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, 1998
[ ] 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 ________ .
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:
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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 25, 1999, was approximately $83 million.
As of March 25, 1999, there were issued and outstanding 7,228,768
shares of the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Fiscal Year Ended
December 31, 1998. (Parts I, II and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders for
the Fiscal Year ended December 31, 1998. (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
SHAREHOLDERS 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 FROM 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.
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Item 1. Business
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General
The Company, a New Jersey corporation, is a multiple-bank holding
company headquartered in Vineland, New Jersey. The Company's principal
subsidiaries are Sun National Bank ("Sun New Jersey") and Sun National Bank,
Delaware ("Sun Delaware," collectively, the "Banks"). At December 31, 1998, the
Company had total assets of $1.5 billion, total deposits of $1.0 billion and
total shareholders' equity of $78.3 million. Substantially all of the Company's
deposits are federally insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). The
Company's remaining deposits are federally insured by the Savings Association
Insurance Fund ("SAIF"), administered by the FDIC. The Company's principal
business is to serve as a holding company for the Banks. As a registered
multiple-bank holding company, the Company is subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System (the "Federal
Reserve").
The ongoing consolidation of the banking industry, as well as a
regionalization of decision-making authority by larger banking institutions, has
left many businesses and individuals in the Company's market area underserved.
Beginning in 1993, the Company embarked upon a strategy to expand its operations
and retail market share in central and southern New Jersey through mergers,
acquisitions and internal growth. More recently, this strategy broadened to
include contiguous portions of Delaware. The Board of Directors and management
see opportunities to expand the Company as a result of the lack of competitive
commercial banking services being provided to local businesses and recognize the
need for a locally based and managed community bank.
In executing its expansion strategy, the Company has successfully
completed the acquisition of two commercial banks with a total of $119 million
in assets and eight purchase transactions, resulting in the Company's
acquisition of a total of 37 branches with $589.5 million in deposits since
1993. Seven de novo financial service centers have been opened since 1993. In
January 1999, the acquisition of two branches in southern New Jersey from Summit
Bank with $15.8 million in deposit liabilities was consummated. Also in January,
Sun New Jersey opened its first supermarket office in Cherry Hill.
In December 1998, the Company completed an acquisition that expanded
its banking operations into Delaware through the assumption, by Sun Delaware, of
approximately $169 million in deposits (including eight branch locations) and
the purchase of $125 million in net loans, from Household Bank, fsb, the
successor to Beneficial National Bank, Wilmington, Delaware (the "Beneficial
Acquisition").
During October 1998, Sun Capital Trust II, a Delaware business trust
subsidiary of the Company, issued $29.9 million of 8.875% Preferred Securities.
The Company also consummated the sale of 700,000 shares of its common stock in
November 1998 and an additional 75,000 shares in accordance with the exercise of
an over-allotment option in December 1998. The Company used the proceeds from
the sales of these securities, in part, to provide capital to Sun Delaware.
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In July 1998, Sun New Jersey acquired its first non-bank operating
subsidiary, Allegiance Mortgage Company, a retail mortgage banking operation
with one office in Cherry Hill, New Jersey, in exchange for 28,302 shares of
common stock of the Company. It was subsequently merged into Sun Mortgage
Company, a new retail mortgage banking subsidiary. During January 1999, Sun New
Jersey acquired a second retail mortgage banking operation, Eastern Financial,
Inc. ("Eastern") with one office in Northfield, New Jersey, in exchange for
60,294 shares of the Company's Common Stock. Eastern was subsequently merged
into Sun Mortgage Company during the first quarter of 1999. The Company offers
residential mortgage products and services to its customers from those two
offices of Sun Mortgage Company. For fiscal 1998, the results of operations of
Sun Mortgage Company were not material to the Company taken as a whole.
The Company provides community banking services through 52 branches
located in southern and central New Jersey and in contiguous markets in
Delaware, including the two branches acquired in January, 1999. The Company
offers a wide variety of consumer and commercial lending, as well as deposit
services. The loans offered by the Company include commercial and industrial
loans, commercial real estate loans, home equity loans, mortgage loans and
installment loans. The Company's deposit and personal banking services include
checking, regular savings, money market deposits, certificates of deposit and
individual retirement accounts. Through a third party arrangement, the Company
also offers mutual funds, securities brokerage and investment advisory services.
The Company considers its primary market area to be southern and central New
Jersey and contiguous markets in Delaware served by Sun Delaware. The Company's
market area contains a diverse base of customers, including agricultural,
manufacturing, transportation, hospitality and retail consumer businesses.
In recent years, the Company has experienced a significant level of
loan growth. The Company's loan portfolio increased from $83.4 million at
December 31, 1993, to $689.9 million at December 31, 1998. Much of this loan
growth is attributable to the Company's hiring of a number of experienced loan
officers previously employed by larger banking organizations. In most cases,
these loan officers brought with them established contacts and relationships
with individuals or entities throughout the Company's primary market area and
thus have been able to increase the Company's customer base and the number of
loan originations. The Company also has established a number of regional
advisory boards, comprised of prominent local business and community
representatives, who refer significant business opportunities to the Company. In
addition, the Company has made significant efforts to increase its lending to
businesses along the central and southern New Jersey seashore that are primarily
operational during certain times of each year (i.e. seasonal lending), which has
contributed to the Company's loan growth.
To support and manage the expanded operations of the Company and to
provide adequate management resources to support further expansion and growth,
the Company has recruited and hired, in addition to experienced commercial loan
officers, credit, compliance, loan review, internal audit, operations personnel
and senior level executives. Additionally, the Company has enhanced and expanded
its operational and management information systems and enhanced its oversight of
third-party vendors. While the Company continues to monitor its rapid growth, as
well as the adequacy of management and resources available to support such
growth, there can be no assurance that the Company will be successful in
managing all elements relating to this rapid growth.
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Market Area
The Banks are community-oriented financial institutions, offering a
wide variety of financial services to meet the needs of the communities they
serve. The Banks conduct business through 52 branch offices, one loan
administration office and two mortgage origination offices located in the
southern and central New Jersey counties of Atlantic, Burlington, Camden, Cape
May, Cumberland, Gloucester, Mercer, Middlesex, Monmouth, Ocean, Salem and
Somerset and New Castle County, Delaware ("primary market area"). The Banks'
deposit gathering base and lending area is concentrated in the communities
surrounding their offices.
Sun New Jersey is 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 Sun New Jersey with a stable source of deposit
funds. The economy of Sun New Jersey'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.
Sun Delaware is headquartered in New Castle County, Delaware. The city
of Wilmington is approximately 25 miles southwest of Philadelphia, Pennsylvania.
The Philadelphia International Airport is approximately 30 minutes from
Wilmington.
In addition to its relatively affluent and steadily increasing
population base, New Castle County, Delaware also contains a very significant
and diverse employment base. Employment is concentrated in the services,
manufacturing, retail trade, finance, insurance and real estate sectors of the
economy. The county contains a disproportionate share of the State's employment
and payroll.
Management considers Sun New Jersey's reputation for customer service
as its major competitive advantage in attracting and retaining customers in its
market area. Sun New Jersey also benefits from its community orientation, as
well as its established deposit base and level of core deposits. Management
intends to apply these strategies to Sun Delaware as well.
Lending Activities
General
The principal lending activity of the Banks 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 Banks' primary market area.
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Commercial and Industrial Loans
The Banks originate 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 Banks is on the origination of commercial loans secured by
real estate. The majority of the Banks' customers for these loans are small- to
medium-sized businesses located in the southern and central parts of New Jersey
and New Castle County, Delaware.
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 Banks' commercial real estate and commercial and
industrial loan portfolios 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 Banks originate 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 Banks generally require 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 Banks use outside loan correspondents to originate residential
mortgages. These loans are originated using the Banks' underwriting standards,
rates and terms, and are approved
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according to the Banks' lending policy prior to origination. Prior to closing,
the Banks usually have 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 amount of
loans available for sale at year end 1998 was not material.
The majority of the Banks' residential mortgage loans consists of loans
secured by owner-occupied, single-family residences. The Banks' mortgage loan
portfolios consist of both fixed-rate and adjustable-rate loans secured by
various types of collateral as discussed below. Management generally originates
residential mortgage loans in conformity with Federal National Mortgage
Association ("FNMA") standards so that the loans will be eligible for sale in
the secondary market. Management expects to continue offering mortgage loans at
market interest rates, with substantially the same terms and conditions as it
currently offers.
The Banks' residential mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Banks 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
Banks' fixed-rate mortgage portfolios. The Banks usually exercise their rights
under these clauses.
Installment Loans
The Banks originate installment or consumer loans secured by a variety
of collateral, such as new and used automobiles. The Banks make a very limited
number of unsecured installment loans.
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 Banks. The Banks require
that an appraisal of the real estate intended to secure the proposed loan is
undertaken by a certified independent appraiser approved by the Banks and
licensed by the States of New Jersey and Delaware. After all of the required
information is obtained, the Banks then make a 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. Each of the Banks has an Officers'
Loan Committee 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 Board of Directors for
approval. Loans under $100,000 are generally approved by various levels of
management. All loans require the approval of at least two lending officers.
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Title insurance policies are required on all first mortgage loans.
Hazard insurance coverage is required on all properties securing loans made by
the Banks. 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 is
required on all first mortgage loans.
Loan Commitments
When a commercial loan is approved, the Banks issue 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 Banks' commitments are accepted or rejected by the customer before the
expiration of the commitment. At December 31, 1998, the Banks had approximately
$103.3 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 Banks incur credit
risk whenever they extend credit to, or enter into other transactions with,
their 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 Banks' 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 Banks' management to
ascertain whether proper credit, underwriting and loan documentation policies,
procedures and practices are being followed by the Banks' loan officers and are
being applied uniformly. Sun New Jersey 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 its rapid growth. While the
Company continues to review these and other related functional areas, there can
be no assurance that the steps it has taken to date will be sufficient to enable
it to identify, measure, monitor and control all credit risk.
Mortgage Banking Subsidiary
The Company's mortgage banking activities are conducted principally
through Sun Mortgage Company. Sun Mortgage Company's activities include the
origination of residential real estate loans (generally consisting of
one-to-four family first mortgage loans), for sale into the secondary market. In
the future, Sun Mortgage Company will also consider purchasing, as well as
selling, loan servicing rights.
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Sun Mortgage Company originates, without the use of third-party
brokers, fixed-rate and adjustable rate residential real estate loans for sale
into the secondary mortgage market. Sun Mortgage Company's total residential
real estate loan production during 1998 was $65.2 million.
