and investments 610,339 117,388 164,251 70,809 24,134
Loans receivable (net) 427,761 295,501 183,634 134,861 83,387
Deposits 695,388 385,987 335,248 196,019 99,099
Borrowings and securities sold
under agreements to repurchase 316,314 21,253 8,000
Shareholders' equity 54,632 27,415 24,671 20,571 12,306
Selected Results of Operations:
Interest income $ 47,185 $ 29,270 $ 20,850 $ 12,194 $ 8,164
Net interest income 22,778 16,736 13,163 8,256 5,327
Provision for loan losses 1,665 900 808 383 2
Net interest income after
provision for loan losses 21,113 15,836 12,355 7,873 5,325
Non-interest income 2,236 1,746 1,651 732 472
Non-interest expense 17,445 13,207 10,047 5,991 4,198
Net income 4,171 3,013 2,819 1,840 1,128
Per Share Data:
Net income
Basic $ 0.91 $ 0.71 $ 0.69 $ 0.65 $ 0.45
Diluted $ 0.82 $ 0.66 $ 0.65 $ 0.60 $ 0.43
Book Value $ 9.07 $ 6.28 $ 6.02 $ 5.33 $ 4.88
</TABLE>
2
<PAGE>
To Our Shareholders and Friends:
The pages of this report chronicle the most dynamic year in our Company's
history. It was a year in which Sun took many great strides; a year in which our
mission statement continued to serve as our guide and our focus.
Sun's mission has been to create enhanced value for its customers, its
communities, its employees and its shareholders. Each of these four
constituencies were well-served during the past year.
Customers were a priority in 1997. In March, Sun National Bank converted
its data systems to an in-house system licensed from Kirchman Corporation. As a
result of the conversion, Sun has more flexibility in the types of products and
services it offers its customers. Products such as "Sun-Dial," our automated
information system, allows customers the ability to call, toll-free, 24-hours a
day to inquire about the status of their accounts as well as access rate and
financial service center information.
In November, Sun initiated a comprehensive menu of cash management products and
services to offer its customers. PC banking, lock-box and wire transfer
services, among others, have become available to the Bank's customers.
Community impact was a priority in 1997. During the course of the year, Sun
successfully completed three separate acquisitions that resulted in the purchase
of eighteen branches. Sun acquired four branches from First Union National Bank,
three branches from Oritani Savings Bank, and eleven branches from The Bank of
New York, in the aggregate, totaled about $257 million in deposits, $20 million
in loans and $12 million in real estate and equipment.
In addition, the Bank opened new branches in Cape May, Toms River and Long Beach
Island. In total, Sun had thirty-eight financial service centers in nine central
and southern New Jersey counties at year-end.
We also established new advisory boards in Mercer and Salem Counties during the
year. Along with our seven other advisory boards, they have been an excellent
source of community information and customer referrals which have contributed to
our dynamic growth.
Employees were a priority in 1997. Sun made a significant commitment to training
its employees. This was especially important in a year that included a computer
system conversion, a sharp increase in the number and complexity of products and
services available to our customers and a continually changing regulatory
environment. The company initiated a new incentive pay system in which
excellence is measured and rewards are possible at every job level.
Additionally, an employee stock purchase plan was implemented allowing employees
to become owners by purchasing Sun Bancorp, Inc. common stock at a discount
through payroll deduction.
3
<PAGE>
Capital and shareholder value was a priority in 1997. Beginning in March, Sun
raised a total of $28.8 million through the sale of trust preferred securities.
Sun was one of the first community banks in the country to issue trust preferred
securities on a retail and unrated basis. Trust preferred securities are an
innovative way to raise capital that allows dividends to be tax-deductible. In
November, Sun raised an additional $23 million through the sale of common stock
in a public offering underwritten by Advest, Inc. As a result, at December 31,
1997, Sun had approximately 975 shareholders of record. Advest has since named
our stock the "1998 Bank Stock of the Year." During 1997, the stock was moved
from the Nasdaq SmallCap market to the Nasdaq National Market under the same
symbol, "SNBC." We are pleased with the substantial increase in the market value
of your investment in Sun during 1997.
Our financial statements show that 1997 was another record-setting year. Total
assets at December 31, 1997 were $1.1 billion, up from $436.8 million at
December 31, 1996. This was an increase of $663.2 million, or 152%. Net loans
grew from $295.5 million at December 31, 1996 to $427.8 million at December 31,
1997, an increase of $132.3 million, or 45%. Total deposits at December 31, 1997
were $695.4 million, an increase of $309.4 million, or 80%, from the December
31, 1996 total of $386.0 million. Total common equity grew $27.2 million, or
99%, from $27.4 million at December 31, 1996 to $54.6 million at December 31,
1997.
Net interest income for the year ended December 31, 1997 was $22.8 million
compared to $16.7 million for the same period in 1996, an increase of $6.0
million or 36%. Net income for the year ended December 31, 1997 amounted to $4.2
million compared to $3.0 million for the same period in 1996, an increase of
$1.2 million, or 38%.
As we begin 1998, we have extended our presence into Monmouth County by
successfully completing the acquisition of the Eatontown branch, with deposits
of $25.2 million, from First Savings Bank. A natural extension of Sun's market
area, Monmouth County has been a strategic target of ours because of its
significant growth opportunities.
Our systems, our products and services, our people and our philosophy of an
"Attitude of Excellence" have prepared us well for future growth. With mergers
and consolidations of large banks occurring in our marketplace, we feel that
1998 will continue to provide Sun with numerous opportunities to take advantage
of the customer disruption created by those transactions.
On behalf of the Board of Directors and officers, we appreciate your continued
support. Our successes could not have been possible without the untiring effort
of a staff of professional bankers dedicated to achieving excellence. We thank
them and we thank you.
Sincerely,
/s/Bernard A. Brown /s/Adolph F. Calovi /s/Philip W. Koebig, III
Bernard A. Brown Adolph F. Calovi Philip W. Koebig, III
Chairman President and Chief Executive Vice President
Executive Officer
4
<PAGE>
Board of Directors
[Photo] [Photo] [Photo]
Bernard A. Brown Adolph F. Calovi Philip W. Koebig, III
Chairman of the Board President and CEO Executive Vice President
[Photo] [Photo] [Photo]
Sidney R. Brown Peter Galetto, Jr. Anne E. Koons
5
<PAGE>
The Sun Story
The numbers tell the story. As recently as 1992, with approximately $100 million
in assets, Sun National Bank, a subsidiary of Sun Bancorp, Inc., was a
successful community bank serving a defined community headquartered in Vineland,
New Jersey.
At the close of 1997, Sun's asset base exceeded $1 billion and its community
presently extends in a circle encompassing much of central and southern New
Jersey. From Cape May to Toms River, from Trenton to the suburbs of Camden
County, Sun is in the process of establishing a market presence as the community
bank of choice.
But numbers alone do not tell the full story of Sun. In an era of industry
consolidation, the idea that a customer-friendly, community-based bank could
prosper and grow seemed to run counter to prevailing conventional wisdom.
By pursuing a strategy of continuing growth within well defined parameters, Sun
has succeeded in building a viable, contiguous network of offices. That system,
now in place, is positioned to begin playing what is certain to be a major role
in the financial life of the region.
Implementation of the Sun growth strategy has been built upon a rigorous
analysis of the opportunities within the regional marketplace. The criteria for
those areas chose for expansion has included: growth potential, deposit base,
competition, types of businesses, income levels and of course, location. An
added dimension in Sun's continuing success is that it is perhaps the only
institution of its size with a full-time Director of Corporate Development,
devoted exclusively to pursuing merger and acquisition opportunities.
The Sun philosophy of always seeking opportunity can be seen in its ability to
capitalize upon some otherwise unnoticed effects of the larger changes in the
banking industry. In addition to the obvious opportunities created by customer
displacements resulting from the ongoing mega-bank mergers, Sun has been able to
increasingly draw upon the availability of a wider and deeper talent pool of
banking professionals, quickly and efficiently raising capability levels
throughout the organization. Through timely applications of appropriate
technologies, Sun has also been able to significantly level the combative
playing field. Sun's new technical capacities mean the Bank now offers many of
the services that were once the prerogative of only the largest financial
institutions -- cash management and merchant services, to not just a few.
6
<PAGE>
By remaining true to the fundamental principles of its mission, Sun continues to
succeed. Integrating new employees, new customers and new communities into the
Sun family represents an ongoing challenge that is being met in part with
intensive training programs, and superior standards of service reflected in a
uniform set of "Best Practices" that are being applied across the entire
organization. A consistent theme of internal communications is the creation of a
vital, entrepreneurial, sales culture aimed at continuous improvements in
profitability and an ever-increasing share of the market.
Sun's "Customer First" attitude remains the benchmark for every initiative
taken. To better anticipate and satisfy the real needs of the Bank's customers,
regional advisory boards have been established throughout the market to listen
and learn what is really expected from Sun in each of the communities served by
the Bank. The people of Sun live, work and take an active leadership role in
their communities, assuring that the Bank's visible presence in the marketplace
continues to increase.
In 1997, Sun Bancorp, Inc. successfully raised over $50 million in new capital,
and in January of this year was named by Advest, Inc. as the "top bank stock
pick for 1998."
Sun now has the organizational infrastructure, the seasoned expertise, the
regional awareness and, most importantly, the enterprising vision to become the
region's super community bank. With a dynamic, but still conservative, eye on
growth and new opportunities, Sun Bancorp, Inc. looks with confidence on a
future of expanded services, increased commercial business and it emergence as a
truly complete banking financial services institution.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The primary activity of the Company is the oversight of the Bank. Through the
Bank, the Company engages in community banking activities by accepting deposit
accounts from the general public and investing such funds in a variety of loans.
These community banking activities primarily include providing home equity
loans, mortgage loans, a variety of commercial business and commercial real
estate loans and, to a much lesser extent, installment loans. The Company also
maintains an investment securities portfolio. The Company's lending and
investing activities are funded by retail deposits. The largest component of the
Company's net income is net interest income. Consequently, the Company's
earnings are primarily dependent on its net interest income, which is determined
by (i) the difference between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread),
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net income is also affected by its provision for loan
losses, as well as the amount of non-interest income and non-interest expenses,
such as salaries and employee benefits, professional fees and services, deposit
insurance premiums, occupancy and equipment costs and income taxes.
Overview
Beginning in 1993, the Company embarked upon a strategy to expand its operations
and retail market throughout southern New Jersey through internal growth and
mergers and acquisitions. The Board and management perceived opportunities to
expand the Company as a result of a lack of competitive commercial banking
services being provided to local businesses and the need for a locally based and
managed community bank. Continued consolidation of the banking industry and a
regionalization of decision 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 which
operated three branch offices in Cape May County, and Southern Ocean State Bank,
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.
During 1997, the Bank completed three separate transactions involving eighteen
branch locations. On June 5, 1997, the Bank acquired $66.7 million in deposit
liabilities, $2.3 million of loans and four branch offices located in the
southern New Jersey counties of Salem and Burlington from First Union National
Bank, Avondale, Pennsylvania ("First Union"). On July 24 1997, the Bank acquired
approximately $34 million in deposit liabilities in three branch offices located
in Camden County, New Jersey from Oritani Savings Bank, SLA, Hackensack, New
Jersey ("Oritani"). On November 25, 1997, the Bank acquired $156 million in
deposit liabilities and $18 million of loans and eleven branch offices located
in Atlantic, Mercer, Middlesex and Somerset Counties, New Jersey from The Bank
of New York ("BNY"). Simultaneous with the completion of the BNY branch
purchase, a branch located in Trenton, New Jersey was consolidated into a branch
acquired with the BNY transaction. During the first six months of 1997, the Bank
opened three new banking offices in the communities of Cape May, Toms River and
Ship Bottom, New Jersey.
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 $427.8 million at December 31, 1997. Much of this loan growth is
attributable to the Bank's hiring of a number of experienced loan officers
previously employed by money center and multi-state regional banking
organizations. In most cases, these loan officers brought with them established
contacts and relationships with individuals or entities throughout the Bank's
primary market area and have been able thereby to increase the Bank's customer
base and the number of loan originations. The Bank also has established a number
of regional advisory boards that have continued to refer loans to the Bank.
8
<PAGE>
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.
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.
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 recruited and hired 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 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.
In 1997, the Company began the process of preparing its computer systems and
applications to properly recognize the year 2000. The inability of computers,
software and other equipment to recognize and properly process data fields
containing a two-digit year is commonly referred to as the Year 2000 Compliance
issue. The compliance process has involved modifying certain software, testing
hardware and software and communicating with external service providers and
customers to ensure they are also taking the appropriate action to remedy any
Year 2000 Compliance issues. Management expects to have substantially all of its
system and application changes completed and tested by the end of 1998.
Management believes that its level of preparedness is appropriate.
The total cost to the Company of the Year 2000 compliance activities has not
been, nor is anticipated to be, material to its financial position or results of
operations. The costs and the date on which the Company plans to complete the
Year 2000 Compliance modifications and testing processes are based on
management's best estimates.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1997 was $4.2 million, or $0.82 per
share, in comparison to $3.0 million, or $0.66 per share, for the year ended
December 31, 1996. The increase in net income was generally attributable to a
significant increase in net interest income of $6.0 million and an increase of
$490,000 in non-interest income. These increases were partially offset by an
increase in non-interest expenses of $4.2 million, an increase in the provision
for loan losses of $765,000 and an increase in income tax expense of $411,000 in
comparison to the results of operations for 1996.
Net income for the year ended December 31, 1996 was $3.0 million or $0.66 per
share in comparison to $2.8 million or $0.65 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 Interest Income. Net interest income is the most significant component of
the Company's income from operations. Net interest income is the difference
between interest received on interest-earning assets (primarily loans and
investment securities) and interest paid on interest-bearing liabilities
(primarily deposits and borrowed funds). Net interest income depends on the
volume and rate earned on interest-earning assets and the volume and interest
rate paid on interest-bearing liabilities.