Sun Mortgage Company's residential real estate loan production during
1998 was primarily concentrated in the State of New Jersey, and includes loans
(i) that meet the standard underwriting policies and purchase limits established
by the Federal National Mortgage Association ("FNMA") Government National
Mortgage Association ("GNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC") guidelines ("conforming conventional loans"); (ii) in amounts in
excess of the purchase limits established by FNMA, GNMA and FHLMC ("jumbo
loans"); (iii) insured or guaranteed under the Federal Housing Administration
("FHA") or Veteran Administration ("VA") programs; (iv) that conform to programs
established by various state and local authorities; and (v) exclusively for sale
to specified secondary market investors that conform to the requirements of such
investors, which may be more or less stringent than those for conforming
conventional loans.
Underwriting policies and guidelines for residential real estate loans
produced for Sun Mortgage Company's portfolio (except to finance sales of the
Bank's residential owned real estate) are, at a minimum, in conformance with
those of FNMA, GNMA and FHLMC. Such policies and guidelines include requiring an
appraisal of the value of the collateral for the purpose of determining the
loan-to-value ratio (i.e., the ratio that the principal amount of the loan bears
to the value of the collateral securing the loan at the time of origination) and
the collateral's adequacy as security. The collateral's value is deemed to be
the lower of the purchase price or the appraised value, except for refinance
loans, where the appraised value is used. With respect to residential first
mortgage loans having a loan-to-value ratio in excess of 80% at the date of
origination, Sun Mortgage company generally requires private mortgage insurance
underwritten by FNMA-, GNMA- and FHLMC-approved insurers on the least the amount
of the loan in excess of 80% of the collateral's value.
Investment Securities Activities
General
The investment policy of the Banks 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 Banks' 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
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Deposits are the major source of the Banks' funds for lending and other
investment purposes. In addition to deposits, the Banks derive funds from the
amortization, prepayment or sale of loans, maturities or sale of investment
securities, borrowings 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 Banks' primary market area through the offering of a broad selection of
deposit instruments including checking, regular savings, money market deposits,
term certificate accounts and individual retirement accounts. Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. The Banks
regularly evaluate the internal cost of funds, survey rates offered by competing
institutions, review the Banks' cash flow requirements for lending and liquidity
and execute rate changes when deemed appropriate. The Banks do not obtain funds
through brokers, nor do they solicit funds outside the States of New Jersey or
Delaware, respectively.
Borrowings
Deposits are the primary source of funds of the Banks' lending and
investment activities and for their general business purposes. Sun New Jersey
may obtain advances from the FHLB of New York to supplement its supply of
lendable funds. Such advances must be secured by a pledge of the Bank's stock in
the FHLB of New York and a portion of the Bank's first mortgage loans and
certain other assets. The Banks, if the need arises, may also access the Federal
Reserve Bank discount window to supplement their supply of lendable funds and to
meet deposit withdrawal requirements. At December 31, 1998, Sun New Jersey had
$296.1 million in secured FHLB advances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Borrowings" in the
Company's 1998 Annual Report to Shareholders.
Cash Management Services
The Banks offer a menu of cash management services designed to meet the
more sophisticated needs of their 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. Fees generated by
cash management services were not material to the Company for fiscal 1998.
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Competition
The Banks face substantial competition both in attracting deposits and
in lending funds. The states of New Jersey and Delaware have a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Banks, all of which
are competitors of the Banks to varying degrees. In order to compete with the
many financial institutions serving their primary market area, the Banks'
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 and New Castle County, Delaware.
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 Banks. Non-bank competition, such as investment brokerage houses, has
intensified in recent years for all banks as non-bank competitors are not
subject to same regulatory burdens as banks.
Personnel
At December 31, 1998, the Company had 384 full-time and 83 part-time
employees. The Company's employees are not represented by a collective
bargaining group. The Company believe 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 description of statutory provisions and regulations
applicable to banking institutions and their holding companies set forth in this
Form 10-K does not purport to be a complete description of such statutes and
regulations and their effects on the Banks and the Company. The discussion is
qualified in its entirety by reference to all particular statutory or regulatory
provisions.
The Company is a legal entity separate and distinct from the Banks.
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 Banks is necessarily subject to the prior claims of
creditors of the Banks, 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 Banks. There are legal limitations
on the extent to which a subsidiary bank can finance or otherwise supply funds
to its parent holding company.
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The Company
General. As a registered bank 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 Board of Governors of the Federal
Reserve System ("Federal Reserve"). As a bank holding company, the Company's
activities and those of the Banks are limited to the business of banking and
activities closely related or incidental to banking. The BHCA requires, among
other things, the prior approval of the Federal Reserve in any case where the
Company proposes to (i) acquire or retain, with certain exceptions, more than 5%
of a nonsubsidiary company engaged in activities other than those permitted by
the BHCA; (ii) acquire direct or indirect ownership or control, through one or
more subsidiaries, of more than 5% of the voting shares of any banking
institution or holding company thereof, or (iii) acquire or retain control of a
depository institution that is not insured by the FDIC.
Capital Requirements. The Federal Reserve adopted risk-based capital
guidelines for bank holding companies, such as the Company. The required minimum
ratio of total capital to risk-weighted assets (including off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be "Tier 1 capital," consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill.
The remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt and intermediate-term preferred stock, certain hybrid capital instruments
and other debt securities, perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal Reserve
established minimum leverage ratio (Tier 1 capital to average total assets)
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of 3% for those bank holding companies which have the highest
regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are required
to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum.
The Company is in compliance with these guidelines. The Banks are also subject
to similar capital requirements adopted by the OCC.
The risk-based capital standards are required to take adequate account
of interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
State Regulation of Bank Holding Companies. Bank holding companies are
exclusively state chartered corporations and as such are subject to state
regulation. The States of New Jersey and Delaware have statutes governing bank
holding companies.
Under ss.375 to Article 48 of the New Jersey Banking Statutes, the
Commissioner of Banking of New Jersey shall have the right to examine any
company which controls a bank, the cost of which examination shall be assessed
against and paid by the company. Such examination shall be conducted jointly,
concurrently or in lieu of examinations made by a federal or other state bank
regulatory agency. As a bank holding company located in New Jersey, the Company
may acquire a bank or bank holding company located in any state other than New
Jersey;
12
<PAGE>
provided that such acquisition is permitted by applicable law of the United
States or any other state.
Under Chapter 8 to Title 5 of the Delaware Code, the Company will be
considered an "out-of-state bank holding company" because the greatest amount of
deposits of all of the Company's banking subsidiaries is not located in
Delaware. Generally, no bank holding company other than a Delaware bank holding
company may control a Delaware institution. An out-of-state bank holding company
or subsidiary thereof proposing an acquisition of certain Delaware institutions
must first apply for the approval or consent of the State Bank Commissioner of
Delaware. If the Company becomes a Delaware bank holding company, the State Bank
Commissioner of Delaware shall have supervision over the Company and the
Commissioner shall have the right to examine the Company, including its nonbank
subsidiaries. Such examination shall be conducted jointly, concurrently or in
lieu of examinations made by a federal bank regulatory agency.
Acquisitions/Permissible Business Activities. The Banks have the
ability, subject to certain restrictions, including state opt-out provisions, to
acquire by acquisition or merger branches outside their respective home states.
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
multiple-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
multiple-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 Banks
General. The Banks are subject to supervision and examination by the
Office of the Comptroller of the Currency ("OCC"). In addition, the Banks are
insured by and subject to certain regulations of the FDIC and are members of the
FHLB. The Banks are 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
13
<PAGE>
the types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Banks.
Dividend Restrictions. Dividends from the Banks constitute the
principal source of income to the Company. The Banks are subject to various
statutory and regulatory restrictions on their ability to pay dividends to the
Company. Under such restrictions, the amount available for payment of dividends
to the Company by the Banks totaled $10.2 million at December 31, 1998. In
addition, the OCC has the authority to prohibit the Banks from paying dividends,
depending upon the Banks' financial condition, if such payment is deemed to
constitute an unsafe or unsound practice. The ability of the Banks to pay
dividends in the future is presently, and could be further, influenced by bank
regulatory and supervisory policies.
Affiliate Transaction Restrictions. The Banks are 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
Banks 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, 1998, the Banks 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.
Under the OCC's prompt corrective action regulations, the OCC is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a bank is considered "well capitalized" if its
ratio of total capital to risk-weighted assets is at least 10%, its ratio of
Tier 1 (core) capital to risk-weighted assets is at least 6%, its ratio of core
capital to total assets is at least 5%, and it is not subject to any order or
directive by the OCC to meet a specific capital
14
<PAGE>
level. A bank generally is considered "adequately capitalized" if its ratio of
total capital to risk- weighted assets is at least 8%, its ratio of Tier 1
(core) capital to risk-weighted assets is at least 4%, and its ratio of core
capital to total assets is at least 4% (3% if the institution receives the
highest CAMEL rating). A bank that has lower ratios of capital are categorized
as "undercapitalized," "significantly under capitalized," or "critically
undercapitalized." Numerous mandatory supervisory actions become immediately
applicable to an undercapitalized institution, including, but not limited to,
increased monitoring by regulators and restrictions on growth, capital
distributions and expansion.
The OCC's 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 bank 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. The OCC could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Capital Guidelines. Under the risk-based capital guidelines applicable
to the Company and the Banks, 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 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, 1998, the Banks' total and Tier 1 risk-based capital
ratios and leverage ratios exceeded the minimum regulatory capital requirements.
15
<PAGE>
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 Banks.
Item 2. Properties
The Company operates from its main office in Vineland, New Jersey and
52 branch offices, including the two branches acquired in January, 1999. Sun New
Jersey and Sun Delaware lease their main offices and 24 branch offices. The
remainder of the branch offices are owned by Sun New Jersey.
Item 3. Legal Proceedings
There are various claims and lawsuits in which the Company or the Banks
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Banks hold security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Banks' 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
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information relating to the market for the Company's Common Stock and
related shareholder matters appears under the caption "Price Range of Common
Stock and Dividends" on page 51 of the Company's 1998 Annual Report to
Shareholders, filed as Exhibit 13 to this Report (the "Annual Report"), and is
incorporated herein by this reference.
Item 6. Selected Financial Data
The above-captioned information appears under the caption "Selected
Financial Data" on page 2 of the Annual Report and is incorporated herein by
this reference.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 7 through 22 of the Company's Annual Report and is incorporated herein by
this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The above-captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Gap
Analysis" on pages 14 and 15 of the Company's Annual Report and is incorporated
herein by this reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Sun Bancorp, Inc. are included
in the Annual Report on pages 23 through 50, and are incorporated herein by this
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 Company's Proxy Statement for its 1999 Annual Meeting of Shareholders
(the "Proxy Statement") is incorporated herein by this reference.
Item 11. Executive Compensation
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
17
<PAGE>
(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 of the Company are incorporated herein by this reference from the
pages in the Annual Report set forth below:
Report of Independent Auditors.................................23
Consolidated Statements of Financial Condition.................24
Consolidated Statements of Income..............................25
Consolidated Statements of Shareholders' Equity................26
Consolidated Statements of Cash Flows..........................27
Notes to Consolidated Financial Statements.....................29
There are no financial statements schedules that are required to be
included in Part II, Item 8.
(b) Not applicable.
(c) Exhibits
18
<PAGE>
The following Exhibits are filed as part of this report:
3(i) Amended and Restated 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 ****
10.3 Amended and Restated 1997 Stock Option Plan
10.4 Branch Purchase and Deposit Assumption Agreement dated July 17, 1998
by and between Sun New Jersey and Household Bank, f.s.b.*****
11 Computation regarding earnings per share******
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche, LLP
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-3 (File No. 333-62223) filed with the SEC on August 25, 1998.
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (File No. 0-20957).
*** Incorporated by reference to the Form 10 filed with the SEC on June 28,
1996 (File No. 0-20957).
**** Incorporated by reference to the Company's Registration Statement on Form
S-1/A (File No. 333-21903) filed with the SEC on January 24, 1997.
*****Incorporated by reference to the Company's Current Report on Form 8-K dated
July 20, 1998.
******Incorporated by reference to Note 19 of the Notes to Consolidated
Financial Statements of the Company included in Exhibit 13 hereto.
19
<PAGE>
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 30, 1999.
SUN BANCORP, INC.
By: /s/Philip W. Koebig, III
--------------------------------------------
Philip W. Koebig, III
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 30, 1999.
/s/Bernard A. Brown /s/Philip W. Koebig, III
- --------------------------------------- ------------------------------------
Bernard A. Brown Philip W. Koebig, III
Chairman of the Board of Directors President, Chief Executive Officer and
Director
/s/Adolph F. Calovi /s/Sidney R. Brown
- --------------------------------------- ---------------------------------------
Adolph F. Calovi Sidney R. Brown
Director Vice Chairman, Secretary and Treasurer
/s/Peter Galetto, Jr. /s/Anne E. Koons
- --------------------------------------- ---------------------------------------
Peter Galetto, Jr. Anne E. Koons
Director Director
/s/Robert F. Mack
- --------------------------------------- ---------------------------------------
Ike Brown Robert F. Mack
Director Executive Vice President
(Principal Financial and Accounting
Officer)
SUN BANCORP, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
1. Purpose of Plan.
---------------
The purpose of the Sun Bancorp, Inc. 1997 Stock Option Plan (the
"Plan") contained herein is to provide additional incentive to employees,
officers, directors and advisory directors of Sun Bancorp, Inc. (the "Company")
and each present or future subsidiary corporation of the Company, by encouraging
them to invest in shares of the Company's common stock ("Common Stock"), and
thereby to acquire a proprietary interest in the business of the Company and
each present or future subsidiary corporation of the Company and an increased
personal interest in their continued success and progress, to the mutual benefit
of the shareholders and recipient of stock option awards.
2. Aggregate Number of Shares.
--------------------------
605,115 shares of Common Stock (par value $1.00 per share) shall be the
aggregate number of shares which may be issued under this Plan. Notwithstanding
the foregoing, in the event of any change in the outstanding shares of Common
Stock by reason of a stock dividend, stock split, combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion, or other event that the Board of Directors of the Company or the
Executive Compensation Committee (the "Committee"), deems in its sole discretion
to be similar circumstances, the aggregate number and kind of shares which may
be issued under this Plan shall be approximately adjusted in a manner determined
in the sole discretion of the Committee. Reacquired shares of Common Stock as
well as unissued shares may be used for the purpose of this Plan. Shares of
Common Stock subject to options which have terminated unexercised, either in
whole or in part, shall be available for future options granted under this Plan.
3. Class of Individuals Eligible to Receive Options.
------------------------------------------------
(a) All officers and employees of the Company and of any present and
future subsidiary corporation of the Company are eligible to receive an option
or options under this Plan. The officers, employees and advisory directors who
shall, in fact, receive an option or options shall be selected by the Committee
in its sole discretion, except as otherwise specified in Section 4 hereof.
(b) All directors of the Company and of any present and future
subsidiary corporation of the Company are eligible to receive an option or
options under this Plan in accordance with Section 16 hereof.
<PAGE>
4. Administration of Plan.
----------------------
(a) This Plan shall be administered by the Board of Directors of the
Company or the Committee, which will be appointed by the Board of Directors of
the Company. The Committee shall consist of a minimum of two and a maximum of
seven members of the Company's Board of Directors. All persons designated as
members of the Committee shall meet the requirements of a "Non-Employee
Director" within the meaning of Rule 16b-3 (17 CFR ss.240.16b-3) under the
Securities Exchange Act of 1934, as amended ("Exchange Act"). The Board of
Directors of the Company or the Committee shall, in addition to its other
authority and subject to the provisions of this Plan, have authority in its sole
discretion to determine who are the officers, employees and advisory directors
of the Company and each present and future subsidiary corporation of the Company
eligible to receive options under this Plan, which officers, employees and
advisory directors shall in fact be granted an option or options, whether the
option shall be an incentive stock option or a non-qualified stock option, the
time or times at which the options shall be granted, the rate of option
exercisability, and, subject to Section 5 hereof, the price at which each of the
options is exercisable and the duration of the option.
(b) The Committee shall adopt such rules for the conduct of its
business and administration of this Plan as it considers desirable. A majority
of the members of the Committee shall constitute a quorum for all purposes. The
vote or written consent of a majority of the members of the Committee on a
particular matter shall constitute the act of the Committee on such matter. The
Committee shall have the exclusive right to construe the Plan and the options
issued pursuant to it, correct defects, supply omissions and reconcile
inconsistencies to the extent necessary to effectuate the Plan and the options
issued pursuant to it, and such action shall be final, binding and conclusive
upon all parties concerned. No member of the Committee or the Board of Directors
shall be liable for any act or omission (whether or not negligent) taken or
omitted in good faith, or for the exercise of an authority or discretion granted
in connection with this Plan to the Committee or the Board of Directors, or for
the acts or omissions of any other members of the Committee or the Board of
Directors. Subject to the numerical limitations on Committee membership set
forth in Section 4(a) hereof, the Board of Directors may at any time appoint
additional members of the Committee and may at any time remove any member of the
Committee with or without cause. Vacancies in the Committee, however caused, may
be filled by the Board of Directors if it so desires.
5. Incentive Stock Options and Nonqualified Stock Options.
------------------------------------------------------
(a) Options issued pursuant to this Plan may be either incentive stock
options granted pursuant to Section 5(b) hereof or nonqualified stock options
granted pursuant to Section 5(c) hereof, as determined by the Committee. An
"incentive stock option" is an option which satisfies all of the requirements of
Section 422 of
<PAGE>
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder, and a nonqualified stock option is an option which does not satisfy
the requirements of Code Section 422. The Committee may grant both an incentive
stock option and a nonqualified stock option to the same person, or more than
one of each type of option to the same person. The option price for both
incentive stock options and nonqualified stock options issued under this Plan
shall equal at least the fair market value of the Common Stock as of the date of
the grant of the option, such fair market value being determined by the
Committee in accordance with its interpretation of the requirements of Section
422 of the Code and the regulations thereunder.
(b) Incentive stock options shall expire not later than ten years from
the date of grant by action of the Committee, unless terminated earlier under
the option terms; provided that in the case of an Employee who owns stock
representing more than ten percent (10%) of the Common Stock outstanding at the
time the Incentive Stock Option is granted, the term of exercisability of the
Incentive Stock Option shall not exceed five (5) years. Notwithstanding other
provisions hereof, the aggregate fair market value (determined as of the time an
incentive stock option is granted) of the stock for which any employee may be
granted incentive stock options in any calendar year (under all incentive stock
option plans, as defined in Section 422 of the Code, of the Company or any
present or future parent or subsidiary of the Company) shall not exceed
$100,000. In the case of an Employee who owns Common Stock representing more
than ten percent (10%) of the outstanding Common Stock at the time the Incentive
Stock Option is granted, the Incentive Stock Option exercise price shall not be
less than one hundred and ten percent (110%) of the Fair Market Value of the
Common Stock on the date that the Incentive Stock Option is granted. No
Incentive Stock Option may be exercised unless the Optionee shall have been in
the employ of the Company at all times during the period beginning with the date
of grant of any such Incentive Stock Option and ending on the date three (3)
months prior to the date of exercise of any such Incentive Stock Option. At the
time of granting an incentive stock option hereunder, the Committee shall
determine in its discretion, the terms and conditions of such option for any
person who receives an option pursuant to the Plan ("Optionee"), provided that
the option continues to be an incentive stock option. In the event that any
Optionee's employment with the Company shall terminate for any reason, other
than disability or death, all of any such Optionee's Incentive Stock Options,
and all of any such Optionee's rights to purchase or receive Shares of Common
Stock pursuant thereto, shall automatically terminate on (A) the earlier of (i)
or (ii): (i) the respective expiration dates of any such Incentive Stock
Options, or (ii) the expiration of not more than three (3) months after the date
of such termination of employment; or (B) at such later date as is determined by
the Committee at the time of the grant of such Option or at the time of
termination of employment, if the individual was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment, and
further
<PAGE>
that such Option shall thereafter be deemed a Nonqualified Stock Option. In the
event that a Subsidiary ceases to be a Subsidiary of the Company, the employment
of all of its employees who are not immediately thereafter employees of the
Company shall be deemed to terminate upon the date such Subsidiary so ceases to
be a Subsidiary of the Company. Each of the options granted pursuant to this
Section 5(b) is intended, if possible, to be an "incentive stock option" as that
term is defined in Section 422 of the Code and the regulations thereunder. In
the event this Plan or any option granted pursuant to this Section 5(b) is any
way inconsistent with the applicable legal requirements of the Code or the
regulations thereunder for an incentive stock option, this Plan and such option
shall be deemed automatically amended as of the date hereof to conform to such
legal requirements, if such conformity may be achieved by amendment.
(c) Nonqualified stock options shall expire ten years and ten days
after the date they are granted, unless terminated earlier under the option
terms. At the time of granting a nonqualified stock option hereunder, the
Committee shall determine in its discretion, the terms and conditions of any
such options, provided that the option exercise price is not less than the fair
market value of the Common Stock as of the date of such grant.
(d) Neither the Company nor any present or future affiliated or
subsidiary corporation of the Company, nor their officers, directors,
shareholders, stock option plan committees, employees or agents shall have any
liability to any Optionee in the event an option granted pursuant to Section
5(b) hereof does not qualify as an "incentive stock option" as that term is used
in Section 422 of the Code and the regulations thereunder, or in the event any
Optionee does not obtain the tax benefits of such an incentive stock option, or
in the event any option granted pursuant to Section 5(c) hereof is an "incentive
stock option."