9
<PAGE>
The following table sets forth a summary of average balances with
corresponding interest income and interest expense as well as average yield and
cost information for the periods presented. Average balances are derived from
daily balances. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $355,540 $33,130 9.32 % $235,744 $22,084 9.36 % $155,139 $15,101 9.73 %
Investment securities 218,645 13,410 6.13 129,164 7,127 5.52 85,445 5,286 6.19
Federal funds sold 11,618 645 5.55 1,323 68 5.14 7,756 463 5.97
-------- ------- -------- ------- -------- --------
Total interest-earning
assets 585,803 47,185 8.05 366,231 29,269 7.99 248,340 20,850 8.40
Non-interest-earning assets 49,645 40,316 24,409
-------- -------- --------
Total assets $635,448 $406,547 272,749
======== ======== =======
Interest-bearing liabilities
Interest-bearing deposit
accounts $391,374 16,458 4.21 % $298,538 11,954 4.00 % $202,276 7,640 3.78 %
Borrowed money 98,702 5,673 5.75 10,397 580 5.58 775 47 6.06
Interest on guaranteed
preferred beneficial
interest in subordinated
debt 22,571 2,276 10.08
-------- -------
Total interest-bearing
liabilities 512,647 24,407 4.76 308,935 12,534 4.06 203,051 7,687 3.79
Non-interest-bearing liabilities 90,440 72,486 47,004
-------- -------- --------
Total liabilities 603,087 381,421 250,055
Shareholders' equity (2) 32,361 25,126 22,694
-------- -------- --------
Total liabilities and
shareholders' equity $635,448 $406,547 $272,749
======== ======== ========
Net interest income $22,778 $16,735 13,163
======= ======= ======
Interest rate spread (3) 3.29 % 3.93 % 4.61 %
====== ====== ======
Net yield on interest earning
assets (4) 3.89 % 4.57 % 5.30 %
====== ====== ======
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 114.27 % 118.55 % 122.30 %
====== ====== ======
</TABLE>
- -------------
(1) Average balances include non-accrual loans.
(2) Averages were computed using month-end balances.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
10
<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,
--------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------- --------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate / Rate /
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income: (In thousands)
Loans receivable $ 11,218 $ (107) $ (55) $ 11,056 $ 7,847 $ (575) $ (299) $ 6,973
Investment securities 4,939 794 550 6,283 2,707 (573) (293) 1,841
Federal funds sold 530 794 550 577 (382) (65) 53 (394)
-------- ------ ------- -------- ------- -------- -------- --------
Total interest-earning assets $ 16,687 $ 692 $ 537 $ 17,916 $ 10,172 $ (1,213) $ (539) $ 8,420
======== ====== ======== ======== ======== ======== ======== ========
Interest expense:
Deposit accounts $ 3,718 $ 600 $ 186 $ 4,504 $ 3,658 $ 445 $ 211 $ 4,314
Borrowings 4,927 17 149 5,093 584 (4) (47) 533
Guaranteed preferred beneficial
interest in subordinated debt 2,276 2,276
-------- --------
Total interest-bearing
liabilities $ 8,645 $ 617 $ 2,611 $ 11,873 $ 4,242 $ 441 $ 164 $ 4,847
======== ====== ======== ======== ======== ======== ======== ========
Net change in interest income $ 8,042 $ 75 $ (2,074) $ 6,043 $ 5,930 $ (1,654) $ (703) $ 3,573
======== ====== ======== ======== ======== ======== ======== ========
</TABLE>
Net interest income increased $6.0 million or 36% to $22.8 million in 1997
compared to $16.7 million in 1996. The increase is due primarily to the growth
of average interest-earning assets from $366.2 million in 1996 to $585.8 million
in 1997, partially offset by a decline in the interest rate spread from 3.93% in
1996 to 3.29% in 1997. The decline in the interest rate spread had a
corresponding impact on the net interest margin which declined 68 basis points
to 3.89% in 1997.
The increase in average interest-earning assets of $219.6 million reflects an
increase of $119.8 million in average loans and $89.5 million in average
investment securities and $10.3 million of federal funds sold which were funded
by an increase of $203.7 million of average interest-bearing liabilities and an
increase of $18.0 million of average non-interest bearing liabilities. This
increase in interest-bearing liabilities reflects the 1997 acquisition of
branches and deposits, the growth of deposits at existing offices, the opening
of three new branches and an increase in borrowings.
The interest rate spread declined as of December 31, 1997, compared to December
31, 1996, due to higher costs on borrowed money as well as interest on
guaranteed preferred beneficial interest in subordinated debt. The interest rate
spread and net interest margin declined in 1997 compared to 1996 due to an
increase in the interest cost of average interest-bearing liabilities from 4.06%
in 1996 to 4.76% in 1997.
The yield on average interest-earning assets increased in 1997 primarily to an
increase in the yield on investment securities and federal funds sold, offset by
a slight decline in the yield on loans. As general market interest rates were
relatively stable during 1996 and 1997, the decline in the yield of loans in
1997 reflects the continued impact of competition for new loan originations The
increase in the yield on investment securities was due primarily to the
investment in U.S. government agency securities made during 1997.
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 4.00% in 1996 to 4.21% in 1997. The higher interest cost of deposits in
1997 resulted primarily from a slight increase in rates on certificates of
deposit, an increase in the cost of borrowed money and the interest cost of the
Company's trust preferred securities described below. The higher rates paid on
certificates of deposit were consistent with those paid by competing financial
institutions. The higher level of borrowed funds was primarily a
11
<PAGE>
result of LIBOR-based repurchase agreements acquired from the Federal Home Loan
Bank of New York. The proceeds from those borrowings were used to purchase U.S.
Government agency securities yielding a spread over LIBOR.
On March 17, 1997, Sun Capital Trust (the "Trust") issued $25 million of 9.85%
Preferred Securities with a stated value and liquidation preference of $25 per
share. The proceeds from the sale of the Preferred Securities of the Trust were
utilized by the Trust to invest in $25 million of 9.85% Junior Subordinated
Debentures (the "Debentures") of the Company due in March, 2027. On April 9,
1997, the underwriters for the Preferred Securities exercised their right to
cover over-allotments. The proceeds from the sale of the Preferred Securities
were utilized by the Trust to invest in $3,750,000 of the Debentures of the
Company. In view of these transactions, the Company may incur increased interest
expense in future periods.
Net interest income increased $3.6 million or 27% to $16.7 million in 1996
compared to $13.2 million in 1995. The increase is due primarily to the growth
of average interest-earning assets from $248.3 million in 1995 to $366.2 million
in 1996, partially offset by a decline in the interest rate spread from 4.61% in
1995 to 3.93% in 1996. The decline in the interest rate spread had a
corresponding impact on the net interest margin which declined 73 basis points
to 4.57% in 1996.
The 1996 increase in average interest-earning assets of $117.9 million reflects
an increase of $80.6 million in average loans and $43.7 million in average
investment securities which were funded by an increase of $105.9 million of
average interest-bearing liabilities and an increase of $25.5 million of average
non-interest bearing liabilities. This increase in interest-bearing liabilities
reflects the acquisition of the branches and deposits in 1995, the growth of
deposits at existing offices in 1996, the opening of two new branches in 1995
and 1996 and an increase in borrowings in 1996.
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.
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.
Provision for Loan Losses. For the year ended December 31, 1997, the provision
for loan losses amounted to $1.7 million, an increase of $765,000, or 85.0%,
compared to $900,000 for the same period in 1996. The increase was primarily the
result of the increase in the Company's loan portfolio of approximately $133.9
million at December 31, 1997 compared with December 31, 1996, primarily from
commercial loans. The Company recorded a provision for loan losses of $900,000
in 1996 compared with a provision of $808,000 in 1995. The increase in the
provision for loan losses in 1996 was attributable to an increase in the size of
the loan portfolio due to internal loan growth. Management regularly performs an
analysis to identify the inherent risk of loss in its loan portfolio. This
analysis includes evaluation of concentrations of credit, past loss experience,
current economic conditions, amount and composition of the loan portfolio
(including loans being specifically monitored by management), estimated fair
value of underlying collateral, loan commitments outstanding, delinquencies, and
other factors.
The Bank will continue to monitor its allowance for loan losses and make future
adjustments to the allowance through the provision for loan losses as 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.
12
<PAGE>
Non-Interest Income. Other income increased $490,000 for the twelve month period
ended December 31, 1997 compared to the twelve month period ended December 31,
1996. The increase was a primarily a result of higher levels of service charges
on deposit accounts resulting from a larger deposit base caused by the Bank's
acquisitions and internal growth; increased fees from safe deposit box rentals
in acquired branches; and partially offset by a loss on sale of fixed assets
during 1997. The amount of service charges on deposit accounts increased to $1.5
million in 1997 compared to $1.1 million in 1996. Safe deposit box rental income
amounted to $181,000 during 1997 compared with $85,000 during 1996. The loss on
sale of fixed assets was $53,000 in 1997 compared to a gain in 1996 of $45,000.
Other operating income increased $95,000, or 5.7%, from $1.7 million for the
year ended December 31, 1995 to $1.8 million for the year ended December 31,
1996. The increase was primarily a result of an increase in service charges on
deposit accounts and other service charges, partially offset by a reduction of
gains on asset sales. Gains on sales of investment securities declined by
$170,000, from $377,000 in 1995 to $207,000 in 1996. During 1995, the Company
recognized $208,000 as gains on the sales of loans. During 1996, there were no
sales of loans in which gains or losses were recorded. Service charges on
deposit accounts increased $397,000, from $660,000 for the year ended December
31, 1995 to $1.1 million in 1996. The increase was due to a larger customer base
in 1996 as a result of the branch acquisitions in 1995 and the growth of the
Bank's business and higher fees on deposit accounts. Other service charges
increased $88,000, from $28,000 in 1995 to $116,000 in 1996. The increase was
also a result of a larger customer base.
Non-Interest Expenses. Other expenses increased approximately $4.2 million, to
$17.4 million for the year ended December 31, 1997 as compared to $13.2 million
for the same period in 1996. The increase was a result of operating a larger
organization. Of the increase, $1.8 million was in salaries and employee
benefits, $327,000 in occupancy expense, $483,000 in equipment expense, $388,000
in data processing expense, $408,000 in miscellaneous expenses, $78,000 in
insurance expense and $678,000 in amortization of excess of cost over fair value
of assets acquired. The increase in other expenses reflects the Company's
strategy to support planned expansion. Salaries and benefits increased due to
additional staff positions resulting from the acquisitions as well as in
lending, loan review, compliance and audit departments. The increase in data
processing expense and equipment expense was the result of operating a larger
institution than in the previous year. The increase in insurance expense
resulted from higher premium payments to the Federal Deposit Insurance
Corporation ("FDIC") in 1997. The higher amount was a result of the Bank being
assessed a premium based on a capital level of "adequately capitalized" for a
portion of the year. As a result of the Company's increased capital, the Bank is
now considered "well-capitalized" and the FDIC premium is expected to be reduced
in future periods. The increase in amortization of excess of cost over fair
value of assets acquired resulted from the acquisitions completed in 1997.
Other operating expenses increased $3.2 million, from $10.0 million for the year
ended December 31, 1995 to $13.2 million for the year ended December 31, 1996.
The increase reflects the Company's strategy to build an infrastructure to
support planned expansion. Non-interest expense was directly impacted by
increased salaries and employee benefits, equipment expense, data processing and
amortization of intangibles, partially offset by a reduction of insurance
expense. Salaries and employee benefits increased $1.8 million, from $4.7
million for the year ended December 31, 1995 to $6.5 million during 1996. The
increase was a result of a higher number of officers and other employees during
1996. In addition, during 1996 the Company began a 401(k) benefits plan. As a
result of the Company match, as well as administrative costs, the Company
incurred approximately $91,000 in expenses during 1996. Equipment costs
increased $359,000, from $459,000 for the year ended December 31, 1995 to
$818,000 in 1996. Equipment costs (such as maintenance, repairs and rentals)
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 $1.1 million for 1996. The
increase was a result of maintaining a larger deposit and loan base during 1996.
The amortization of the excess cost over fair value of assets acquired increased
$484,000, from $343,000 for the year ended December 31, 1995 to $827,000 in
1996. The increase was a result of a full year of amortizing the intangibles
associated with the 1995 acquisitions. Insurance expenses declined $187,000,
from $383,000 for the year ended December 31, 1995, to $196,000 for 1996. The
reduction of insurance expense was a result of lower insurance premiums assessed
by the FDIC amounting to $181,000.
Income Tax Expense. Income taxes increased $371,000, from $1.4 million to $1.7
million for the years ended December 31, 1996 and December 31, 1997,
respectively. Income taxes increased $222,000, or 19%, from $1.1 million for the
year ended December 31, 1995 to $1.4 million for 1996. The increase was due to
increased pre-tax income.
13
<PAGE>
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 as well as sales 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, Federal Home Loan Bank ("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, 1998 total $284.4 million. The Company may
renew these certificates, attract new replacement deposits, or replace such
funds with borrowed funds. 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 $34.1 million at December 31, 1997, the Company
has substantial additional secured borrowing capacity with the FHLB and other
sources. The substantial increase in liquidity resulting from the recent branch
acquisitions has a negative impact on earnings resulting from lower yields on
short-term assets. However, such net cash received will be invested in loans
over time, which will have the effect of decreasing the Company's liquidity.
Management will continue to monitor its liquidity in order to maintain it at a
level which is adequate but not excessive.
Net cash provided by operating activities for the year ended December 31, 1997
totaled $703,000, as compared to $3.8 million for the year ended December 31,
1996. Net cash provided by operating activities for the year ended December 31,
1996 totaled $3.8 million a decrease of $261,000 from the year ended December
31, 1995.
Net cash used in investing activities for the year ended December 31, 1997
totaled $618.6 million, an increase from the year ended December 31, 1996 of
$64.4 million. The increase was primarily due to an increase in the purchase of
investment securities of $270.5 million, an increase in the purchase of
mortgage-backed securities of $307.6 million, an increase of $113.8 million in
loans, a $22.6 million increase in bank properties and equipment and an increase
of $22.3 million of the excess of cost over fair value of branch assets
acquired, offset by $8.7 million from maturities of investment securities, $67.1
million from sales of investment securities, $19.3 million from sales of
mortgage-backed securities, and $28.8 million in proceeds from the issuance of
Trust Preferred Securities.
Net cash used in investing activities for the year ended December 31, 1996,
totaled $64.4 million, a decrease from the year ended December 31, 1995, of
$80.7 million. The decrease was primarily attributable to the 1995 branch
acquisitions which resulted in an increase in investment securities of $97.6
million, offset by an increase, in 1996, in cash used for loan originations of
approximately $62.0 million, and net proceeds from sale of investment securities
and mortgage-backed securities of approximately $50.0 million.
Net cash provided by financing activities for the year ended December 31, 1997
totaled $626.4 million. This amount was a result of a net increase in deposits
of $309.4 million, of which $256.5 million was from branch acquisitions; an
increase of $301.0 million from net borrowings under line of credit and
repurchase agreements; proceeds from the issuance of common stock of $21.9
million, partially offset by principal repayments on borrowed funds of $6
million.
14
<PAGE>
Net cash provided by financing activities for the year ended December 31, 1996
totaled $65.1 million. This is a result of a net increase in deposits of $50.7
million, an increase in net borrowings of $13.3 million, and a $1.1 million
increase resulting from the proceeds of the exercise of stock options. The
increase in deposits and net borrowings were used primarily to fund the increase
in loan originations and investment securities.
Net cash provided by financing activities for the year ended December 31, 1995
totaled $148.1 million. This is a result of an increase in deposits resulting
from the 1995 branch acquisitions of $122.5 million, a net increase in customers
deposits of $16.7 million, and an increase in net borrowings of $8 million. The
increase in deposits and net borrowings were used primarily to fund the increase
in loan originations and investment securities.
The Company monitors its capital levels relative to its business operations and
growth. It has sought to maintain the Bank's and its capital at levels
consistent with, or in excess of, regulatory requirements. During 1997, the
Company raised approximately $21.9 million of additional capital through a
public offering of its common shares.
The increase in commercial loans has had the effect of lowering the Company's
risk-based capital ratios. In general, commercial loans are categorized as
having a 100% risk-weighting using the calculations required by the Company's
regulators. Until its recent issuance of Trust Preferred Securities and
additional issuance of common shares, the rate at which commercial loans have
grown has outpaced the growth rate of the Company's capital.
The Company's Guaranteed Preferred Beneficial Interest in Subordinated Debt
qualifies as Tier 1 or core capital of the Company, subject to a 25% capital
limitation under risk-based capital guidelines developed by the Federal Reserve.
The portion that exceeds the 25% capital limitation qualifies as Tier 2, or
supplementary, capital of the Company.
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, 1997:
<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 $55,445,443 9.76% $ 22,723,542 4.00% $ 34,085,313 $ 6.00%
Total Risk-Based Capital 59,639,244 10.50% 45,439,424 8.00% 56,799,280 10.00%
Leverage 55,445,443 6.42% 34,545,447 4.00% 43,181,809 5.00%
</TABLE>
The following table sets forth the Company's risk-based capital levels at
December 31, 1997:
Required for
Capital Adequacy
Actual Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 Risk-Based Capital 46,516,411 8.17% $ 22,774,253 4.00%
Total Risk-Based Capital 61,249,446 10.75% 45,580,983 8.00%
Leverage 46,516,411 6.42% 28,982,188 4.00%
15
<PAGE>
Asset and Liability Management
The Company's exposure to interest rate risk results from the difference in
maturities on interest-bearing liabilities and interest-earning assets and the
volatility of interest rates. Because the Company's assets have a longer
maturity than its liabilities, the Company's earnings will tend to be negatively
affected during periods of rising interest rates. Conversely, this mismatch
should benefit the Company during periods of declining interest rates.
Management monitors the relationship between the interest rate sensitivity of
the Company's assets and liabilities. In this regard, the Company emphasizes the
origination of short-term commercial loans and revolving home equity loans and
de-emphasizes the origination of long-term mortgage loans.
Gap Analysis
Banks have become increasingly concerned with the extent to which they are able
to match maturities of interest-earning assets and interest-bearing liabilities.
Such matching is facilitated by examining the extent to which such assets and
liabilities are interest-rate sensitive and by monitoring a bank'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 quarterly 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%.
Management and the Board of Directors monitors its gap position at quarterly
meetings. The Asset/Liability Committee of the Bank's Board of Directors meets
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, 1997, the Bank had a negative position with respect to its
exposure to interest rate risk: total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing during the same time period by $43.0 million, representing a negative
cumulative one-year gap ratio of 3.91%. 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 negligible negative gap characteristics in its shorter
maturity periods, the Bank's one-year gap mismatch would have little 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 at December 31,
1997. All amounts are categorized by their actual maturity or repricing date
with the exception of interest-bearing demand deposits and savings deposits. The
Bank's historical experience with both interest-bearing demand deposits and
savings 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.
16
<PAGE>
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
(Dollars in Thousands)
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Loans Receivable $ 149,163 $ 52,032 $ 164,327 $ 66,432 $ 431,954
Investment Securities 284,409 130,479 102,977 58,414 576,279
--------- ---------- ---------- ---------- ----------
Total interest-earning assets 433,572 182,511 267,304 124,846 1,008,233
--------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 46,012 - 73,387 - 119,399
Savings deposits 11,731 - 105,578 - 117,309
Time certificates under $100,000 43,202 178,967 21,687 - 243,856
Time certificates $100,000 or
more 27,415 35,426 2,754 - 65,595
Federal Home Loan Bank advances 75,000 - - - 75,500
Federal funds purchased 5,500 - - - 5,500
Securities sold under agreements
to repurchase 235,814 - - - 235,814
--------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities 444,674 214,393 203,406 - 862,473
--------- ---------- ---------- ---------- ----------
Periodic Gap $ (11,102) $ (31,882) $ 63,898 $ 124,846 $ 145,760
========= ========== ========== ========== ==========
Cumulative Gap $ (11,102) $ (42,984) $ 20,914 $ 145,760
========= ========== ========== ==========
Cumulative Gap Ratio (1.01%) (3.91%) (1.90%) 13.27%
========= ========== ========== ==========
</TABLE>
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which requires the measurement of financial
position and operating results without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Nearly
all the assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
FINANCIAL CONDITION
General - The Company has experienced significant growth as a result of
acquisitions and internal growth. Increases were most prevalent in loans,
generally commercial loans, investments, deposits and borrowed funds. The
Company's assets increased by $663.2 million, or 152%, from $436.8 million at
December 31, 1996 to $1.1 billion at December 31, 1997; and by $66.9 million, or
18%, from $369.9 at December 31, 1995 to $436.8 million at December 31, 1996.
These increases in assets primarily reflects the Company's deployment of
proceeds into the loan portfolio and investment securities portfolio from
increased deposit levels resulting from its 1997 acquisitions and internal
growth. Comparing balances from December 31, 1997 to December 31, 1996, the
Company's cash and cash equivalents increased $12.3 million, net loans
receivable increased $132.3 million, investment securities increased $480.7
million, bank properties and equipment increased $12.3 million and excess of
cost over fair value of assets acquired increased $20.8 million. Total
liabilities increased $607.2 million, or 148%, to $1.0 billion from December 31,
1996 to December 31, 1997. Deposits increased $309.4 million, borrowed funds
increased $295.1 million from December 31, 1996 to December 31, 1997. As a
result of the issuance of Trust Preferred Securities in 1997, the guaranteed
preferred beneficial interest in subordinated debt amounted to $28.8 million at
December 31, 1997. There were no such securities or subordinated debt at
December 31, 1996. Before the effect of unrealized gains or losses on securities
held for sale, shareholders' equity increased $26.1 million, or 92%, to $54.5
million at December 31, 1997, from December 31, 1996.
Loans - Net loans receivable increased $132.3 million, or 45%, from December 31,
1996 to December 31, 1997, due primarily to internally-generated commercial loan
growth and approximately $18 million in loans acquired with the acquisition of
branches from BNY. Approximately $123.4 million of this increase was in
commercial loans -- predominately commercial real estate loans. This significant
increase was a result of a wider market area and the efforts from a large
commercial lending staff
17
<PAGE>
(many with long-established customer relationships) available to offer
competitively priced loans. Installment loans increased $14.2 million, mostly
due to a more active consumer lending department and an increase in financing of
mobile homes. Residential real estate loans decreased $3.7 million as a result
of scheduled principal repayments. During 1996 and 1997, 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 normally 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,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ----------------- ------------------- -----------------
$ % $ % $ % $ % $ %
- - - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan: (Dollars in Thousands)
- ------------
Commercial and industrial $346,475 81.00 $223,116 75.51 $118,874 64.73 $ 69,249 51.35 $ 41,642 49.94
Home equity 20,725 4.84 22,070 7.47 25,129 13.68 26,799 19.87 23,510 28.19
Residential real estate 29,454 6.89 31,777 10.75 29,287 15.95 29,633 21.97 19,151 22.97
Installment 35,301 8.25 21,133 7.51 12,409 6.76 10,787 8.00 151 0.18
Less: Loan loss allowance 4,194 0.98 2,595 0.88 2,065 1.12 1,607 1.19 1,067 1.28
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Net loans $426,761 100.00 $295,501 100.00 $183,634 100.00 $134,861 100.00 $ 83,387 100.00
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Type of Security:
- ----------------
Residential real estate:
1-4 family $ 83,169 19.44 $ 84,036 28.44 68,904 37.52 $ 72,466 53.72 $ 49,777 59.68
Other 11,098 2.59 11,115 3.76 6,295 3.43 839 0.62 757 0.91
Commercial real estate 204,053 47.70 166,893 56.48 85,239 46.40 48,845 36.22 28,682 34.40
Commercial business loans 107,963 25.25 20,455 6.93 13,822 7.54 6,621 4.92 5,031 6.04
Consumer 22,240 5.20 15,229 5.15 11,214 6.11 6,511 4.83 151 0.18
Other 3,432 0.80 368 0.12 225 0.12 1,186 0.88 56 0.07
Less: Loan loss allowance 4,194 0.98 2,595 0.88 2,065 1.12 1,607 1.19 1,067 1.28
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Net loans $427,761 100.00 $295,501 100.00 $183,634 100.00 $134,861 100.00 $ 83,387 100.00
======== ====== ======== ====== ======== ====== ======== ====== ========= ======
</TABLE>
The following table sets forth the estimated maturity of the Bank's
loan portfolio at December 31, 1997. 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 $ 66,050 $ 46,554 $ 233,871 $ (2,278) $ 344,197
Home equity 190 20,535 (752) 19,973
Residential real estate 1,989 743 26,722 (129) 29,325
Installment 876 2,512 31,913 (391) 34,910
Unassigned reserve (644) (644)
--------- ---------
$ 68,915 $ 49,999 $ 313,041 $ (4,194) $ 427,761
========= ======== ========= ========= =========
</TABLE>
18
<PAGE>
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.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In thousands)
Commercial and industrial $ 207,489 $ 138,986 $ 346,475
Home equity 1,104 19,621 20,725
Residential real estate 24,226 5,228 29,454
Installment 35,186 115 35,301
--------- --------- ----------
$ 268,005 $ 163,950 $ 431,955
========= ========= ==========
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 assessed. 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. Delinquent loans are 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 1997, the Company continued to experience a
decline in the amount of loans that were on non-accrual. Total non-performing
assets declined by $696,000, or 22%, from $3.2 million at December 31, 1996 to
$2.5 million at December 31, 1997. The ratio of non-performing assets to net
loans was .58% at December 31, 1997, compared to 1.07% at December 31, 1996. In
1996, non-performing assets decreased by $903,000, from $4.1 million at December
31, 1995 to $3.2 million at December 31, 1996. 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.
19
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and industrial $ 116 $ 354 $ 1,721 $ 1,178 $ 1,074
Home equity 466 337 295 341 204
Residential real estate 253 586 607 342 265
Installment 62 - 35 40 -
------- ------- ------- -------- -------
Total $ 897 $ 1,277 $ 2,658 $ 1,901 $ 1,543
======= ======= ======= ======== =======
Accruing loans that are contractually past
due 90 days or more:
Commercial and industrial $ 642 $ 404 $ 135 $ 525
Home equity 168 62 279 30
Residential real estate 355 572 64 20 $ 2
Installment 168 105 67 7 -
------- ------- ------- -------- -------
Total $ 1,313 $ 1,143 $ 545 $ 582 $ 2
======= ======= ======= ======== =======
Total non-accrual and 90-day past due loans $ 2,210 $ 2,420 $ 3,203 $ 2,483 1,545
Real estate owned 270 756 876 1,033 359
------- ------- ------- -------- -------
Total non-performing assets $ 2,480 $ 3,176 $ 4,079 $ 3,506 $ 1,904
======= ======= ======= ========= =======
Total non-accrual and 90-day past due loans to net
loans 0.52% 0.82% 1.74% 1.84% 1.85%
Total non-accrual and 90-day past due loans to total
assets 0.20% 0.55% 0.87% 1.14% 1.38%
Total non-performing assets to net loans 0.58% 1.07% 2.22% 2.61% 2.28%
Total non-performing assets to total assets 0.23% 0.73% 1.10% 1.62% 1.70%
Total allowance for loan losses to total
non-performing loans 189.77% 107.23% 64.47% 64.72% 69.06%
</TABLE>
Interest income that would have been recorded on loans on non-accrual status,
under the original terms of such loans, would have totaled $115,144 for the year
ended December 31, 1997.
Foreclosed Real Estate - Real estate acquired by the Bank as a result of
foreclosure is classified as Real Estate Owned until such time as it is sold.
When Real Estate Owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated disposal
costs. Any subsequent write-down of Real Estate Owned is charged to operations.
At December 31, 1997, the Bank had a net amount of $270,000 classified as Real
Estate Owned.
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 estimated 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.