6. Six Month Holding Period.
------------------------
With respect to options awarded to officers and employees who are
subject to the reporting requirements under Section 16(a) of the Exchange Act,
subject to vesting requirements, if applicable, except in the event of the death
or disability of the Optionee or a Change in Control of the Company, a minimum
of six months must elapse between the date of the grant of an option and the
date of the sale of the Common Stock received through the exercise of such
option.
7. Cashless Exercise.
-----------------
Subject to vesting requirements, if applicable, an Optionee who has
held an option for at least six months may engage in the "cashless exercise" of
the option. Upon a cashless exercise, an Optionee gives the Company written
notice of the exercise of the option together with an order to a registered
broker-dealer or equivalent third party, to sell part or all of the Common Stock
<PAGE>
under option ("Optioned Stock") and to deliver enough of the proceeds to the
Company to pay the option exercise price and any applicable withholding taxes.
If the Optionee does not sell the Optioned Stock through a registered
broker-dealer or equivalent third party, the Optionee can give the Company
written notice of the exercise of the option and the third party purchaser of
the Optioned Stock shall pay the option exercise price plus any applicable
withholding taxes to the Company.
8. Transferability.
---------------
An incentive stock option granted pursuant to the Plan shall be
exercised during an Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or by
the laws of descent and distribution. A nonqualified stock option granted
pursuant to the Plan may, with the prior written consent of the Committee, be
assignable or transferable during the Optionee's lifetime. In determining
whether consent shall be given to an Optionee with regard to the assignment or
transfer of a nonqualified stock option, it shall be at the sole discretion of
the Committee.
9. Modification, Amendment, Suspension and Termination.
---------------------------------------------------
Options shall not be granted pursuant to this Plan after the expiration
of ten years from and after the date of the adoption of the Plan by the
Company's Board of Directors. The Board of Directors reserves the right at any
time, and from time to time, to modify or amend this Plan in any way, or to
suspend or terminate it, effective as of such date, which date may be either
before or after the taking of such action, as may be specified by the Board of
Directors; provided, however, that such action shall not affect options granted
under the Plan prior to the actual date on which such action occurred. If a
modification or amendment of this Plan is required by the Code or the
regulations thereunder to be approved by the shareholders of the Company in
order to permit the granting of "incentive stock options" (as that term is
defined in Section 422 of the Code and regulations thereunder) pursuant to the
modified or amended Plan, such modification or amendment shall also be approved
by the shareholders of the Company in such manner as is prescribed by the Code
and the regulations thereunder. If the Board of Directors voluntarily submits a
proposed modification, amendment, suspension or termination for shareholder
approval, such submission shall not require any future modifications, amendments
(whether or not relating to the same provision or subject matter), suspensions
or terminations to be similarly submitted for shareholder approval.
Notwithstanding any other provision contained in this Plan, in the
event of a change in any federal or state law, rule or regulation which would
make the exercise of all or part of any previously granted option unlawful or
subject the Company to any penalty, the Committee may restrict any such exercise
without the consent of the Optionee or other holder thereof in order to comply
<PAGE>
with any such law, rule or regulation or to avoid any such penalty.
10. Recapitalization, Merger, Consolidation, Change in Control and Other
-----------------------------------------------------------------------
Transactions.
------------
(a) Subject to any required action by the shareholders of the Company,
within the sole discretion of the Committee, the aggregate number of shares of
Common Stock for which options may be granted hereunder, the number of shares of
Common Stock covered by each outstanding option, and the exercise price per
share of Common Stock of each option, shall all be proportionately adjusted for
any increase or decrease in the number of issued and outstanding shares of
Common Stock resulting from a subdivision or consolidation of shares (whether by
reason of merger, consolidation, recapitalization, reclassification, split-up,
combination of shares, or otherwise) or the payment of a stock dividend or any
other increase or decrease in the number of such shares of Common Stock effected
without the receipt or payment of consideration by the Company (other than
Common Stock held by dissenting shareholders).
(b) All outstanding options previously granted shall become immediately
exercisable in the event of a Change in Control of the Company, as determined by
the Committee. "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Company; (ii) the merger or
recapitalization of the Company whereby the Company is not the surviving entity;
or (iii) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder) of twenty-five percent
(25%) or more of the outstanding voting securities of the Company by any person,
trust, entity or group. This limitation shall not apply to the purchase of
shares by underwriters in connection with a public offering of Common Stock, or
the purchase of shares of up to 25% of any class of securities of the Company by
a tax-qualified employee stock benefit plan which is exempt from the approval
requirements, as now in effect or as may hereafter be amended. The term "person"
refers to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein. The decision of the
Committee as to whether a Change in Control has occurred shall be conclusive and
binding.
In the event of such a Change in Control, the Committee and the Board
of Directors of the Company will take one or more of the following actions to be
effective as of the date of such Change in Control:
(i) provide that such options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the acquiring or
succeeding corporation (or an affiliate thereof), provided that: (A) any such
Substitute Options exchanged for incentive stock options shall meet the
requirements of Section
<PAGE>
424(a) of the Code, and (B) the shares of stock issuable upon the exercise of
such Substitute Options shall constitute securities registered in accordance
with the Securities Act of 1933, as amended, ("1933 Act") or such securities
shall be exempt from such registration in accordance with Sections 3(a)(2) or
3(a)(5) of the 1933 Act, (collectively, "Registered Securities"), or in the
alternative, if the securities issuable upon the exercise of such Substitute
Options shall not constitute Registered Securities, then the Optionee will
receive upon consummation of the Change in Control transaction a cash payment
for each option surrendered equal to the difference between (1) the fair market
value of the consideration to be received for each share of Common Stock in the
Change in Control transaction times the number of shares of Common Stock subject
to such surrendered options, and (2) the aggregate exercise price of all such
surrendered options, or
(ii) in the event of a transaction under the terms of which
the holders of the Common Stock will receive upon consummation thereof a cash
payment (the "Merger Price") for each share of Common Stock exchanged in the
Change in Control transaction, to make or to provide for a cash payment to the
Optionees equal to the difference between (A) the Merger Price times the number
of shares of Common Stock subject to such options held by each Optionee (to the
extent then exercisable at prices not in excess of the Merger Price) and (B) the
aggregate exercise price of all such surrendered options in exchange for such
surrendered options.
(c) Notwithstanding any provisions of the Plan to the contrary, subject
to any required action by the shareholders of the Company, in the event of any
Change in Control, recapitalization, merger, consolidation, exchange of Shares,
spin-off, reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of shares of Common Stock
subject to each option, the option exercise price per share of Common Stock, and
the consideration to be given or received by the Company upon the exercise of
any outstanding option;
(ii) cancel any or all previously granted options, provided
that appropriate consideration is paid to the Optionee in connection therewith;
and/or
(iii) make such other adjustments in connection with the Plan
as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause incentive stock options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code without the
consent of the Optionee.
<PAGE>
Except as expressly provided in Sections 10(a), 10(b) and 10(e) hereof,
no Optionee shall have any rights by reason of the occurrence of any of the
events described in this Section 10.
(d) The Committee shall at all times have the power to accelerate the
exercise date of options previously granted under the Plan.
(e) Upon the payment of a special or non-recurring cash dividend that
has the effect of a return of capital to the shareholders, the option exercise
price per share shall be adjusted proportionately.
11. Conditions Upon Issuance of Common Stock; Limitations on Option
-----------------------------------------------------------------------
Exercise; Cancellation of Option Rights.
---------------------------------------
(a) Common Stock shall not be issued with respect to any option granted
under the Plan unless the issuance and delivery of such shares shall comply with
all relevant provisions of applicable law, including, without limitation, the
1933 Act, the rules and regulations promulgated thereunder, any applicable state
securities laws and the requirements of any stock exchange upon which the Common
Stock may then be listed.
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Company's legal counsel to be necessary to the lawful
issuance and sale of any Common Stock issuable hereunder shall relieve the
Company of any liability with respect to the non-issuance or sale of such
shares.
(c) As a condition to the exercise of an option, the Company may
require the Optionee to make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company or its
subsidiaries for "cause" (as determined by the Board of Directors in good
faith), all options held by such Optionee shall cease to be exercisable as of
the date of such termination of employment or service.
(e) Upon the exercise of an option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the fair
market value of the Common Stock on the date of exercise and the exercise price
per share of the option. Such cash payment shall be in exchange for the
cancellation of such option. Such cash payment shall not be made in the event
that such transaction would result
<PAGE>
in liability to the Optionee or the Company under Section 16(b) of the Exchange
Act, and regulations promulgated thereunder.
12. Withholding Tax.
---------------
The Company shall have the right to deduct from all amounts paid in
cash with respect to the cashless exercise of options under the Plan any taxes
required by law to be withheld with respect to such cash payments. Where an
Optionee or other person is entitled to receive shares of Common Stock pursuant
to the exercise of an option, the Company shall have the right to require the
Optionee or such other person to pay the Company the amount of any taxes which
the Company is required to withhold with respect to such Common Stock, or, in
lieu thereof, to retain, or to sell without notice, a number of such shares
sufficient to cover the amount required to be withheld.
13. Effectiveness of Plan; Shareholder Ratification.
-----------------------------------------------
This Plan shall become effective on the date of its adoption
("Effective Date") by the Company's Board of Directors subject, however, to
ratification by the shareholders of the Company in such manner as is prescribed
by the Code and the regulations thereunder. Options may be granted under this
Plan prior to obtaining such shareholder ratification, provided such options
shall not be exercisable until such shareholder ratification, is obtained.
14. General Conditions.
------------------
(a) Nothing contained in this Plan or any option granted pursuant to
this Plan shall confer upon any employee the right to continue in the employ of
the Company or any present or future affiliated and subsidiary corporation of
the Company, or interfere in any way with the rights of the Company and any
affiliated or subsidiary corporation of the Company to terminate his employment
in any way.
(b) Corporate action constituting an offer of stock for sale to any
employee under the terms of the options to be granted hereunder shall be deemed
completed as of the date when the Committee authorizes the grant of the option
to the employee, regardless of when the option is actually delivered to the
employee or acknowledged or agreed to by him.
(c) The term "subsidiary corporation" as used throughout this Plan, and
the options granted pursuant to this Plan, shall (except as otherwise provided
in the option form) have the meaning that is ascribed to that term by
subsections 424(f) and (g) of the Code, and the Company shall be deemed to be
the grantor corporation for purposes of applying such meaning.
(d) References in this Plan to the Code shall be deemed to also refer
to the corresponding provisions of any amendments thereto and to any future
United States revenue law.
<PAGE>
(e) The use of the masculine pronoun shall include the feminine gender
whenever appropriate.