20
<PAGE>
The following table sets forth information with respect to the Bank's allowance
for losses on loans at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for losses on loans, beginning of period $ 2,595 $ 2,065 $ 1,607
Charge-offs:
Commercial 307 286
Mortgage 37 9 73
Installment 65 85 67
------------- -------- --------
Total charge-offs 102 401 426
------------- -------- --------
Recoveries
Commercial 22 6 33
Mortgage 4 28
Installment 14 21 15
------------- -------- --------
Total recoveries 36 31 76
------------- -------- --------
Net charge-offs 66 370 350
Provision for loan losses 1,665 900 808
------------- -------- --------
Allowance for losses on loans, end of period $ 4,194 $ 2,595 $ 2,065
============= ======== ========
Net loans charged off as a percent of average loans
outstanding 0.02% 0.16% 0.23%
</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,
--------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Percent of Percent of Percent of
Loans to Loans to Loans to
Total Total Total
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial and industrial $ 2,278 80.21 % $ 1,301 74.98 % $ 1,094 64.02 %
Residential real estate 129 6.82 139 10.65 403 15.96
Home equity 752 4.80 490 7.40 319 13.34
Installment 391 8.17 167 6.97 54 6.68
Unallocated 644 - 498 - 195 -
-------- ---------- -------- ---------- -------- --------
Total allowance $ 4,194 100.00 % $ 2,595 100.00 % $ 2,065 100.00 %
======== ====== ======== ====== ======== ======
</TABLE>
Investment Securities - Most of the Company's investment portfolio is held at
the Bank's wholly-owned subsidiary, Med-Vine, Inc. ("Med-Vine"). Total
investment securities increased $480.7 million, or 502.9%, from $95.6 million at
December 31, 1996 to $576.3 million at December 31, 1997. During 1997, the
growth in the investment portfolio was the result of a number of factors. The
Bank used repurchase agreements from the FHLB, which totaled approximately
$210.8 million at December 31, 1997, to match fund or partially match fund
short-term investment securities for an incremental profit in a structured
transaction. The purpose of the structured transactions is to increase net
interest income and partially offset the increase in interest expense resulting
from the issuance of Trust Preferred Securities. The Company also received
approximately $200 million in cash from the branch acquisitions completed during
1997 and approximately $42.1 million in net proceeds from the sales of common
stock and Trust Preferred Securities. The internal growth of the Bank's deposit
base also contributed a source of funds for deployment into the investment
portfolio.
21
<PAGE>
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. The Bank
has classified its entire portfolio of investment securities as available for
sale. As a result, the investment securities are carried at their estimated fair
value which is based on quoted market prices.
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ---------------------------------- -------------------------------
Net
Unrealized Estimated Net Estimated Net Estimated
Amortized Gains Fair Amortized Unrealized Fair Amortized Unrealized Fair
Cost (Losses) Value Cost Losses Value Cost Gains Value
---- -------- ----- ---- ------ ----- ---- ----- -----
Available for sale (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 53,113 $ (106) $ 53,007 $ 51,955 $ (921) $ 51,034 $ 41,674 $ 230 $ 41,904
Government agency and
mortgage-backed
securities 449,771 390 450,161 63 - 63 41,734 264 41,998
State and political
subdivision securities 41,738 ( 16) 41,722 20,168 (329) 19,839 16,667 75 16,742
Other securities 31,424 ( 36) 31,388 24,877 (232) 24,645 46,304 61 46,365
--------- ------ -------- -------- ------- -------- -------- ------- --------
Total securities
available for sale $ 576,046 $ 232 $576,278 $ 97,063 $ 1,482 $ 95,581 $146,379 $ 630 $147,009
========= ====== ======== ======== ======= ======== ======== ======= ========
</TABLE>
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, 1997. All securities are classified as being available
for sale, therefore the carrying value is the estimated fair value.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
------------------ ------------------ ----------------- ------------------- -----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Obligations $ 5,092 5.27 % $47,915 5.49 % $ 53,007 5.47 %
Government agency and
mortgage-backed securities 1,198 5.33 29,408 6.17 $ 64,091 6.95 % $ 355,464 6.80 % 450,161 6.78
Municipal obligations - - - - 2,676 4.78 39,046 5.43 41,722 5.38
Other securities 3,077 5.02 3,196 5.86 5 6.00 25,110 6.45 31,388 6.25
------- ---- ------- ---- -------- ---- --------- ---- -------- ----
Total $ 9,367 5.19 % $80,519 5.76 % $ 66,772 6.87 % $ 419,620 6.65 % $ 95,581 6.53 %
======= ==== ======= ==== ======== ==== ========= ==== ======== ====
</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, 1997, totaled $695.4 million, an increase of
$309.4 million, or 80%, over the December 31, 1996 balance of $386.0 million.
Demand deposits, including NOW accounts and money market accounts, increased
$135.0 million, or 101%, at December 31, 1997, to $268.7 million, compared with
December 31, 1996. Savings deposits increased $54.4 million to $117.9 million at
December 31, 1997, from $63.5 million at December 31, 1996.
22
<PAGE>
Certificates of deposit under $100,000 increased $91.6 million from December 31,
1996, to $243.3 million at December 31, 1997. Certificates of deposit of
$100,000 or more increased $28.4 million to $65.6 million at December 31, 1997.
The increase in all categories of deposits during 1997 was due in large part to
the acquisition of deposits in connection with the branch office purchases, as
well as 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.
The following table sets forth average deposits by various types of demand and
time deposits:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------
1997 Avg. Yield 1996 Avg. Yield 1995 Avg. Yield
---- ---------- ---- ---------- ---- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 85,985 $ 65,556 $ 45,562
Interest bearing demand deposits 78,383 1.95 % 62,270 1.78 % 48,609 2.19 %
Savings deposits 72,927 2.13 65,393 2.23 57,470 2.28
Time deposits 240,064 5.57 170,875 5.49 96,256 5.48
--------- ---- --------- ---- --------- ----
Total $ 477,359 3.45 % $ 364,094 3.28 % $ 247,897 3.09 %
========= ==== ========= ==== ========= ====
</TABLE>
The following table indicates the amount of certificates of deposit of
$100,000 or more by remaining maturity at December 31, 1997. Dollar amounts are
shown in thousands.
Remaining maturity:
Three months or less $ 27,415
Over three through six months 14,138
Over six through twelve months 21,288
Over twelve months 2,754
---------
$ 65,595
=========
Borrowings - Borrowed funds increased $295.1 million at December 31, 1997, to
$316.3 million, from $ 21.3 million at December 31, 1996. The increase was a
result of an increase of $65.0 million in advances from the FHLB, an increase of
$5.5 million in federal funds purchased, an increase of $210.8 million in
securities sold under agreements to repurchase with the FHLB and an increase of
$19.8 million in securities sold under agreements to repurchase with customers.
This was partially offset by a loan repayment of $6.0 million. For the years
ended December 31, 1997 and 1996 the maximum month-end amount of advances
borrowed from the FHLB was $75.0 million and $10.0 million, respectively. The
Company sold U.S. Treasury securities to customers under agreements to
repurchase them, at par, on the next business day. For the years ended December
31, 1997 and 1996 the maximum month-end amount of securities sold under
agreements to repurchase with customers was $29.8 million and $5.3 million,
respectively. The Company purchased federal funds from correspondent banks, on
an overnight basis. For the years ended December 31, 1997 and 1996, the maximum
month-end amount of federal funds purchased from correspondents was $10.0.
During 1997, the Company engaged in structured transactions designed to offset
the interest expense incurred in connection with the issuance of the Trust
Preferred Securities (See -- Investment Securities). For the year ended December
31, 1997, the maximum month-end amount of securities sold under agreements to
repurchase with the FHLB was $210.8 million.
23
<PAGE>
At December 30, 1996, the Company obtained a $6 million revolving line of credit
from a correspondent bank with a term of 36 months. The floating rate of
interest was the prime rate plus fifty basis points. For the years ended
December 31, 1997 and 1996 the maximum month-end amount outstanding from the
line of credit was $6.0 million.
December 31,
----------------------------
1997 1996
---- ----
(Dollars in thousands)
FHLB advances outstanding at end of period $ 75,000 $ 10,000
Interest rate 6.93% 7.38%
Approximate average amount outstanding $ 7,726 $ 5,265
Approximate weighted average rate 5.67% 5.44%
FHLB repurchase agreements outstanding
at end of period $ 210,751
Interest rate 6.01%
Approximate average amount outstanding $ 75,101
Approximate weighted average rate 5.71%
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 FHLB and various other correspondent banks. In
addition, on an overnight basis, the Bank has the ability to offer securities
sold under agreements to repurchase.
Guaranteed Preferred Beneficial Interest in Subordinated Debt
On March 17, 1997, the Company's subsidiary, Sun Capital Trust (the "Trust")
issued $25 million of 9.85% Preferred Securities with a stated liquidation
preference of $25 per share. The proceeds from the sale of the Preferred
Securities were utilized by the Trust to invest in $25 million of 9.85% Junior
Subordinated Debentures (the "Debentures") of the Company, due in March, 2027.
On April 9, 1997, the underwriters for the Preferred Securities exercised their
right to purchase an additional $3.75 million of the Preferred Securities on the
same terms as the original issuance to cover over-allotments. The proceeds from
the sale of the Preferred Securities were utilized by the Trust to invest in
$3.75 million of the Debentures of the Company.
The Preferred Securities represent preferred undivided beneficial interests in
the Trust's assets which consists solely of the Debentures. The distributions
payable on each Preferred Security is fixed at a rate per annum of 9.85% of the
stated liquidation amount per Preferred Security, is cumulative and is payable
quarterly. The Company has fully, irrevocably and unconditionally guaranteed the
Trust's obligations under the Preferred Securities (including the payment of
distributions and certain other payments relating to the Preferred Securities).
The Debentures mature on March 31, 2027. The Preferred Securities are subject to
mandatory redemption (I) in whole, but not in part, at the maturity upon
repayment of the Debentures, (ii) in whole, but not in part, contemporaneously
with the optional redemption at any time by the Company of the Debentures upon
the occurrence of certain events and (iii) in whole or in part at any time on or
after March 31, 2002, contemporaneously with the optional redemption by the
Company of the Debentures in whole or in part.
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Sun Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997, and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche, LLP
- -------------------------
DELOITTE & TOUCHE, LLP
Philadelphia, Pennsylvania
February 1, 1998
25
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 34,060,747 $ 17,006,758
Federal funds sold - 4,800,000
--------------- --------------
Cash and cash equivalents 34,060,747 21,806,758
Investment securities available for sale (amortized cost -
$576,045,766; 1997 and $97,063,398; 1996) 576,278,353 95,581,384
Loans receivable (net of allowance for loan losses -
$4,193,801; 1997 and $2,595,312; 1996) 427,761,049 295,500,668
Bank properties and equipment, net 24,479,854 12,222,507
Real estate owned, net 270,114 755,628
Accrued interest receivable 6,752,163 2,850,399
Excess of cost over fair value of assets acquired 26,174,146 5,365,218
Deferred taxes 1,314,043 1,070,535
Other assets 2,882,356 1,641,959
--------------- --------------
TOTAL $ 1,099,972,825 $ 436,795,056
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 695,387,536 $ 385,986,905
Advances from the Federal Home Loan Bank 75,000,000 10,000,000
Loan payable - 6,000,000
Federal funds purchased 5,500,000 -
Securities sold under agreements to repurchase 235,813,503 5,253,048
Other liabilities 4,889,487 2,140,527
--------------- --------------
Total liabilities 1,016,590,526 409,380,480
--------------- --------------
Guaranteed preferred beneficial interest in subordinated debt 28,750,000 -
COMMITMENTS AND CONTINGENT LIABILITIES (Note 16)
SHAREHOLDERS' EQUITY
Preferred stock, none issued - -
Common stock, $1 par value, 10,000,000 shares authorized, issued and
outstanding: 4,013,791 in 1997 and 1,848,929 in 1996 4,013,791 1,848,929
Surplus 38,850,245 18,124,359
Retained earnings 11,614,755 8,419,417
Net unrealized gain (loss) on securities available for sale, net of income taxes 153,508 (978,129)
--------------- --------------
Total shareholders' equity 54,632,299 27,414,576
--------------- --------------
TOTAL $ 1,099,972,825 $ 436,795,056
=============== ==============
</TABLE>
- -----------------------------------------------
See notes to consolidated financial statements
26
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on loans $ 33,129,946 $22,073,767 $15,100,885
Interest on investment securities 13,409,947 7,127,393 5,285,877
Interest on federal funds sold 645,602 68,366 463,001
------------ ----------- -----------
Total interest income 47,185,496 29,269,526 20,849,763
------------ ----------- -----------
INTEREST EXPENSE:
Interest on deposits 16,458,025 11,953,591 7,639,933
Interest on short-term funds borrowed 5,673,562 580,412 47,158
Interest on guaranteed preferred beneficial interest in
subordinated debt 2,275,795 - -
------------ ----------- -----------
Total interest expense 24,407,382 12,534,003 7,687,091
------------ ----------- -----------
Net interest income 22,778,114 16,735,523 13,162,672
PROVISION FOR LOAN LOSSES 1,665,000 900,000 807,660
------------ ----------- -----------
Net interest income after provision for loan losses 21,113,114 15,835,523 12,355,012
------------ ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 1,549,021 1,057,139 659,811
Other service charges 49,057 115,999 28,068
(Loss) Gain on sale of fixed assets (53,136) 45,207 46,487
Gain on sale of loans 990 207,984
Gain on sale of investment securities 207,037 206,538 377,126
Other 483,202 320,890 331,513
------------ ----------- -----------
Total other income 2,236,171 1,745,773 1,650,989
------------ ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 8,349,048 6,525,903 4,689,269
Occupancy expense 1,735,137 1,407,875 1,269,514
Equipment expense 1,300,234 817,696 459,460
Provision for losses on real estate owned 14,963 78,000
Professional fees and services 328,349 352,970 249,760
Data processing expense 1,474,247 1,085,874 634,753
Amortization of excess of cost over fair value of assets
acquired 1,504,713 826,701 342,562
Postage and supplies 483,496 420,120 335,055
Insurance 273,732 196,110 382,554
Other 1,981,017 1,573,404 1,606,404
------------ ----------- -----------
Total other expenses 17,444,936 13,206,653 10,047,331
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 5,904,349 4,374,643 3,958,670
INCOME TAXES 1,733,000 1,362,000 1,140,000
------------ ----------- -----------
NET INCOME $ 4,171,349 $ 3,012,643 $ 2,818,670
============ =========== ===========
Basic earnings per share $ 0.91 $ 0.71 $ 0.69
============ =========== ===========
Diluted earnings per share $ 0.82 $ 0.66 $ 0.65
============ =========== ===========
Weighted average shares 4,607,534 4,247,540 4,064,196
============ =========== ===========
</TABLE>
- ------------------------------------------------------
See notes to consolidated financial statements
27
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on Securities
Retained Available for
Common Stock Surplus Earnings Sale Total
------------ ------- -------- ---- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 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
Net unrealized loss on securities
available for sale, net of income taxes (1,393,701) (1,393,701)
Net income - - 3,012,643 - 3,012,643
------------ ------------ ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 1,848,929 18,124,359 8,419,417 (978,129) 27,414,576
Exercise of stock options 3,531 34,237 37,768
Sale of common stock 1,094,428 20,787,283 21,881,711
Stock dividend 1,066,903 (92,511) (974,392) -
Cash paid for fractional interest
resulting from stock dividends (3,123) (1,619) (4,742)
Net unrealized gain on securities
available for sale, net of income taxes 1,131,637 1,131,637
Net income - - 4,171,349 - 4,171,349
------------ ------------ ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 $ 4,013,791 $ 38,850,245 $ 11,614,755 $ 153,508 $ 54,632,299
============ ============ ============= ============= =============
</TABLE>
28
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,171,349 $ 3,012,643 $ 2,818,670
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses
1,665,000 900,000 807,660
Provision for losses on real estate owned 14,963 78,000
Depreciation and amortization
529,734 484,059 325,913
Amortization of excess cost over fair value of assets acquired 1,504,713 826,701 342,562
Gain on sale of loans (990) (207,984)
Gain on sale of investment securities available for sale (207,037) (206,538) (246,129)
Gain on sale of mortgage-backed securities available for sale (130,997)
(Loss) Gain on sale of bank properties and equipment 53,136 (29,298) (46,487)
Deferred income taxes (826,472) (147,401) (27,398)
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (5,142,161) (1,175,180) (838,246)
Accounts payable and accrued expenses 2,748,960 164,483 1,215,343
------------- ------------- -------------
Net cash provided by operating activities 702,741 3,829,469 4,090,907
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of investment securities held to maturity (30,094,922)
Purchases of investment securities available for sale (270,543,543) (27,823,745)
Purchases of mortgage-backed securities held to maturity (45,544,706)
Purchases of mortgage-backed securities available for sale (307,630,314) (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
Proceeds from maturities of investment securities available for sale 8,716,550 99,213,685 10,344,666
Proceeds from maturities of mortgage-backed securities held to maturity 19,908,185
Proceeds from maturities of mortgage-backed securities available for sale 4,354,398 125,716
Proceeds from sale of investment securities available for sale
67,133,964 93,679,375 16,880,505
Proceeds from sale of mortgage-backed securities available for sale
19,346,213 50,782,881 7,359,934
Proceeds from sale of loans 220,000 1,870,608
Net increase in loans
(113,795,707) (112,767,037) (50,605,944)
Increase in loans resulting from branch acquisitions (20,348,684) (636,714)
Purchase of bank properties and equipment
(1,241,818) (1,359,295) (825,912)
Increase in bank properties and equipment resulting from branch (11,786,574) (5,430,744)
acquisitions
Proceeds from sale of bank properties and equipment 35,576 42,606 250,824
Proceeds from issuance of guaranteed preferred beneficial interest in
subordinated debt 28,750,000
Excess of cost over fair value of branch assets acquired (22,313,641) (4,450,145)
Decrease in real estate owned, net 470,551 120,674 78,578
------------- ------------- -------------
Net cash used in investing activities (618,633,029) (64,382,072) (145,113,582)
------------- ------------- -------------
</TABLE>
29
<PAGE>
FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net increase in deposits 52,877,747 50,739,109 16,685,101
Increase in deposits resulting from branch acquisitions 256,522,884 122,543,875
Net borrowings under line of credit and repurchase agreements 301,060,455 21,253,048 12,500,000
Principal payments on borrowed funds (6,000,000) (8,000,000) (4,500,000)
Proceeds from exercise of stock options 37,768 1,126,984 605,368
Payments for fractional interests resulting from stock dividend (4,742) (2,146)
Proceeds from issuance of common stock
21,881,711 -- 260,000
------------- ------------- -------------
Net cash provided by financing activities 626,375,823 65,116,995 148,094,344
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,253,989 4,564,392 7,071,669
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,806,758 17,242,366 10,170,697
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,060,747 $ 21,806,758 $ 17,242,336
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 23,323,935 $ 12,743,696 $ 6,100,954
Income taxes paid 1,450,000 $ 1,577,757 $ 944,516
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans to real estate owned $ 389,867 $ 424,644 $ 196,181
</TABLE>
- ----------------------------------------------------------------------------
See notes to consolidated financial statements
30
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS
Sun Bancorp, Inc. (the "Company") is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, Sun Capital Trust (the "Trust"), Sun National Bank (the "Bank")
and the Bank's wholly owned subsidiary, Med-Vine, Inc. All significant
inter-company balances and transactions have been eliminated.
The Company and the Bank have their administrative offices in Vineland,
New Jersey. At December 31, 1997, the Bank had thirty-eight 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 Company's
outstanding common stock is traded on the Nasdaq National Market under the
symbol "SNBC." The Company is subject to reporting requirements of the
Securities and Exchange Commission. The Trust is a Delaware business trust which
holds the Debentures issued by the Company. The Bank is in the business of
attracting customer deposits through its financial service centers and investing
these funds, together with borrowed funds and cash from operations, in loans,
primarily commercial real estate and non-real estate loans, as well as
mortgage-backed and investment securities. The Bank's primary regulatory agency
is the Office of the Comptroller of the Currency ("OCC"). 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 Company 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.
31
<PAGE>
Allowance for Loan Losses - The allowance for loan losses is determined by
management based upon past experience, evaluation of estimated loss and
impairment 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 estimated losses and impairment
based upon an evaluation of known and inherent risk in the loan portfolio. Loan
impairment is evaluated based on the fair value of collateral. Any reserves
required based on this evaluation are included in the allowance for loan losses.
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 the fair value of the underlying collateral. 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.
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
$3,542,579 and $2,037,866 at December 31, 1997 and 1996, respectively, and is
amortized by the straight-line method over 15 years for bank acquisitions and
over 7 years for branch acquisitions.
Long-Lived Assets - Management evaluates the carrying amount of long-lived
assets and intangibles for impairment based on the fair value of the asset. At
December 31, 1997 and 1996, the Company had not recognized an impairment loss
based on this evaluation.
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 - 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. 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 - In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share , which is effective for periods ending after December
15, 1997. This statement establishes standards for computing and presenting
earnings per share (EPS) and supersedes APB Opinion No. 15, Earnings Per Share.
The Company adopted SFAS No. 128 effective December 31, 1997 and all EPS for
periods presented have been retroactively restated in accordance with the
Statement. The adoption of this statement did not have a material effect on the
Company's reported earnings per share
Stock dividend - On May 20, 1997 and September 17, 1996, the Company's
Board of Directors declared special 5% stock dividends which were paid on June
25, 1997 and October 30, 1996, respectively, to stockholders of record on June
2, 1997 and October 15, 1996, respectively. Accordingly, earnings per share for
the years ended December 31, 1996 and 1995 have been restated to reflect the
increased number of shares outstanding.
32
<PAGE>
Stock split - On February 17, 1998, the Company's Board of Directors
declared a three-for-two stock split effected in the form of a 50% stock
dividend payable on March 18, 1998 to shareholders of record on March 4, 1998.
On August 28, 1997 the Company's Board of Directors declared a three-for-two
stock split effected in the form of a 50% stock dividend which was paid on
September 25, 1997 to shareholders of record on September 11, 1997. Accordingly,
earnings per share for the years ended December 31, 1997, 1996 and 1995 have
been restated to reflect the increased number of shares outstanding.
Accounting for Stock Options - The Company accounts for stock-based
compensation using the intrinsic value method which recognizes as expense the
difference between the market value of the stock and the exercise price at grant
date. The Company has not recognized any compensation expense under this method.
In the year ended December 31, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation which permits the use of the intrinsic
value method of accounting for stock-based compensation but also requires the
Company to disclose the pro forma effects of accounting for stock-based
compensation using the fair value method as described in SFAS No. 123.
Accounting Principles Issued But Not Adopted - In June, 1997, the FASB
issued SFAS No. 130, Reporting Comprehensive Income, which requires disclosure,
as a component of comprehensive income, amounts from transactions and other
events which are currently excluded from the statement of income and are
recorded directly to shareholders' equity. Also in June, 1997, SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information was issued.
This statement requires an entity to disclose financial information in a manner
consistent with internally used information and requires more detailed
disclosures of operating and reporting segments than are currently in practice.
These statements are effective for fiscal years beginning after December 15,
1997 and early adoption is permitted. 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. The Company will adopt both
standards effective January 1, 1998.
Reclassifications - Certain reclassifications have been made in the 1996
and 1995 consolidated financial statements to conform to those classifications
used in 1997.
3. ACQUISITIONS
On November 20, 1997, the Bank purchased eleven branches from The Bank of
New York. The Bank acquired approximately $156,049,000 of deposit liabilities
plus $240,000 of accrued interest, $9,485,000 of real estate and equipment,
$18,035,000 of loans plus related accrued interest and $2,277,000 in cash. The
Bank paid a premium of approximately $15,501,000, which will be amortized
primarily over seven years.
On July 24, 1997, the Bank purchased three branches from Oritani Savings
Bank. The Bank acquired approximately $33,922,000 of deposit liabilities plus
$144,000 of accrued interest, $547,000 of real estate and equipment and $180,000
in cash. The Bank paid a premium of $2,151,000, which is being amortized over
seven years.
On June 5, 1997, the Bank purchased four branches from First Union
National Bank. The Bank acquired approximately $66,552,000 of deposit
liabilities plus $222,000 of accrued interest, $1,755,000 of real estate and
equipment, $2,313,000 of loans plus related accrued interest and $1,203,000 in
cash. The Bank paid a premium of approximately $4,661,000, which is being
amortized over seven years.
On 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 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.
33
<PAGE>
4. INVESTMENT SECURITIES
The amortized costs of investment securities and the approximate fair
values at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
<S> <C> <C> <C> <C>
Available for Sale: Cost Gains Losses Value
Debt Securities
U. S. Treasury Obligations $ 53,112,961 $ 22,245 $ (128,487) $ 53,006,719
State and Municipal Obligations 41,738,042 115,920 (131,695) 41,722,267
Other bonds 6,313,495 -- (35,849) 6,277,646
Mortgage-backed securities 449,770,918 629,512 (239,059) 450,161,371
------------ ------------ ------------ ------------
Total debt securities 550,935,416 767,677 (535,090) 551,168,003
------------ ------------ ------------ ------------
Equity Securities
Federal Reserve Bank stock 1,367,100 1,367,100
Federal Home Loan Bank stock 23,660,000 23,660,000
Atlantic Central Bankers Bank stock 83,250 -- -- 83,250
------------ ------------ ------------ ------------
Total equity securities 25,110,350 -- -- 25,110,350
------------ ------------ ------------ ------------
Total $576,045,766 $ 767,677 $ (535,090) $576,278,353
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
<S> <C> <C> <C> <C>
Available for Sale: Cost Gains Losses Value
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 10,075,483 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>
During 1997, the Company sold $86,480,177 of securities available for sale
resulting in a gross gain of $225,959. During 1996, the Company sold
$144,529,374 of securities available for sale resulting in a gross gain of
$206,538. During 1995, the Company sold $24,240,439 of securities available for
sale resulting in a gross gain of $377,126.
At December 31, 1997 and 1996 the Bank was required to maintain an average
reserve balance with the Federal Reserve Bank of $100,000
and $3,579,000 respectively.
34
<PAGE>
The maturity schedule of the investment in debt securities available for sale at
December 31, 1997 is as follows:
Amortized Estimated
Cost Market Value
Due in one year or less $ 9,370,575 $ 9,366,919
Due after one year through five years 80,691,171 80,518,151
Due after five years through ten years 66,650,723 66,762,117
Due after ten years 110,229,882 110,207,604
266,942,351 266,854,791
Mortgage-backed securities 283,993,065 284,313,212
------------ ------------
$550,935,416 $551,168,003
============ ============
At December 31, 1997, $4,000,000 of U.S. Treasury Notes were pledged to
secure public deposits.
5. LOANS
The components of loans as of December 31, 1997 and 1996 were as follows:
December 31,
--------------------------------
1997 1996
Commercial and industrial $ 346,475,157 $ 223,116,474
Real estate-residential mortgages 50,178,260 53,846,436
Installment 35,301,433 21,133,070
------------- -------------
Total gross loans 431,954,850 298,095,980
Allowance for loan losses (4,193,801) (2,595,312)
------------- -------------
Net loans $ 427,761,049 $ 295,500,668
============= =============
Nonaccrual loans $ 896,902 $ 1,277,208
============= =============
There were no irrevocable commitments to lend additional funds on
nonaccrual loans at December 31, 1997. The reduction in interest income
resulting from nonaccrual loans was $115,144, $151,614 and $276,955 for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest income
recognized on these loans for the years ended December 31, 1997, 1996 and 1995
was $40,334, $15,414 and $24,989, 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, 1997 and
1996, along with an analysis of the activity for the years ended December 31,
1997 and 1996, is summarized as follows:
For the Years Ended
December 31,
----------------------------
1997 1996
Balance, beginning of year $ 11,437,134 $ 8,621,460
Additions 10,954,834 7,306,997
Repayments (2,954,727) (4,491,323)
------------ ------------
Balance, end of year $ 19,437,241 $ 11,437,134
============ ============
35
<PAGE>
Under approved lending decisions, the Company has commitments to lend
additional funds totaling approximately $84,302,101 and $58,635,413 at December
31, 1997 and 1996, 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 an individual 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.
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses is as follows:
For the Years Ended
December 31,
-------------------------------------------
1997 1996 1995
Balance, beginning of period $ 2,595,312 $ 2,064,640 $ 1,607,375
Charge-offs (102,408) (400,387) (426,289)
Recoveries 35,897 31,059 75,894
----------- ----------- -----------
Net charge-offs (66,511) (369,328) (350,395)
Provision for loan losses 1,665,000 900,000 807,660
----------- ----------- -----------
Balance, end of period $ 4,193,801 $ 2,595,312 $ 2,064,640
=========== =========== ===========
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. 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.