(f) Notwithstanding anything herein to the contrary, in no event shall
shares of Common Stock subject to Options granted to any individual exceed more
than 80% of the total number of shares of Common Stock authorized for delivery
under the Plan.
15. Award of Options to Directors.
-----------------------------
Nonqualified Stock Options to purchase 15,000 shares of Common Stock
will be granted to each Director who is not an employee of the Company or any
subsidiary as of the Effective Date, at an exercise price equal to the fair
market value of the Common Stock on such date of grant. Such options will be
first exercisable as of such date of grant, subject to ratification of the Plan
by the shareholders of the Company. Such Options shall continue to be
exercisable for a period of ten years and ten days following the date of grant
without regard to the continued services of such Director. In the event of the
Optionee's death, such Options may be exercised by the personal representative
of his estate or person or persons to whom his rights under such Option shall
have passed by will or by the laws of descent and distribution. Options may be
granted to newly appointed or elected non-employee Directors within the sole
discretion of the Committee. The exercise price per Share of such Options
granted shall be equal to the fair market value of the Common Stock at the time
such Options are granted. Unless otherwise inapplicable, or inconsistent with
the provisions of this paragraph, the Options to be granted to Directors
hereunder shall be subject to all other provisions of this Plan.
16. Reload Options.
--------------
The Committee shall have the authority to specify at the time of Grant
of an Option that an Optionee shall be granted the right to a further Option (a
"Reload Option") in the event such optionee exercises all or a part of an Option
(an "Original Option"), by surrendering already owned shares of Common Stock in
full or partial payment of the Option Price under such Original Option. Each
such Reload Option shall be granted on the date of exercise of the Original
Option, shall cover a number of shares of Common Stock not exceeding the whole
number of shares of Common Stock surrendered in payment of the Option Price
under such Original Option, and any shares of Common Stock used to satisfy any
taxes incident to the exercise of the Original Option, shall have an Option
Price equal to the Fair Market Value of the Common Stock on the date of Grant of
such Reload Option, shall expire on the stated expiration date of the Original
Option and shall be subject to such other terms and conditions as the Committee
may determine.
Sun Bancorp, Inc.
Annual Report 1998
<PAGE>
Mission Statement
o 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.
o 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.
o Our employees are our most valued assets. We will offer a challenging and
rewarding work environment that provides career advancement opportunities
to attract and retain quality personnel.
o 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.
o 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.
o Our shareholders provide us the capital we need to exist. We will
consistently achieve above-average financial results to provide value to
our shareholders.
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Assets $ 1,515,403 $ 1,099,973 $ 436,795 $ 369,895 $ 217,351
Cash and investments 739,274 610,339 117,388 164,251 70,809
Loans receivable (net) 689,852 427,761 295,501 183,634 134,861
Deposits 1,025,397 695,388 385,987 335,248 196,019
Borrowings and securities sold
under agreements to repurchase 337,665 316,314 21,253 8,000
Guaranteed preferred beneficial
interest in Company's
Subordinated debt 58,650 28,750
Shareholders' equity 78,333 54,632 27,415 24,671 20,571
Selected Results of Operations:
Interest income $ 84,673 $ 46,699 $ 28,981 $ 20,698 $ 12,194
Net interest income 39,579 22,291 16,447 13,011 8,256
Provision for loan losses 2,213 1,665 900 808 383
Net interest income after
provision for loan losses 37,365 20,626 15,547 12,203 7,873
Non-interest income 5,517 2,236 1,746 1,651 732
Non-interest expense 30,368 16,958 12,918 9,895 5,991
Net income 8,784 4,171 3,013 2,819 1,840
Per Share Data:
Net income
Basic $ 1.36 $ 0.86 $ 0.68 $ 0.66 $ 0.57
Diluted $ 1.20 $ 0.78 $ 0.63 $ 0.61 $ 0.57
Book Value $ 10.96 $ 8.64 $ 5.98 $ 5.74 $ 5.07
Selected Ratios:
Return on average assets 0.75 % 0.66 % 0.74 % 1.03 % 1.09 %
Return on average equity 14.29 % 12.89 % 11.99 % 12.42 % 11.74 %
Ratio of equity to assets 5.17 % 4.97 % 6.28 % 6.67 % 9.46 %
</TABLE>
2
<PAGE>
To Our Shareholders and Friends:
We are very pleased to report another record performance by Sun Bancorp. As you
will read in these pages, we have grown in size, expanded our geographic
boundaries, broadened our products and services and deepened our commitment to
the communities we serve. In short, it was a year of Excellence.
The people of Sun Bancorp live by its mission statement each day of the year. It
is so important to our success that we have it posted in each of our offices and
every employee has their own personal copy. It serves to remind us of our
business values, as well as the commitment we have to our employees, our
customers, our communities and our shareholders.
During the past year, Sun Bancorp continued its expansion strategy that included
the consummation of transactions that will help broaden the Company's core
business. Eight of the nine branch offices acquired during the year were in the
State of Delaware. In February 1998, the first acquisition of the year was an
office located in Eatontown, New Jersey with about $25 million in deposits. It
marked the first entry of Sun Bancorp into Monmouth County which, we feel, has
the characteristics to be a very strong market. Then in December, Sun National
Bank, Delaware, headquartered in Wilmington, was created as a subsidiary of Sun
Bancorp. All eight offices of the former Beneficial National Bank were acquired
in mid-December and merged into Sun Delaware. The offices are all located in New
Castle County and had total deposits of about $168 million and total loans of
about $128 million. We are very excited about the expansion of Sun Bancorp into
Delaware. Its demographics are remarkably similar to the communities we serve in
southern and central New Jersey. Moreover, we feel there are significant
opportunities for a community bank to be successful in that market.
In July, Sun National Bank made a significant commitment to the origination of
mortgage loans by acquiring Allegiance Mortgage Company located in Cherry Hill,
New Jersey. It was merged into Sun Mortgage Company, a wholly owned subsidiary
of Sun National Bank, and provides a wide variety of mortgage related products
to the southern New Jersey marketplace. With a further expansion of Sun Mortgage
Company's activities, we expect it to increase Sun Bancorp's level of fee
income.
In New Jersey, two de novo offices were created during the year to help fill out
our franchise. In April, we opened an office in Marlton, Burlington County; and
in June we opened an office in Lanoka Harbor, Ocean County. Each office is
already doing quite well in meeting the needs of its customers.
As a result of the Beneficial acquisition in Delaware, and other corporate
activities, it was necessary to raise additional capital. This was accomplished
through the sale of a combination of common stock and trust preferred
securities. By early November, we had raised $29.9 million of 8.875% Trust
Preferred securities through a new statutory business trust, Sun Capital Trust
II. By mid-November, we had raised about $15.5 million of common stock through
an underwritten public offering. The offerings were successfully completed
despite significant market turbulence. We were pleased to have such a strong
story to tell our new investors.
While all this was happening, Sun Bancorp was also strengthening its core
business: providing superior products and services delivered by well-trained and
motivated employees. Of particular note was our significant expansion of cash
management products introduced in late 1997. This new line of business was
initially created for customers using many of those services resulting from The
Bank of New York branch acquisition. The availability of cash management
products was expanded to other medium-sized business customers of Sun National
Bank and has met with a high level of success.
3
<PAGE>
The twelve months ended December 31, 1998 marked another record financial
performance. During that period of time total assets grew 38% to $1.5 billion.
Net loans increased 61% to $690 million while total deposits grew 47% to just
over $1 billion and total capital increased 43% to $78 million.
Net interest income for the year ended December 31, 1998 was $39.6 million
compared to $22.3 million for the same period in 1997, an increase of $17.3
million or 78%. Net income for the year ended December 31, 1998 amounted to $8.8
million compared to $4.2 million for the same period in 1997, an increase of
$4.6 million, or an astounding 111%.
The first few months of 1999 have seen a continuation of our growth activities.
In January, Sun National Bank acquired two offices from Summit Bank. One is in
Port Norris, Cumberland County and the other is in Beckett, representing our
entry into Gloucester County, New Jersey. These branches had combined deposits
of about $16 million. Also in January, Sun National Bank successfully opened its
first New Jersey supermarket office inside a 90,000 square-foot state-of-the-art
Shop-Rite Supermarket located in Cherry Hill.
In February, Sun Bancorp acquired another full service mortgage banking company,
Eastern Financial, Inc. located in Northfield, New Jersey. It is now operating
as the Eastern Financial Division of Sun Mortgage Company serving the southern
New Jersey counties of Atlantic, Cape May, Cumberland, and Ocean.
In addition to its mortgage company operations, Sun Bancorp now operates
commercial banks in two states with a total of fifty-two financial service
centers. During the second quarter of 1999, Sun Bancorp plans to open several
more financial service centers in central and southern New Jersey to complement
the current network of financial service centers.
It has been our strategy to take consistent advantage of opportunities in our
marketplace. With the continuing consolidation and customer disruption caused by
large bank mergers, Sun Bancorp is well positioned to increase its market share
for customers who are accustomed to, and deserve, personalized service. This
will be the focus of our marketing campaign this spring.
Lastly, we would like to acknowledge, with deep appreciation, the contribution
made by Adolph F. "Randy" Calovi who recently retired after fourteen years as
President and Chief Executive Officer of Sun Bancorp, Inc. With the help of
Randy's leadership, Sun Bancorp was guided from a fledgling, newly-chartered
bank in 1985 to a vibrant $1.5 billion financial institution serving thirteen
counties in southern and central New Jersey and northern Delaware.
These are exciting times at Sun Bancorp. The successes we have achieved are the
direct result of a wonderfully dedicated and talented staff of people who have
not only worked hard as a team...but have genuinely enjoyed what they have
created. We are grateful for their commitment to excellence. As always, we are
also appreciative of the continued support of our shareholders and friends.
Sincerely,
/s/ Bernard Brown /s/ Philip W. Koebig, III /s/ Sidney Brown
- -------------------------- ------------------------- ------------------------
Bernard A. Brown Philip W. Koebig, III Sidney R. Brown
Chairman President and Chief Vice Chairman
Executive Officer
4
<PAGE>
The People
Sun's achievements have been due to the people that are associated with it:
Sun's Boards of Directors, its officers and employees, its customers and its
shareholders. Each has made a direct contribution to what Sun has become.
The company's success can be directly attributed to the strategies developed in
Sun's board room, the leadership shown by Sun's officers, the dedication to a
solid work ethic demonstrated by Sun's employees, the capital commitment made by
Sun's shareholders, and the loyal support shown by Sun's customers.
The growth of Sun continues at a quick pace. As other banks struggle at
achieving any meaningful growth, Sun's solid internal growth, enhanced by
common-sense acquisitions have increased the asset base of $112 million at
year-end 1993 to over $1.5 billion at year-end 1998.