36
<PAGE>
Impairment losses are included in the provision for loan losses. Large
groups of smaller balance, homogeneous loans 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, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Impaired loans with related reserve for loan losses calculated
under SFAS No. 114 $ -- $ --
Impaired loans with no related reserve for loan losses calculated
under SFAS No. 114 $1,157,838 $ 584,114
---------- ----------
Total impaired loans $1,157,838 $ 584,114
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Average impaired loans $1,244,522 $ 596,519
========== ==========
Interest income recognized on impaired loans $ 106,715 $ 18,284
========== ==========
Cash basis interest income recognized on impaired loans $ 82,544 $ 15,414
========== ==========
</TABLE>
Interest payments on impaired loans are typically applied to principa l unless
the ability to collect the principal amount is fully assured, in which case
interest is recognized on the cash basis.
Commercial loans and commercial real estate loans are placed on nonaccrual at
the time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Generally, commercial loans are charged off no later
than 120 days delinquent unless the loan is well secured and in the process of
collection, or other extenuating circumstances support collection. Residential
real estate loans are typically placed on nonaccrual at the time the loan is 90
days delinquent. Other consumer loans are typically charged off at 90 days
delinquent. In all cases, loans must be placed on nonaccrual or charged off at
an earlier date if collection of principal or interest is considered doubtful.
7. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment at December 31, 1997 and 1996 consist of the
following major classifications:
December 31,
-----------------------------
1997 1996
Land $ 5,923,238 $ 3,084,395
Buildings 13,520,232 6,982,449
Leasehold improvements and equipment 7,485,262 3,991,723
------------ ------------
26,928,732 14,058,567
Accumulated depreciation and amortization (2,448,878) (1,836,060)
------------ ------------
Total $ 24,479,854 $ 12,222,507
============ ============
37
<PAGE>
8. REAL ESTATE OWNED
Real estate owned consisted of the following:
December 31,
-----------------------
1997 1996
Commercial properties $ 128,031 $ 435,765
Residential properties 142,083 360,863
--------- ---------
270,114 796,628
Allowance -- (41,000)
--------- ---------
Total $ 270,114 $ 755,628
========= =========
During 1997 and 1995, approximately $15,000 and $78,000, respectively, was
charged against operations to adjust real estate owned for declines in value.
There was no charge in 1996.
9. DEPOSITS
Deposits consist of the following major classifications:
December 31,
----------------------------
1997 1996
Demand Deposits $268,655,067 $133,624,391
Savings Deposits 117,879,048 63,506,894
Time Certificates under $100,000 243,257,829 151,615,202
Time Certificates $100,000 or more 65,595,592 37,240,418
------------ ------------
Total $695,387,536 $385,986,905
============ ============
Of the total demand deposits, approximately $149,499,000 and $76,500,000 are
non-interest bearing at December 31, 1997 and 1996, respectively.
A summary of certificates by year of maturity is as follows:
Year Ended December 31,
1998 $284,412,949
1999 14,495,629
2000 5,800,887
Thereafter 4,143,956
------------
Total $308,853,421
============
A summary of interest expense on deposits is as follows:
Year Ended December 31,
----------------------------------------
1997 1996 1995
Savings Deposits $ 1,555,491 $ 1,455,043 $ 1,394,849
Time Certificates 13,370,984 9,382,920 5,274,045
Interest-Bearing Demand Deposits 1,531,550 1,115,628 971,039
----------- ----------- -----------
Total $16,458,025 $11,953,591 $ 7,639,933
=========== =========== ===========
38
<PAGE>
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank ("FHLB") advances at December 31, 1997 and 1996 were
$75,000,000 and $10,000,000, respectively. Advances are collateralized under a
blanket collateral lien agreement. At December 31, 1997 and 1996, $17,000,000
and $10,000,000, respectively were borrowed under overnight lines of credit at
interest rates of 7.125% and 7.35%, respectively. At December 31, 1997,
$58,000,000 was borrowed under a one-month advance maturing in January, 1998 at
a rate of interest of 6.875%. Interest expense on advances was $438,268,
$286,316 and $6,733 for the years ended December 31, 1997, 1996 and 1995,
respectively.
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
In 1997, the Company entered into repurchase agreements with the FHLB. At
December 31, 1997, the amount outstanding was $210,751,000, maturing in January,
1998 and bearing an average interest rate of 6.01%. Interest expense on FHLB
repurchase agreements was $4,285,478 for the year ended December 31, 1997. There
were no such repurchase agreements during 1996 or 1995. Collateral for the
repurchase agreements were U.S. Government Agency Collateralized Mortgage
Obligations. The market value of the collateral at December 31, 1997 was
approximately $220,118,000.
During 1997 and 1996, the Company entered into overnight repurchase agreements
with customers. At December 31, 1997 and 1996, the amounts outstanding were
$25,062,502 and $5,253,048, respectively. At December 31, 1997, the amounts were
borrowed at interest rates ranging from 4.75% to 6.275%. At December 31, 1996,
the amounts were borrowed at interest rates ranging from 4.75% to 5.11%.
Collateral for customer repurchase agreements were U.S. Treasury Notes. The
market value of the collateral was equal to the amounts outstanding.
12. OTHER BORROWED FUNDS
At December 31, 1997, the Company purchased federal funds in the amount of
$5,500,000 from correspondent banks on an unsecured overnight line of credit at
an interest rate of 6.00%. There were no such purchases at December 31, 1996.
On 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 was the prime rate plus fifty basis points. At December 31, 1996, there
was $6,000,000 outstanding at an interest rate of 8.75%. At December 31, 1997
there was no balance outstanding.
13. 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. There were 744,187 shares of stock reserved for issuance
under the 1995 Plan.
On May 31, 1985, the Company adopted a Stock Option Plan (the "1985 Plan").
During 1995, options were no longer eligible to be granted under the 1985 Plan.
Options granted under the 1985 Plan were either qualified incentive stock
options or nonqualified options as determined by the Executive Compensation
Committee. Options granted under the 1985 Plan were at the estimated fair value
at the date of grant. At December 31, 1997, there were 309,730 shares of stock
remaining for issuance under the 1985 Plan.
39
<PAGE>
Under the 1995 Plan, the nonqualified options expire ten years and ten days
after the date of grant, unless terminated earlier under the option terms. The
incentive options expire ten years after the date of grant, unless terminated
earlier under the option terms. Under the 1985 Plan, all options expire in the
year 2001. The vesting provision of the 1995 Plan allows for 50% of options to
vest one year after the date of grant, and 50% two years after the date of
grant, subject to employment and other conditions. All shares granted under the
1985 Plan are fully vested.
Options granted under the 1995 and 1985 Plans, adjusted for the 5% stock
dividends granted in 1996 and 1997 and the three-for-two stock splits granted in
1997 and 1998, are as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
<S> <C> <C>
Options granted and outstanding:
December 31, 1997 at prices ranging from $3.04 to $16.67 per share 444,680 609,193
======= =======
December 31, 1996 at prices ranging from $3.04 to $7.77 per share 351,647 454,900
======= =======
December 31, 1995 at prices ranging from $3.04 to $6.53 per share 439,785 371,118
======= =======
</TABLE>
Activity in the stock option plans for the period beginning January 1, 1995 and
ending December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Number Price Price
of Shares Per Share Per Share
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1995 692,585 $ 3.58
1995:
Granted 310,080 $5.24 - $ 5.77 $ 5.50
Exercised (185,405) $3.04 - $ 4.22 $ 3.26
Expired (6,357) $3.04 - $ 6.53 $ 5.85
---------
Outstanding at December 31, 1995 810,903 $ 4.29
1996:
Granted 269,148 $7.06 - $ 7.77 $ 7.06
Exercised (272,403) $3.04 - $ 3.84 $ 3.73
Expired (1,101) $ 6.53 $ 6.53
---------
Outstanding at December 31, 1996 806,546 $ 5.39
1997:
Granted 257,997 $8.89 - $16.67 $ 10.00
Exercised (8,205) $5.24 - $ 6.53 $ 4.60
Expired (2,466) $ 7.06 $ 7.06
---------
Outstanding at December 31, 1997 1,053,873 $3.04 - $16.67 $ 6.56
========= ========
</TABLE>
The following table summarizes stock options outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Number of Options Weighted Average Remaining Weighted Average Exercise
Range of Exercise Price Outstanding Contractual Life Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3.04 - $ 3.34 177,945 4 $ 3.79
$ 5.24 - $ 6.53 351,265 6 $ 5.33
$ 7.06 - $ 8.89 295,016 8 $ 7.27
$ 10.00 - $ 11.00 224,997 9 $ 10.04
$ 16.67 - $ 16.67 4,650 10 $ 16.67
------------------------------------------------------------------------------------
1,053,873 7 $ 6.56
</TABLE>
40
<PAGE>
The Company accounts for stock-based compensation using the intrinsic value
method. Had compensation cost for the Company's two stock option plans been
determined based on the fair value method of accounting described in SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported $ 4,171,349 $ 3,012,643 $ 2,818,670
Pro forma $ 3,736,190 $ 2,461,089 $ 2,370,020
Earnings per share on net income:
Basic As reported $ 0.91 $ 0.71 $ 0.69
Pro forma $ 0.81 $ 0.58 $ 0.58
Diluted As reported $ 0.82 $ 0.66 $ 0.65
Pro forma $ 0.74 $ 0.54 $ 0.54
Weighted average fair value of options
granted during the year $ 1.69 $ 3.42 $ 2.39
</TABLE>
Significant assumptions used to calculate the above fair value of the awards are
as follows:
1997 1996 1995
---- ---- ----
Risk free rate of return 6.16 % 6.44 % 5.65 %
Expected option life 60 months 60 months 60 months
Expected volatility 24 % 14 % 15 %
Expected dividends 0 0 0
14. EMPLOYEE AND DIRECTOR STOCK PURCHASE PLANS
On July 15, 1997 the Company adopted an Employee Stock Purchase Plan ("ESPP")
and a Directors Stock Purchase Plan ("DSPP") (collectively, the "Purchase
Plans") wherein 218,812 shares were reserved for issuance pursuant to the plan.
Under the terms of the Purchase Plans, the Company grants participants an option
to purchase shares of Company common stock with an exercise price equal to 95%
of market prices. Under the ESPP, employees are permitted, through payroll
deduction, to purchase up to $25,000 of fair market value of common stock per
year. Under the DSPP, directors are permitted to remit funds, on a regular
basis, to purchase up to $25,000 of fair market value of common stock per year.
Participants incur no brokerage commissions or service charges for purchases
made under the Purchase Plans. For the year ended December 31, 1997, there were
1,191 shares and 3,896 shares granted and issued through the ESPP and DSPP,
respectively.
15. 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 could contribute up to 15% of their
compensation to a maximum of $9,500 in 1997 and 1996. The Company contributes
Company common stock, at market value, at 50% of the employee contribution, up
to 6% of compensation. The Company's contribution to the 401(k) Plan was $90,619
and $85,722 for the years ended December 31, 1997 and 1996, respectively. The
Company paid $9,705 and $4,861 during 1997 and 1996, repectively, to administer
the 401(k) Plan.
41
<PAGE>
16. 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 $12,335,011 and $9,663,853 at December 31, 1997 and 1996,
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 $344,592 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 of the Bank and shareholders of the Company to lease an
office building for an initial term of ten years with three renewal options of
five years each, requiring annual rentals of $96,000 in addition to real estate
taxes during the extension periods. The Bank has exercised its first five-year
renewal option. The Bank subleases a portion of the office building.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more consisted of the following at December 31, 1997:
1998 $ 867,339
1999 797,011
2000 690,504
2001 672,104
2002 647,695
Thereafter 5,471,888
-----------
$ 9,146,541
===========
Rental expense included in occupancy expense for all operating leases was
$609,161, $516,526 and $510,285 for the years ended December 31, 1997, 1996 and
1995, respectively.
42
<PAGE>
17. INCOME TAXES
The income tax provision consists of the following:
December 31,
------------------------------------------
1997 1996 1995
Current $ 2,559,473 $ 1,504,874 $ 1,167,398
Deferred (826,473) (142,874) (27,398)
----------- ----------- -----------
Total $ 1,733,000 $ 1,362,000 $ 1,140,000
=========== =========== ===========
Items that gave rise to significant portions of the deferred tax accounts at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
Deferred tax asset:
<S> <C> <C>
Allowance for loan losses $ 1,219,106 $ 590,257
Deferred loan fees 83,541 63,900
Other real estate - 73,344
Goodwill amortization 373,016 72,150
Unrealized loss on investment securities - 503,885
Other 225,042 51,274
----------- -----------
Total deferred tax asset 1,900,705 1,354,810
Deferred tax liability:
Property (450,126) (284,275)
Unrealized gain on investment securities (79,080)
Other real estate (57,456)
----------- -----------
Total deferred tax liability (586,662) (284,275)
----------- -----------
Net deferred tax asset $ 1,314,043 $ 1,070,535
=========== ===========
</TABLE>
The provision for federal income taxes for the years ended December 31, 1997,
1996 and 1995, differs from that completed at the statutory rate as follows:
Years Ended December 31,
------------------------------------------
1997 1996 1995
Tax computed at the statutory rate $ 2,007,479 $ 1,487,379 $ 1,345,948
Increase in charge resulting from:
Goodwill amortization 57,321 57,327 57,160
Tax exempt interest (net) (258,994) (340,896) (157,940)
Other, net (72,806) 158,190
----------- ----------- -----------
$ 1,733,000 $ 1,362,000 $ 1,140,000
=========== =========== ===========
43
<PAGE>
18. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
shareholders (net income), by the weighted average number of shares of common
stock outstanding during the year. Diluted earnings per share is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding 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). These purchases were assumed to have been made at the average
market price of the common stock, which is based on the average price received
on common shares sold. Retroactive recognition has been given to market values,
common stock outstanding and potential common shares for periods prior to the
date of the Company's stock dividends and stock splits, as well as for the
adoption of SFAS No. 128.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $4,171,349 $3,012,643 $2,818,670
Average dilutive stock options outstanding 1,053,873 806,548 810,906
Average exercise price per share $ 6.56 $ 5.39 $ 4.28
Average market price - diluted basis $ 11.87 $ 8.89 $ 6.85
Average common shares outstanding 4,607,533 4,247,540 4,064,196
Increase in shares due to exercise of options - diluted basis 471,736 317,549 304,281
---------- ---------- ----------
Adjusted shares outstanding - diluted 5,079,269 4,565,089 4,368,477
Net income per share - basic $ 0.91 $ 0.71 $ 0.69
Net income per share - diluted $ 0.82 $ 0.66 $ 0.65
</TABLE>
19. REGULATORY MATTERS
The ability of the Bank to pay dividends to the Company is controlled by certain
regulatory restrictions. Permission from the 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 OCC, for that year, combined with its retained net
profits of the two preceding years.