In the relatively short time Sun has been in existence, it is proud of the
impact the company has made on the communities it serves. One reason for Sun's
success is that its lending officers live in the communities in which they work.
They understand the local economy and the competitive forces that work within
it. Businesses have been able to grow because Sun understands their financial
needs and has the ability to respond quickly. In a small way, that growth has
resulted in more jobs, better working conditions and improved local economies.
Sun's network of regional advisory boards has provided referrals and introduced
key individuals that have helped fuel its growth. They are viewed as Sun's eyes
and ears in each of the communities it serves...telling us about those things
being done right, and helping us understand those things which need improvement.
The Places (and Things)
Along the way, Sun has filled-in its financial service center footprint to
include all twelve contiguous counties of central and southern New Jersey, as
well as New Castle County, Delaware. This has made Sun's locations significantly
more convenient to its customers and has made its marketing efforts much more
efficient. Sun has emerged from an unknown bank, to a vibrant community
financial institution possessing a strong, competitive and entrepreneurial
presence.
Sun's infrastructure has been developed to enjoy considerable future growth. Its
computer systems, data networks, management team and wide array of products and
services are each poised to meet the competitive demands of a rapidly growing
company. Sun has paid considerable attention to addressing computer issues
related to the year 2000. Because of its successful year 2000 tests of software
and equipment, Sun's management is confident that it has appropriately prepared
itself for the next millennium.
5
<PAGE>
The Future
Integrating new employees and new companies into Sun is always a challenge. By
continuing its philosophy of maintaining a "Customer First" attitude and a
commitment to the ideals contained in its mission statement, Sun has been able
to apply a consistent standard of excellence.
This year's annual report shows you the people, the places and the ideals that
make the Sun family what it is today. Sun Bancorp, Inc. is genuinely excited
about the possibilities of what it can become. But in the end, the difference
will be...the people.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The primary activity of the Company is the oversight of Sun National Bank
("Sun") and Sun National Bank, Delaware ("Sun Delaware") (collectively the
"Banks"). Through the Banks, 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 lesser extent, installment loans. The
Company also maintains an investment securities portfolio. Retail deposits fund
the Company's lending and investing activities. 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. In the opinion of management, continued consolidation of
the banking industry and a regionalization of decision authority by larger
banking institutions left many businesses and individuals in the Banks' market
area under-served.
In 1998, the Company completed three transactions. In February, Sun acquired
approximately $25 million in deposits and one branch office in Eatontown, New
Jersey from First Savings Bank, Woodbridge, New Jersey. In July, Sun acquired
Allegiance Mortgage Company (subsequently renamed Sun Mortgage Company), a
company that provides a variety of residential mortgage products. In December,
the Company formed Sun Delaware, a de novo commercial bank headquartered in
Wilmington, Delaware. On December 17, 1998, the Company acquired approximately
$169 million in deposits, $128 million in loans and eight branch offices located
in New Castle County, Delaware from Household Bank, f.s.b. ("Household"). This
acquisition marked the Company's first entry into the State of Delaware and
established itself as a multi-bank holding company.
In recent years, the Company has also has experienced a significant level of
loan growth. The loan portfolio has increased from $83.4 million at December 31,
1993 to $689.9 million at December 31, 1998. Much of this loan growth is
attributable to the 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 Company's primary
market area and have been able thereby to increase its customer base and the
number of loan originations. Sun also has established a number of regional
advisory boards that have continued to refer loans to it. In addition, Sun has
made significant efforts to increase its share of seasonal lending, which has
contributed to its loan growth. As noted previously, portions of the Company's
total loan portfolio may be considered unseasoned and, therefore, specific
payment experiences for portions of the portfolio have 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 its expanded operations, and to provide adequate
management resources to support the further expansion and growth, the Company
recruited and hired additional experienced commercial loan officers (which
itself has contributed to much of the rapid growth in the total loan portfolio),
credit, compliance, loan review and internal audit personnel, operations
personnel and senior level executives. In addition, the Company enhanced and
expanded its operational and management information system and its oversight of
third-party vendors. While it 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 Company will be successful in managing all elements
relating to its rapid growth.
Year 2000 Compliance
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 Company's Board of Directors has approved
a Year 2000 compliance plan designed to address the concerns raised by this
issue.
7
<PAGE>
The areas covered by the plan are hardware, software, customers and service
providers. The Company has identified specific issues related to each area. At
December 31, 1998, the Company had completed the assessment and initial testing
phases of the plan. During 1998 management successfully tested substantially all
of its systems and applications. It intends to continue such testing, as well as
completing its customer awareness phase, during 1999.
The Company's primary system software is licensed from Kirchman Corporation.
Kirchman Corporation has represented to the company that it is Year 2000
compliant. During 1998, the Company received the results of an independent
testing group that verified such compliance.
It is expected that the Year 2000 compliance will cost approximately $180,000,
of which about $100,000 has been spent at December 31, 1998. The primary
expenditure of funds will be for the upgrade of equipment, testing, and to a
much lesser extent, computer software, employee salaries and related employee
benefits. The source of funds for Year 2000 compliance costs is expected to be
derived from current earnings. Management believes the cost of non-information
technology expenses related to Year 2000 compliance will not have a material
adverse effect on the Company's financial statements.
The company will be reliant upon the software of Kirchman Corporation for data
processing. Rapid and accurate data processing is essential to the operations of
the Company. If Kirchman Corporation software malfunctions in the year 2000,
these malfunctions could adversely effect the operations of the Company. To a
much lesser extent, the Company risks the effects of a malfunction by
telecommunication service providers. The Company could experience a slowing of
operations if the telecommunication service providers suffer malfunctions. In
addition, the inability of loan customers to adequately address Year 2000 issues
or borrowers who experience Year 2000 disruptions and are unable to repay their
loans on time may adversely affect the Company.
In the event that the Kirchman Corporation is not Year 2000 compliant, the
Company will attempt to locate an alternative service bureau. A disruption of
this type in the Company's data processing ability may have a material adverse
effect on the Company. If very few financial institution service bureaus are
operating in the year 2000, replacement costs, assuming the Company could
negotiate an agreement, could be material to the Company.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1998 was $8.8 million, or $1.20 per
share, in comparison to $4.2 million, or $0.78 per share for the year ended
December 31, 1997. The increase in net income was attributable to a significant
increase in net interest income of $17.3 million and an increase in non-interest
income of $3.3 million. These increases were partially offset by increases in
non-interest expense of $13.4 million, provision for loan losses of $548,000 and
income tax expense of $2.0 million compared to the previous year.
Net income for the year ended December 31, 1997 was $4.2 million, or $0.78 per
share, in comparison to $3.0 million, or $0.63 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 $5.8 million and an increase of
$490,000 in non-interest income. These increases were partially offset by an
increase in non-interest expenses of $4.0 million, an increase in the provision
for loan losses of $765,000 and an increase in income tax expense of $371,000 in
comparison to the results of operations for 1996.
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.
8
<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,
----------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 494,856 $ 47,019 9.50 % $ 355,540 $ 32,643 9.18 % $ 235,744 $ 21,785 9.24 %
Investment securities (2) 575,191 38,311 6.66 218,645 13,917 6.37 129,164 7,755 6.00
Federal funds sold 7,996 339 4.24 11,618 645 5.55 1,323 68 5.14
--------- ------ --------- ------ -------- ------
Total interest-earning assets 1,078,043 85,669 7.95 585,803 47,205 8.06 366,231 29,608 8.08
Non-interest-earning assets 94,746 49,645 40,316
---------- --------- -------
Total assets $1,172,789 $ 635,448 $406,547
========== ========= ========
Interest-bearing liabilities
Interest-bearing deposit accounts $ 614,993 25,322 4.12 % $ 391,374 16,458 4.21 % $298,538 11,954 4.00 %
Borrowed money 301,345 16,431 5.45 98,702 5,673 5.75 10,397 580 5.58
Interest on guaranteed preferred
beneficial interest in Company's
subordinated debt 33,911 3,342 9.86 22,571 2,276 10.08 -- --
--------- ------ --------- ------ --------- --------
Total interest-bearing liabilities 950,249 45,095 4.75 512,647 24,407 4.76 308,935 12,534 4.06
------ ------ --------
Non-interest-bearing liabilities 161,080 90,440 72,486
--------- --------- --------
Total liabilities 1,111,329 603,087 381,421
Shareholders' equity 61,460 32,361 25,126
--------- --------- --------
Total liabilities and shareholders'
equity $1,172,789 $ 635,448 $406,547
========= ========= ========
Net interest income $40,574 $22,798 $17,074
======= ======= =======
Interest rate spread (3) 3.20 % 3.30 % 4.02 %
==== ==== ====
Net yield on interest earning assets (4) 3.76 % 3.89 % 4.66 %
==== ==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.45 % 114.27 % 118.55 %
====== ====== ======
</TABLE>
- ----------------------
(1) Average balances and interest include non-accrual loans (see
"Non-Performing and Problem Assets").
(2) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(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.
9
<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,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------ --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------ --------------------------------------
Rate / Rate /
Volume Rate Volume Net Volume Rate Volume Net
Interest income: (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 12,798 $ 1,133 $ 444 $ 14,375 $11,071 $ (141) $ (72) $ 10,858
Investment securities 21,853 780 1,272 23,905 4,938 794 550 6,282
Federal funds sold (200) (153) 47 (306) 530 5 42 577
-------- ------- ------- ------- ------- ------ ------ -------
Total interest-earning assets $ 34,451 $ 1,760 $ 1,763 $ 37,974 $16,539 $ 658 $ 520 $ 17,717
========= ======= ======= ======= ======== ===== ===== ========
Interest expense:
Deposit accounts $ 9,389 $(334) $(191) $ 8,864 $ 3,718 $ 600 $ 186 $ 4,504
Borrowings 11,655 (294) (604) 10,757 4,927 17 149 5,093
Guaranteed preferred beneficial
interest in Company's subordinated debt 1,143 (51) (26) 1,066 -- -- 2,276 2,276
--------- ------ ------ -------- ------- ------ ------- --------
Total interest-bearing liabilities $ 22,187 $(679) $(821) $ 20,687 $ 8,645 $ 617 $2,611 $ 11,873
========= ====== ====== ======== ======= ====== ======= ========
Net change in interest income $ 12,264 $ 2,439 $2,584 $ 17,287 $ 7,894 $ 41 $(2,091) $ 5,844
========= ======= ======= ========= ======== ====== ========= ========
</TABLE>
Net interest income increased $17.3 million or 78% to $39.6 million in 1998
compared to $22.3 million in 1997. The increase is due primarily to the growth
of average interest-earning assets from $585.8 million in 1997 to $1,078.0
million in 1998, partially offset by a decline in the interest rate spread from
3.30% in 1997 to 3.20% in 1998. The decline in the interest rate spread had a
corresponding impact on the net interest margin, which declined 13 basis points
to 3.76% in 1998.