The Company and the Bank are 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, 1997 that the Bank meets all
applicable capital adequacy requirements.
44
<PAGE>
During 1997 regulatory capital was increased through the issuance of Trust
Preferred Securities and common stock. As a result, at December 31, 1997, the
Company's Tier 1 Capital and Total Risk-Based Capital increased by $40.1 million
and $50.1 million, respectively.
As of December 31, 1997, the most recent notification from the OCC (dated May 5,
1997) categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. To be categorized as well-capitalized, the Bank
must maintain minimum Tier 1 Capital, Total Risk-Based Capital and Leverage
Ratios as set forth in the table.
<TABLE>
<CAPTION>
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Procedures
------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997
Tier 1 Risk-Based Capital $ 55,445,443 9.76% $22,723,542 4.00% $34,085,313 6.00%
Total Risk-Based Capital 59,639,244 10.50% 45,439,424 8.00% 56,799,280 10.00%
Leverage 55,445,443 6.42% 34,545,447 4.00% 43,181,809 5.00%
At December 31, 1996
Tier 1 Risk-Based Capital $ 28,907,862 9.34% $12,380,480 4.00% 18,570,720 6.00%
Total Risk-Based Capital 31,503,174 10.18% 24,760,960 8.00% 30,951,200 10.00%
Leverage 28,907,862 6.81% 16,974,791 4.00% 21,218,489 5.00%
</TABLE>
The Company's tier 1 risk-based capital, total risk-based capital and leverage
capital are 8.17%, 10.75% and 5.38%, respectively, at December 31, 1997 and
7.44%, 8.28% and 5.43%, respectively, at December 31, 1996.
45
<PAGE>
20. 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 Company 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
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 34,060,747 $ 34,060,747 $ 21,806,758 $ 21,806,758
Investment securities 576,278,353 576,278,353 95,581,384 95,581,384
Loans receivable, net 427,761,049 424,641,330 295,500,668 293,777,592
Liabilities:
Demand deposits 268,655,067 268,655,067 133,624,391 133,624,391
Savings deposits 117,879,048 117,879,048 63,506,894 63,506,894
Certificates of deposit 308,853,421 308,605,531 188,855,620 191,448,487
Advances from the Federal Home Loan Bank 75,000,000 75,000,000 10,000,000 10,000,000
Loan payable - - 6,000,000 6,000,000
Federal funds purchased 5,500,000 5,500,000
Securities sold under agreements to
repurchase 213,813,503 213,813,503 5,253,048 5,253,048
</TABLE>
Cash and cash equivalents - For cash and cash equivalents, the carrying amount
is a reasonable estimate of fair value.
Investment securities - For investment securities, fair values are based on
quoted market prices.
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 and certificates of deposit - The fair value
of demand deposits and savings deposits 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 of similar remaining maturities.
Advances from the Federal Home Loan Bank, federal funds purchased, securities
sold under agreements to repurchase and loan payable The fair value is estimated
to be the amount payable at the reporting date.
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.
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.
46
<PAGE>
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. 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, 1997 and 1996, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
21. 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.
22. GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT
On March 17, 1997, the Trust, a statutory business trust created under Delaware
law that is a subsidiary of the Company, issued $25 million, 9.85% Preferred
Securities ("Preferred Securities") with a stated value and liquidation
preference of $25 per share. This Trust's obligations under the Preferred
Securities issued are fully and unconditionally guaranteed by the Company. The
proceeds from the sale of the Preferred Securities of the Trust were utilized by
the Trust to invest in $25 million of 9.85% Junior Subordinated Debentures (the
"Debentures") of the Company. The Debentures are unsecured and rank subordinate
and junior in right of payment to all indebtedness, liabilities and obligations
of the Company. The Debentures represent the sole assets of the Trust. Interest
on the Preferred Securities is cumulative and payable quarterly in arrears. The
Company has the right to optionally redeem the Debentures prior to the maturity
date of March 31, 2027, on or after March 31, 2002, at 100% of the stated
liquidation amount, plus accrued and unpaid distributions, if any, to the
redemption date. Under the occurrence of certain events, the Company may redeem
in whole, but not in part, the Debentures prior to March 31, 2002. Proceeds from
any redemption of the Debentures would cause a mandatory redemption of the
Preferred Securities having an aggregate liquidation amount equal to the
principal amount of the Debentures redeemed.
On April 9, 1997, the underwriters for the Preferred Securities
exercised their right to purchase an additional $3,750,000 of the Preferred
Securities on the same terms as the original issuance to cover over-allotments.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $3,750,000 of Debentures of the Company.
The Trust is a wholly-owned subsidiary of the Company, has no
independent operations and issued securities that contained a full and
unconditional guarantee of its parent, the Company.
23. ACQUISITIONS (UNAUDITED)
On February 26, 1998, the Bank purchased one branch from First Savings Bank,
Woodbridge, N.J. The Bank acquired approximately $25,228,000 of deposit
liabilities, $118,000 in equipment, $34,000 in loans and $119,000 in cash. The
Bank paid a premium of $1,085,000, which will be amortized over seven years.
47
<PAGE>
24. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition December 31,
----------------------------------
1997 1996
<S> <C> <C>
Assets
Cash $ 269,709 $ 27,187
Investments in subsidiaries 81,619,589 33,294,851
Prepaid expense 1,466,298 95,417
Accrued interest and other assets 28,889 -
------------- ------------
Total $ 83,384,485 $ 33,417,455
============= ============
Liabilities and Shareholders' Equity
Loan payable $ 6,000,000
Other liabilities $ 2,186 2,879
------------- ------------
Total liabilities 2,186 6,002,879
Guaranteed preferred beneficial interest in subordinated debt 28,750,000
Shareholders' Equity
54,632,299 27,414,576
------------- ------------
Total $ 83,384,485 $ 33,417,455
============= ============
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net interest expense $(2,387,201) $ (1,888)
Other income 48,750 15,909 12,278
Expenses (133,238) (16,271) (27,025)
----------- ----------- -----------
Loss before equity in undistributed
income of subsidiaries and income tax expense (2,471,689) (2,250) (14,747)
Equity in undistributed income of subsidiaries 6,643,038 3,014,893 2,833,417
Income tax expense -- -- --
----------- ----------- -----------
Net income $ 4,171,349 $ 3,012,643 $ 2,818,670
=========== =========== ===========
</TABLE>
48
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income $ 4,171,349 $ 3,012,643 $ 2,818,670
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation and amortization 9,756 8,360
Undistributed income of subsidiaries (6,643,038) (3,014,893) (2,833,417)
Gain on sale of investment securities available for sale (48,750)
Tax benefit from exercise of non-qualified stock options (net) (110,000)
Changes in assets and liabilities which (used) provided cash:
Accrued interest and other assets (1,399,770) (57,241) 9,665
----------- ------------ ------------
Accounts payable and accrued expenses (693) 2,879 -
----------- ------------ ------------
Net cash (used in) provided by operating activities (3,920,902) (156,856) 3,278
----------- ------------ ------------
Investing activities:
Purchases of investment securities available for sale (1,200,000)
Proceeds from sale of investment securities available for sale 1,248,750
Dividend from subsidiary 1,565,937
Advances to subsidiary (42,116,000) (7,100,000) (1,700,000)
----------- ------------ ------------
Net cash used in investing activities (40,501,313) (7,100,000) (1,700,000)
----------- ------------ ------------
Financing activities:
Net borrowings under line of credit agreement 6,000,000
Repayments of short-term borrowings (6,000,000)
Exercise of stock options 37,768 1,126,984 605,358
Proceeds from issuance of guaranteed preferred beneficial interest in
subordinated debt 28,750,000
Proceeds from issuance of commons stock 21,881,711
Payment for fractional interest resulting from stock split (1,619)
Payments for fractional interests resulting from stock dividend (3,123) (2,146) -
----------- ------------ ------------
Net cash provided by financing activities 44,664,737 7,124,838 865,358
----------- ------------ ------------
Increase (decrease) in cash 242,522 (132,018) (831,364)
Cash, beginning of year 27,187 159,205 990,569
----------- ------------ ------------
Cash, end of year $ 269,709 $ 27,187 $ 159,205
=========== ============ ============
</TABLE>
49
<PAGE>
25. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the
last two years restated for stock dividends and stock splits
paid (dollars are in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------
December 31, September 30 June 30, March 31, December 31, September 30, June 30, March 31
1997 1997 1997 1997 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 16,288 $ 12,751 $ 9,893 $ 8,252 $ 7,982 $ 7,917 $ 6,917 $ 6,454
Interest expense 8,898 6,817 4,969 3,723 3,507 3,429 3,001 2,597
-------- --------- -------- --------- -------- ------- ------- --------
Net interest income 7,390 5,934 4,924 4,529 4,475 4,488 3,916 3,857
Provision for loan losses 420 420 405 420 225 225 225 225
Other operating income 864 597 369 408 449 453 356 502
Other expenses 5,687 4,427 3,760 3,573 3,492 3,608 2,991 3,129
-------- --------- -------- --------- -------- ------- ------- --------
Income before income taxes 2,147 1,684 1,128 944 1,207 1,108 1,056 1,005
Income taxes 654 489 325 265 361 333 332 336
-------- --------- -------- --------- -------- ------- ------- --------
Net income $ 1,493 $ 1,195 $ 803 $ 679 $ 846 $ 775 $ 724 $ 669
======== ========= ======== ========= ======== ======= ======= ========
Basic earnings per share $ 0.26 $ 0.27 $ 0.19 $ 0.15 $ 0.19 $ 0.18 $ 0.17 $ 0.17
======== ========= ======== ========= ======== ======= ======= ========
Diluted earnings per share $ 0.26 $ 0.24 $ 0.17 $ 0.15 $ 0.17 $ 0.17 $ 0.17 $ 0.16
======== ========= ======== ========= ======== ======= ======= ========
</TABLE>
Basic and diluted earnings per share is computed independently for each of the
quarters presented. Consequently, the sum of the quarters may not equal the
earnings per share. The Company's common stock began public trading on August
29,1996.
<TABLE>
<CAPTION>
Prices of common stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 22.66 $ 14.67 $ 10.45 $ 9.84 $ 9.42 $ 9.07 N/A N/A
Low 14.33 9.89 9.10 8.67 8.47 8.47 N/A N/A
</TABLE>
50
<PAGE>
CORPORATE DIRECTORY
SUN BANCORP, INC. SUN NATIONAL BANK
DIRECTORS DIRECTORS
Bernard A. Brown Bernard A. Brown
Adolph F. Calovi Adolph F. Calovi
Sidney R. Brown Linwood C. Gerber
Philip W. Koebig, III Douglas J. Heun, CPA
Peter Galetto, Jr. Philip W. Koebig, III
Anne E. Koons Vito J. Marseglia.
Joel B. Martin, CPA
Anthony Russo, III
Edward H. Salmon, PhD
William H. Thompson, DDS
Kevin K. Walsh, PhD
OFFICERS Executive Management
Bernard A. Brown Bernard A. Brown
Chairman of the Board Chairman of the Board
Adolph F. Calovi Philip W. Koebig, III
President and CEO President and CEO
Philip W. Koebig, III James S. Killough
Executive Vice President Executive Vice President
Sidney R. Brown Robert F. Mack
Vice Chairman, Secretary and Treasurer Executive Vice President and Cashier
Robert F. Mack Harry G. Miller
Controller Executive Vice President
Carol A. Pringle Bart A. Speziali
Assistant Secretary Executive Vice President
Catherine Romeo Edward F. Madden
Auditor Senior Vice President
51
<PAGE>
Officers
Dorothy Antrim
Vice President
Darlene Beamsderfer
Assistant Vice President
Patricia M. Bianca
Assistant Cashier
Erika O. Bonsanto
Assistant Cashier
Roxanne C. Booker
Assistant Cashier
William J. Bugdon
Assistant Vice President
Devon C. Callan
Assistant Vice President
Douglas Conover
Vice President
Catherine M. Crosby
Assistant Vice President
Ernest Current
Administrative Services Officer
Darla A. D'Antonio
Assistant Cashier
Robert E. Davis, Jr.
Regional Vice President
Roland J. Dey
Vice President
Fern K. Dirkes
Assistant Vice President
Sharon A. Draine
Assistant Vice President
Darlene V. Driscoll
Assistant Cashier
Vicki L. Duffield
Assistant Vice President
Ronald J. Durborow
Vice President and Regional Manager
Arlene H. Elrod
Assistant Vice President
Bruce E. Engle
Vice President
James G. Erickson
Regional Vice President
Duncan H. Farquhar
Vice President
<PAGE>
Sandra Ferrarie
Vice President
Elizabeth Hackney
Assistant Vice President
John A. Hall
Vice President
Marjorie H. Hall
Vice President
Mark A. Hall
Vice President
John Hancq
Vice President
Marjorie H. Hart
Director, Human Resources
Barbara L. Hawryliw
Audit Officer
Daniel F. Hires
Regional Vice President
Susan Hoffman
Assistant Vice President
Candace L. Johnson
Assistant Vice President
Hugh E. Keefe
Vice President
D. Gail Knight
Assistant Vice President
Allison K. Kruse
Marketing Officer
Adriana B. Lindner
Assistant Vice President
Michael W. Lloyd
Vice President and Regional Manager
Anthony Lombardo
Assistant Controller
Kevin M. Loughlin
Assistant Vice President
52
<PAGE>
William J. MacDonald
Vice President
Bernard J. Maloney
Assistant Cashier
Anthony O. Marinaccio
Vice President
William B. McDowell
Assistant Vice President
Mariluz McVey
Vice President, and Regional Manager
Holly L. Milita
Assistant Vice President
Priscilla A. Miller
Assistant Vice President
Yvette M. Miller
Assistant Vice President
William T. Moyer
Controller
Nancy H. Muldowney
Vice President and Regional Manager
Patricia A. Munson
Assistant Vice President
Louis F. Nell
Vice President
Bette L. Nuss
Vice President and Regional Manager
Henry J. Obergfell
Regional Vice President
Salvatore Panzino
Assistant Vice President
Margarida R. Pereira
Assistant Cashier
Mary Alice Petzinger
Assistant Cashier
Donna M. Plunkett
Assistant Vice President
Robert E. Pollard
Assistant Controller
Roy S. Probst
Vice President
David A. Repici
Vice President
Gary J. Riordan
Assistant Vice President
James D. Robson
Vice President
Catherine R. Romeo
Vice President/Auditor
Steven A. Ryan
Vice President
Jan M. Sanger
Assistant Vice President
Harry B. Sauers
Vice President/Loan Review Officer
Ronald A. Seagraves
Director of Corporate Development
Richard J. Simone
Vice President
John Skoglund
Vice President
Kimberlee J. Studzinski
Assistant Vice President
Richard P. Tocci
Vice President
Lisa Varesio
Assistant Cashier
Cynthia L. Volk
Assistant Cashier
Edward W. Wahl
Regional Vice President
John G. Watkins
Vice President
Ann O. Wigglesworth
Vice President
Charlotte Wigglesworth
Assistant Cashier
David A. White
Assistant Vice President
Beverly A. Wright
Assistant Cashier
53
<PAGE>
ADVISORY BOARD MEMBER DIRECTORY
ATLANTIC COUNTY
- --------------------------------------------------------------------
Robert J. Bray Orthodontist
Paula R. Hetzel, Esq. Attorney
Thomas J. Kuhar Ole Hansen & Sons, Inc.
Richard S. Mairone, Esq. Perskie Nehmad & Perillo, PA
James J. McCullough S.J. Transportation Authority
Robert Nichols Admiral Nissan, Inc.
Frank Rich, Jr. Rich Fire Protection
Frank J. Siracusa Frank J. Siracusa & Son
Richard Traa Traa Corp.
Mike Turner Turner Electrical Inc.
Donald B. Vass
BURLINGTON COUNTY
- -----------------------------------------------------------------------
Ronald L. Allen Allen's Oil & Propane, Inc.
Arthur Brooks Fort & Hargrove
Thomas Budd T.H. Budd & Sons, Inc.
Leonard V. Fox, Jr. Janney Montgomery Scott, Inc.
Philip E. Haines, Esq. Attorney
Eric Johnson Johnson's Corner Farm
Robert Meyer Bob Meyer Communities, Inc.
Thomas A. Paparone Paparone Housing Co., Inc.
Frederick Pond Pond & Spitz Building Corp.
Mike Quick Quick-Wright Electrical
Joseph P. Schooley Schooley Electric, Inc.
BURLINGTON COUNTY
- -----------------------------------------------------------------------
Marcel Schulmann, MD Physician
Stephen Spitz Pond & Spitz Building Corp.
James C. Wagner Wagner Sharer Murtaugh &
CAMDEN COUNTY
- -----------------------------------------------------------------------
Fred S. Berlinsky Markeim-Chalmers, Inc.
Richard B. Charny, Esq. Weiner & Charny, P.A.
Reynold P. Cicalese, CPA Alloy Silverstein Shapiro Adams
Leon D. Dembo, Esq. Dembo & Saldutti
Michael P. Edmondson Wheat First Union
William Green Wilmar Industries, Inc.
Jerome C. Pontillo, Esq. The Fentell Corp.
Jo Surpin Mediq Consulting Group
Bud Tresch Redy-Mixt Konkrete
HAMMONTON
- ------------------------------------------------------------------------
Arthur R. Brown, Jr. Secretary of Agriculture
State of New Jersey
Joseph Continisio, Jr. Joseph Continisio Builders, Inc.
Carmen T. Grasso C.T. Grasso, Inc.
Russell Lucca Lucca's Freezer & Cold
Ralph Morano, Sr. J. Morano & Sons, Inc.
Anthony M. Mortellite, Sr. Mortellite Enterprises
54
<PAGE>
CAPE MAY COUNTY
- -----------------------------------------------------------------------
Curtis Bashaw The Virginia Hotel
Joseph M. Brennan, CPA Tracey Heun Brennan & Co.
Bill Brown William J. Brown Agency
Michael J. Caruso, DO Atlantic Eye Center
Albert Donzanti Aldon Homes & Development
Joseph S. Franco Ocean Front Hotels
Bill Kindle Kindle Auto Plaza
Vincent L. LaManna, Jr., Esq Attorney
Vince Orlando Engineering Design Assoc, PA
Jeff Reichle Lund's Fisheries
Malcolm Robertson Driftwood Camping Resort, Inc.
Robert I. Salasin, MD Cape Associates in Surgery, PA
Charles Sansone
Robert Smeltzer Smeltzer & Sons Feed &
Lewis J. Tozour Coldwell Banker Township Realty
Ernie Utsch Utsch's Marina
MERCER COUNTY
- -----------------------------------------------------------------------
Michael D. Briehler
Harold R. Levenson, CPA Oring, Levenson, Burness, P.A.
Paul N. Watter Szaferman, Lakind, Blumstein,
Watter & Blader, P.C.
OCEAN COUNTY
- ------------------------------------------------------------------------
Stephen M. Cors Superior Mortgage Company
Steven Eisenberg Terrace Tavern
John Ferringo Tucker and Owl Tree Restuarants
Anthony T. Godfrey S.T. Associates
M. Dean Haines Ocean County Clerk
T. Brian Holloway Mystic Shores, Inc.
Robert Lange
Kenneth B. Maxwell Kenneth B. Maxwell, Inc.
Joseph T. Mezzina Mezzina Real Estate
George F. Murphy, Esq. Dasti, Murhpy & Wellerson
John M. Parsons Retired
James N. Rutter Former Ocean Co. Sheriff
John Szymanski Tupper Lake Homes
SALEM COUNTY
- ------------------------------------------------------------------------
Herb Devonshire Budd Division, Liberty Plastics, Inc.
Michael S. Warner, CPA Warner & company
VINELAND
- ------------------------------------------------------------------------
Ralph A. Acevedo Educator
Catherine J. Arpino Newcomb Foundation
Dominick P. Baruffi, II Jersey Panel Corp./
Baruffi Associates
Fred J. Bernardini, Sr. Bernal Mechanical Contractors
Ginger L. Chase Sir Speedy Printing
Mark I. Fisher B&B Poultry
Harry E. Hearing, CPA Romano, Hearing & Testa, CPA
David G. Manders Manders-Merighi Associates
Ronald G. Rossi Joseph Pontiac-Isuzu
Rocco J. Tedesco, Esq. Kavesh, Pancari, Tedesco
& Pancari
Gerard Velazquez, III Community Builders
Scott J. Zucca L.J. Zucca, Inc.
55
<PAGE>
Administrative Offices
226 Landis Avenue
Vineland, NJ 08360
(609) 691-7700
Subsidiaries
Med-Vine, Inc.
1105 North Market Street
Wilmington, DE 19801
Sun Capital Trust
226 Landis Avenue
Vineland, NJ 08360
Financial Service Center Locations
Atlantic County
Atlantic City
2028 Atlantic Avenue
Atlantic City, NJ 08401
345-8272
Brigantine
3900 Atlantic Avenue
Brigantine, NJ 08203
266-2100
Hammonton
12th Street and First Avenue
Hammonton, NJ 08037
567-5880
Egg Harbor Township
3100 Hingston Avenue
Egg Harbor, NJ 08234
272-8200
Linwood
599 New Road
Linwood, NJ 08221
924-9191
Northfield
Mainland Plaza
501 Tilton Road
Northfield, NJ 08225
645-3200
Somers Point
521 New Road
Somers Point, NJ 08244
653-8200
Weymouth
903 Blvd., Route 50
Mays Landing, NJ 08330
625-9152
Burlington County
Florence
220 West Front Street
Florence, NJ 08518
499-4960
Maple Shade
380 S. Lenola Road
Maple Shade, NJ 08052
222-0200
Medford
99 Hartford Road
Medford, NJ 08055
654-7600
Riverside
15-17 Scott Street
Riverside, NJ 080575
461-0461
Camden County
Clementon
1468 Blackwood-Clementon Road
Clementon, NJ 08021
784-4242
Lindenwold
430 Gibbsboro Road
Lindenwold, NJ 08021
346-3800
Merchantville
47 South Centre Street
Merchantville, NJ 08109
622-3800
56
<PAGE>
Cape May County
Cape May
941 Columbia Avenue
Cape May, NJ 08204
898-2120
Cape May Court House
1011 B Route 9 South
CMCH, NJ 08210
465-7197
Greenfield
71 Route 50
Greenfield, NJ 08230
390-3418
Marmora
108 Roosevelt Blvd.
Marmora, NJ 08223
390-3529
Tuckahoe
2201 Route 50
Tuckahoe, NJ 08250
628-2662
Cumberland County
Millville
1026 North High Street
Millville, NJ 08332
293-0800
Vineland
401 Landis Avenue
Vineland, NJ 08360
205-0700
Vineland - East Landis
1180 E. Landis Avenue
Vineland, NJ 08360
205-0900
Mercer County
Trenton
226 South Broad Street
Trenton, NJ 08608
392-3300
Chambersburg
695 Chambers Street
Trenton, NJ 08611
396-1900
Ewing
1660 North Olden Ave.
Trenton, NJ 08638
530-9653
Hamilton Square
411 Route 33
Trenton, NJ 08619
890-7447
Middlesex County
Forrestal Village
2 Village Boulevard
Princeton, NJ 08540
987-8809
Monmouth County
Eatontown
158 Wycoff Road
Eatontown, NJ 07724
(732) 542-4800
Ocean County
Barnegat
311 South Main Street
Barnegat, NJ 08005
698-4300
Long Beach Island
1211 Long Beach Blvd.
Ship Bottom, NJ 08008
361-8011
Manahawkin
Route 72 East
Manahawkin, NJ 08050
597-1800
Mystic Island
800 Radio Road
Little Egg Harbor, NJ 08087
296-1773
Toms River
601 Route 37 West
Toms River, NJ 08753
(732) 240-2922
Tuckerton
540 Route 9
Tuckerton, NJ 08087
296-1700
Salem County
Carney's Point
270 Georgetown Road
Carney's Point, NJ 08069
299-5770
Salem
175 West Broadway
Salem, NJ 08079
935-6560
Woodstown
8 North Main Street
Woodstown, NJ 08098
769-2466
Somerset County
Rocky Hill
1185 Route 206
Montgomery Twp, NJ 08540
497-0500
Additional Information
For financial information, including the annual report, quarterly reports and
reports to the Securities and Exchange Commission on Form 10-K, contact Sun
Bancorp, Inc. Shareholder Relations, 226 Landis Avenue, Vineland, NJ 08360.
57
<PAGE>
Products and Services
<TABLE>
<CAPTION>
<S> <C>
Deposit Products
Commercial Consumer
Commercial Checking Super Interest Checking
Small Business Checking Regular Checking
Sun Preferred Business Checking NJ Consumer Checking
Business Money Market Money Market
Non-Profit Checking Sun Gold Relationship Account
Super Interest Sun Ray Relationship Account
Sole Proprietorship Checking Young Savers
Master Accounting Sunshine Savings
Attorney Trust Sun Premium Savings
Business Savings Certificates of Deposit
Certificates of Deposit Jumbo Certificates of Deposit
Simplified Employee Pension (SEP) Sun Rise Certificates of Deposit
Microlink Electronic Banking Sun Power Certificates of Deposit
Cash Control Investment Account Individual Retirement Account
Lock Box Sun Growth IRA
Controlled Disbursement Holiday Clubs
Account Reconciliation
Account Analysis
Loan Products
Commercial Consumer
Commercial Term Loans Home Equity Loans
Lines of Credit Residential Mortgages
Commercial Real Estate Loans Personal Loans
Equipment Loans Automobile Loans
Small Business Administration Loans Small Business Loans
Cash to Spare
Services
ATM Access
Sun National Bank Check Card
Automatic Transfers
Bank by Mail
Coin and Currency Services
Repurchase Agreements
Federal Tax Depository Services
Merchant Credit Card Services
Safe Deposit Boxes
Telephone Transfers
Wire Transfer Services
Night Depository
SunDial 24-Hour Telephone Banking
</TABLE>
58
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
Subsidiaries Percentage Owned Jurisdiction of Incorporation
- ------------ ---------------- -----------------------------
Sun National Bank 100% United States
Med-Vine, Inc. (1) 100% Delaware
Sun Capital Trust 100% Delaware
(1) Med-Vine, Inc. is a wholly owned subsidiary of Sun National Bank
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-32681 of Sun Bancorp, Inc. on Form S-8 of our report dated February 1, 1998,
appearing in this Annual Report on Form 10-K of Sun Bancorp, Inc. for the year
ended December 31, 1997
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-K405 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,061
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 576,278
<INVESTMENTS-CARRYING> 576,278
<INVESTMENTS-MARKET> 576,278
<LOANS> 431,955
<ALLOWANCE> 4,194
<TOTAL-ASSETS> 1,099,973
<DEPOSITS> 695,388
<SHORT-TERM> 316,314
<LIABILITIES-OTHER> 4,889
<LONG-TERM> 0
28,750
0
<COMMON> 4,014
<OTHER-SE> 50,619
<TOTAL-LIABILITIES-AND-EQUITY> 1,099,973
<INTEREST-LOAN> 33,130
<INTEREST-INVEST> 13,410
<INTEREST-OTHER> 645
<INTEREST-TOTAL> 47,185
<INTEREST-DEPOSIT> 16,458
<INTEREST-EXPENSE> 24,407
<INTEREST-INCOME-NET> 22,778
<LOAN-LOSSES> 1,665
<SECURITIES-GAINS> 207
<EXPENSE-OTHER> 17,445
<INCOME-PRETAX> 5,904
<INCOME-PRE-EXTRAORDINARY> 5,904
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,171
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 3.89
<LOANS-NON> 897
<LOANS-PAST> 1,313
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,595
<CHARGE-OFFS> 102
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 4,194
<ALLOWANCE-DOMESTIC> 4,194
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 644
</TABLE>