The increase in average interest-earning assets of $492.2 million reflects an
increase of $139.3 million in average loans and $356.5 million in average
investment securities, slightly offset by a decrease of $3.6 million of federal
funds sold. These assets were funded by an increase of $437.6 million of average
interest-bearing liabilities and an increase of $70.6 million of average
non-interest bearing liabilities. The increase in interest-bearing liabilities
reflects the 1998 acquisition of branches and deposits, the growth of deposits
at existing offices, the opening of two new financial service centers and
increases in borrowings and guaranteed preferred beneficial interests in
Company's subordinated debt.
The interest rate spread decreased as of December 31, 1998, compared to December
31, 1997, due to a higher percentage of investments to average interest-earning
assets. Investment securities comprised 53.4% of average interest-earning assets
in 1998 compared with 37.3% in 1997. The interest rate spread and net interest
margin decreased in 1998 compared to 1997 due to a decrease in the yield on
average interest-earning assets from 8.06% in 1997 to 7.95% in 1998.
As general market interest rates were relatively stable during 1997, the
increase in the yield on loans in 1998 reflects an increase in loan fees offset
somewhat by a decrease in interest on loans resulting from the lowering of the
prime rate during the fourth quarter of 1998. The increase in the yield on
investment securities was due primarily to the investment in U.S. government
agency securities made during 1998.
The slight decrease in the interest cost of average interest-bearing liabilities
is due principally to a decrease in the interest cost of interest-bearing
deposits from 4.21% in 1997 to 4.12% in 1998. The lower cost of interest-bearing
liabilities in 1998 is the result of a reduction in the interest cost of
deposits due to a slight decrease in interest rates on core deposits, a decrease
in the cost of borrowed money and the interest cost of the Company's trust
preferred securities described below. While interest expense on deposit accounts
and borrowed money was lower, the mix of these liabilities was weighted more to
the higher cost borrowings. The higher level of borrowed funds was primarily a
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.
10
<PAGE>
On October 26, 1998, Sun Capital Trust II ("Sun Trust II") issued $29.9 million
of 8.875% Preferred Securities with a stated value and liquidation preference of
$10 per share. The proceeds from the sale of the Preferred Securities of Sun
Trust II were utilized by Sun Trust II to invest in $29.9 million of 8.875%
Junior Subordinated Debentures ("Sun Trust II Debentures") of the Company due in
December 2028. In view of this transaction, the Company may incur increased
interest expense in future periods.
In 1997, Sun Capital Trust ("Sun Trust I") issued $28.8 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 Sun Trust I
were utilized by Sun Trust I to invest in $28.8 million of 9.85% Junior
Subordinated Debentures ("Sun Trust I Debentures") of the Company due in March
2027.
Net interest income increased $5.8 million or 36% to $22.3 million in 1997
compared to $16.5 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 4.03% in
1996 to 3.30% in 1997. The decline in the interest rate spread had a
corresponding impact on the net interest margin, which declined 77 basis points
to 3.89% in 1997.
The 1997 increase in average interest-earning assets of $219.6 million reflects
an increase of $119.8 million in average loans, $89.5 million in average
investment securities and $10.3 million in 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 financial service centers, and increases in borrowings and
guaranteed preferred interests in Company's subordinated debt.
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 Company's 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 declined in 1997 primarily to an
increase in the yield on investment securities and federal funds sold. 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 loan originations. The increase in the yield on investment
securities was due primarily to the investment in U.S. government agency
securities 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. 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 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.
Provision for Loan Losses. For the year ended December 31, 1998, the provision
for loan losses amounted to $2.2 million, an increase of $548,000, or 32.9%,
compared to $1.7 million for the same period in 1997. The increase was primarily
the result of the increase in the Company's loan portfolio of approximately
$265.0 million at December 31, 1998 compared with December 31, 1997, resulting
primarily from growth in commercial loans and the result of loans acquired from
Household. The Company recorded a provision for loan losses of $1.7 million in
1997 compared with a provision of $900,000 in 1996. The increase in the
provision for loan losses in 1997 was attributable to an increase in the size of
the loan portfolio due to internal loan growth, and to a lesser extent, loans
acquired from BNY. 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 Banks will continue to monitor their allowance for loan losses and make
future adjustments to the allowance through the provision for loan losses as
economic conditions dictate. Although the Banks maintain their allowance for
loan losses at levels considered adequate to provide for the inherent risk of
loss in their loan portfolios, 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, each Bank's determination as to
the amount of its allowance for loan losses is subject to review by its primary
regulator, the Office of the Comptroller of the Currency (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.
11
<PAGE>
Non-Interest Income. Other income increased $3.3 million for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The increase was
a primarily a result of higher service charges on deposit accounts and a larger
deposit base augmented by gains on the sale of fixed assets, loans and
investment securities during 1998. The amount of service charges on deposit
accounts increased to $3.3 million in 1998 compared to $1.5 million in 1997. The
gain on sale of fixed assets was $18,000 in 1998 compared to a $53,000 loss in
1997. The gain on sale of loans was $112,000 in 1998 compared to $1,000 in 1997.
The gain on sale of investment securities was $1.0 million in 1998 compared to
$207,000 in 1997.
Other income increased $490,000 for the year ended December 31, 1997 compared to
the year 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 Company'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.
Non-Interest Expenses. Other expenses increased approximately $13.4 million, to
$30.4 million for the year ended December 31, 1998 as compared to $17.0 million
for the same period in 1997. The increase was a result of operating a larger
organization. Of the increase, $6.1 million was in salaries and employee
benefits, $1.5 million in occupancy expense, $933,000 in equipment expense,
$677,000 in data processing expense, $1.2 million in miscellaneous expenses and
$2.4 million in amortization of excess of cost over fair value of assets
acquired. The increase in other expenses reflects the Company's strategy to
support its continued expansion. Salaries and benefits increased due to
additional staff positions resulting from the acquisitions and increased
staffing in lending and support 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 amortization of excess of cost over
fair value of assets acquired resulted from the acquisitions completed in 1997
and 1998.
Other expenses increased approximately $4.0 million, to $16.9 million for the
year ended December 31, 1997 as compared to $12.9 million for the same period in
1996. The increase was a result of operating a larger organization. Of the
increase, $1.6 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 Sun being assessed a premium based on a capital
level of "adequately capitalized" for a portion of the year. The increase in
amortization of excess of cost over fair value of assets acquired resulted from
the acquisitions completed in 1997.
Income Tax Expense. Income taxes increased $2.0 million, from $1.7 million to
$3.7 million for the years ended December 31, 1997 and December 31, 1998,
respectively. 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. The
increase was due to increased pre-tax income.
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, 1999 total $401.7 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 $89.5 million at December 31, 1998, the Company
has substantial additional secured borrowing capacity with the FHLB and other
sources.
12
<PAGE>
The substantial increase in liquidity resulting from 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 that
is adequate but not excessive.
Net cash provided by operating activities for the year ended December 31, 1998
totaled $19.3 million, as compared to $4.5 million for the year ended December
31, 1997. Net cash provided by operating activities for the year ended December
31, 1997 totaled $4.5 million an increase of $682,000 from the year ended
December 31, 1996.
Net cash used in investing activities for the year ended December 31, 1998
totaled $360.7 million, a decrease of $286.7 million, compared to the year ended
December 31, 1997 of $647.4 million. The decrease was primarily due to a
decrease in the purchase of investment securities of $7.6 million, a decrease in
the purchase of mortgage-backed securities of $99.4 million, an increase in
maturities of investment securities of $82.2 million, an increase in the
maturity of mortgage-backed securities of $79.8 million, an increase in the sale
of investment securities of $97.4, an increase in the sale of mortgage-backed
securities of $39.1 million and a decease in bank properties and equipment
resulting from branch acquisitions of $11.3 million. These were partially offset
by an increase of $134.5 million in loans.
Net cash used in investing activities for the year ended December 31, 1997
totaled $647.4 million, an increase of $583.0 million, compared to 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 $76.3 million, an increase
in the purchase of mortgage-backed securities of $307.6 million, a decrease in
the maturity of investment securities of $90.5 million, a decrease in the sale
of investment securities of $26.5 million, a decrease in the sale of
mortgage-backed securities of $31.4 million, an increase of $21.7 million in
loans, an $11.7 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.
Net cash provided by financing activities for the year ended December 31, 1998
totaled $396.8 million, a decrease of $258.3 million, compared to the year ended
December 31, 1997 of $655.1 million. The decrease was a result of a decrease of
$280.9 million of net borrowings under lines of credit and repurchase agreements
and a decrease of $6.1 million from the issuance of common stock. This was
slightly offset by an increase in deposits of $20.6 million, a decrease of $1.2
million of proceeds from the issuance of Trust Preferred securities and the
purchase of treasury stock of $281,000.
Net cash provided by financing activities for the year ended December 31, 1997
totaled $655.1 million, an increase of $590.0 million, compared to the $65.1
million for the year ended December 31, 1996. The increase was a result of an
increase in deposits of $258.7 million, of which $256.5 million was from branch
acquisitions; an increase of $279.8 million of net borrowings under line of
credit and repurchase agreements; proceeds from the issuance of common stock of
$21.9 million and proceeds from the issuance of Trust Preferred securities of
$28.8 million.
The Company monitors its capital levels relative to its business operations and
growth. It has sought to maintain the Banks' and its own capital at levels
consistent with, or in excess of, regulatory requirements. During 1998, the
Company raised approximately $15.0 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 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 Guaranteed Preferred Beneficial Interest in Company's 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 risk-based capital levels
at December 31, 1998 for the Company, Sun and Sun Delaware.
13
<PAGE>
<TABLE>
<CAPTION>
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998
Total Capital (to Risk Weighted Assets):
Company $ 99,367,578 11.45 % $ 69,427,129 8.00% N/A
Sun $ 73,349,198 10.06 % $ 58,329,382 8.00% $ 72,911,728 10.00%
Sun Delaware $ 14,937,116 12.01 % $ 9,949,786 8.00% $ 12,437,232 10.00%
Tier I Capital (to Risk Weighted Assets):
Company $ 61,483,161 7.08 % $ 34,736,249 4.00% N/A
Sun $ 67,206,360 9.22 % $ 29,156,772 4.00% $ 43,735,158 6.00%
Sun Delaware $ 13,937,116 11.21 % $ 4,973,101 4.00% $ 7,459,652 6.00%
Leverage Ratio:
Company $ 61,483,161 4.83 % $ 50,917,732 4.00% N/A
Sun $ 67,206,360 5.36 % $ 50,154,000 4.00% $ 62,692,500 5.00%
Sun Delaware $ 13,937,116 6.82 % $ 8,174,262 4.00% $ 10,217,827 5.00%
</TABLE>
Asset and Liability Management
The Company's exposure to interest rate risk results from the difference in
maturities on interest-bearing liabilities and interest-earning assets and the
volatility of interest rates. Because the Company's assets have a longer
maturity than its liabilities, the Company's earnings will tend to be negatively
affected during periods of rising interest rates. Conversely, this mismatch
should benefit the Company during periods of declining interest rates.
Management monitors the relationship between the interest rate sensitivity of
the Company's assets and liabilities. In this regard, the Company emphasizes the
origination of short-term commercial loans and revolving home equity loans and
de-emphasizes the origination of long-term mortgage loans.
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 Banks monitor their gap, primarily their six-month and one-year maturities
and work to maintain their 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 Committees of the Banks' Board of Directors
discuss, among other things, interest rate risk. The Company uses simulation
models to measure the impact of potential changes of up to 200 basis points in
interest rates on net interest income. As described below, sudden changes to
interest rates should not have a material impact to the Company's results of
operations. Should Sun or Sun Delaware 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, 1998, the Company 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 $42.2 million, representing a negative
cumulative one-year gap ratio of 2.78%. As a result, the yield on
interest-earning assets of the Company should adjust to changes in interest
rates at a slower rate than the cost of the Company's interest-bearing
liabilities. Because the Company had negligible positive gap characteristics in
its shorter maturity periods, its one-year gap mismatch would have little effect
on its net interest margin during periods of rising or declining market interest
rates.
14
<PAGE>
The following table summarizes the maturity and repricing characteristics of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 1998. All amounts are categorized by their actual maturity or repricing date
with the exception of interest-bearing demand deposits and savings deposits. As
a result of prior experience during periods of rate volatility resulting in
insignificant changes to levels of core deposits and management's estimate of
future rate sensitivities, the Company allocates approximately 35% of
interest-bearing demand deposits and 10% of savings deposits to categories 12
months and under, approximately 35% of interest-bearing demand deposits and 40%
of savings deposits to the 1-5 year category and approximately 30% of
interest-bearing demand deposits and 50% of savings deposits to the over 5 year
category.
<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 $ 304,037 $ 83,110 $253,612 $ 56,236 $ 696,995
Investment securities 311,543 50,455 70,609 217,916 650,523
Federal funds sold 34,700 -- -- -- 34,700
--------- --------- --------- --------- ---------
Total interest-earning assets 650,280 133,565 324,221 274,152 1,382,218
--------- --------- --------- --------- ---------
Interest-bearing demand deposits 65,971 12,687 70,690 62,938 212,286
Savings deposits 3,159 9,577 53,692 73,740 140,168
Time certificates under $100,000 61,591 202,609 49,182 3,810 317,192
Time certificates $100,000 or more 79,779 57,742 6,579 -- 144,100
Federal Home Loan Bank advances 192 595 3,599 -- 4,386
Other borrowed funds -- -- 1,160 -- 1,160
Securities sold under agreements to repurchase 332,119 -- -- -- 332,119
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 542,811 283,210 184,902 140,488 1,151,411
--------- --------- --------- --------- ---------
Periodic Gap $ 107,469 $ (149,645) $ 139,319 $ 133,664 $ 230,807
========= ========= ========= ========= =========
Cumulative Gap $ 107,469 $ (42,176) $97,143 $ 230,807
========= ========= ========= =========
Cumulative Gap Ratio 7.09% (2.78%) 6.41% 15.23%
========= ========= ========= =========
</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 $415.4 million, or 38%, from $1.1 billion at
December 31, 1997 to $1.5 billion at December 31, 1998; and by $663.2 million,
or 152%, from $436.8 at December 31, 1996 to $1.1 billion at December 31, 1997.
These increases in assets primarily reflect the Company's deployment of proceeds
into the loan portfolio and investment securities portfolio from increased
deposit levels resulting from its 1997 and 1998 acquisitions and internal
growth. Comparing balances from December 31, 1998 to December 31, 1997, the
Company's cash and cash equivalents increased $55.5 million, net loans
receivable increased $262.1 million, investment securities increased $73.5
million, bank properties and equipment increased $1.5 million and excess of cost
over fair value of assets acquired increased $16.8 million. Total liabilities
increased $361.8 million, or 36%, to $1.4 billion from December 31, 1997 to
December 31, 1998. Deposits increased $330.0 million, advances from the Federal
Home Loan Bank decreased $70.6 million, securities sold under agreements to
repurchase increased $96.3 million from December 31, 1997 to December 31, 1998.
As a result of an additional issuance of Trust Preferred Securities in 1998, the
guaranteed preferred beneficial interest in Company's subordinated debt amounted
to $58.7 million at December 31, 1998 compared to $28.8 million at December 31,
1997. Shareholders' equity increased $23.7 million, or 43%, to $78.3 million at
December 31, 1998, from December 31, 1997. The increase was due to the Company's
earnings during 1998 as well as the sale of additional common shares during the
year.
15
<PAGE>
Loans - Net loans receivable increased $262.1 million, or 61%, from December 31,
1997 to December 31, 1998, due primarily to internally generated commercial loan
growth and approximately $130 million in loans purchased with the acquisition of
branches from Household. Approximately $204.3 million of this increase was in
commercial loans, primarily commercial real estate loans. This significant
increase was a result of a wider market area and the efforts from a larger
commercial lending staff available to offer competitively priced loans.
Installment loans increased $33.9 million and residential real estate loans
increased $18.7 million mostly due to the Household acquisition. During 1997 and
1998, the Company used outside loan correspondents as well as Sun Mortgage
Company to originate residential mortgages. These loans were originated using
the Company's underwriting standards, rates and terms, and were approved
according to the Company's lending policy prior to origination. Prior to
closing, the Company generally 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 Company's loan portfolio by type of loan on the dates
indicated.
ANALYSIS OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ----------------- --------------------- -------------------
$ % $ % $ % $ % $ %
--------- -------- --------- -------- ------- -------- ---------- --------- --------- --------
Type of Loan: (Dollars in Thousands)
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $548,646 79.53 $346,475 81.00 $223,116 75.51 $118,874 64.73 $ 69,249 51.35
Home equity 31,068 4.50 20,725 4.84 22,070 7.47 25,129 13.68 26,799 19.87
Residential real estate 48,119 6.98 29,454 6.89 31,777 10.75 29,287 15.95 29,633 21.97
Installment 69,162 10.03 35,301 8.25 21,133 7.15 12,409 6.76 10,787 8.00
Less: Loan loss allowance 7,143 1.04 4,194 0.98 2,595 0.88 2,065 1.12 1,607 1.19
--------- ------- --------- ------- -------- ------ -------- ------ -------- ------
Net loans $689,852 100.00 $427,761 100.00 $295,501 100.00 $183,634 100.00 $134,861 100.00
========= ======= ========= ======= ======= ======= ======== ======= ======== ======
Type of Security:
- -----------------
Residential real estate:
1-4 family $123,263 17.87 $ 83,169 19.44 $ 84,036 28.44 $ 68,904 37.52 $ 72,466 53.72
Other 9,726 1.41 11,098 2.59 11,115 3.76 6,295 3.43 839 0.62
Commercial real estate 242,700 35.18 204,053 47.70 166,893 3.76 85,239 46.40 48,845 36.22
Commercial business loans 269,406 39.06 107,963 25.25 20,455 6.93 13,822 7.54 6,621 4.92
Consumer 40,362 5.85 22,240 5.20 15,229 5.15 11,214 6.11 6,511 4.83
Other 11,538 1.67 3,432 0.80 368 0.12 225 0.12 1,186 0.88
Less: Loan loss allowance 7,143 1.04 4,194 0.98 2,595 0.88 2,065 1.12 1,607 1.19
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Net loans $689,852 100.00 $427,761 100.00 $295,501 100.00 $183,634 100.00 $134,861 100.00
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the estimated maturity of the Company's loan
portfolio at December 31, 1998. 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 $ 137,035 $ 267,525 $ 144,086 $(4,929) $543,717
Home equity 587 273 30,208 (164) 30,904
Residential real estate 3,694 1,136 43,289 (382) 47,737
Installment 3,870 22,535 42,757 (466) 68,696
Unassigned reserve -- -- -- (1,202) (1,202)
--------- --------- --------- ------- ---------
$ 145,186 $ 291,469 $ 260,340 $(7,143) $ 689,852
========= ========= ========= ======= =========
</TABLE>
16
<PAGE>
The following table sets forth the dollar amount of all loans due after December
31, 1999, 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 $322,445 $ 89,166 $411,611
Home equity 9,612 20,869 30,481
Residential real estate 34,766 9,459 44,225
Installment 55,015 10,277 65,292
--------- --------- ---------
$ 421,838 $ 129,771 $ 551,609
========= ========= =========
Non-Performing and Problem Assets
Loan Delinquencies - The Company's collection procedures provide that after a
commercial loan is ten days past due, or a residential mortgage loan is fifteen
days past due, a late charge is added. The Company contacts the borrower 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 Company usually initiates foreclosure proceedings
unless other repayment arrangements are made. Delinquent loans are reviewed on a
case by case basis in accordance with lending policy.
Commercial loans and commercial real estate loans are placed on non-accrual at
the time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Generally, commercial loans are charged off no later
than 120 days delinquent unless the loan is well secured and in the process of
collection or other extenuating circumstances support collection. Residential
real estate loans are typically charged off at 90 days delinquent. In all cases,
loans must be placed on non-accrual or charged off at an earlier date if
collection of principal or interest is considered doubtful.
Non-Performing Assets - During 1998, the Company continued to experience low
levels of non-performing assets. Total non-performing assets increased $306,000,
or 12%, from $2.5 million at December 31, 1997 to $2.8 million at December 31,
1998. The ratio of non-performing assets to net loans decreased to .40% at
December 31, 1998 compared to .58% at December 31, 1997, primarily due to the
growth of the loan portfolio. In 1997, non-performing assets decreased by
$696,000, from $3.2 million at December 31, 1996 to $2.5 million at December 31,
1997. The following table sets forth information regarding loans that are
delinquent ninety days or more. Management of the Company believes that all
loans accruing interest are adequately secured and in the process of collection.
At the dates shown, the Company had no restructured loans within the definition
of SFAS No. 15.
17
<PAGE>
<TABLE>
<CAPTION>
Non-Performing Assets
At December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and industrial $ 979 $ 116 $ 354 $ 1,721 $ 1,178
Home equity 241 466 337 295 341
Residential real estate 182 253 586 607 342
Installment 206 62 -- 35 40
------- ------ ------- ------- -------
Total $ 1,608 $ 897 $ 1,277 $ 2,658 $ 1,901
======= ====== ======= ======= =======
Accruing loans that are contractually past
due 90 days or more:
Commercial and industrial $ 202 $ 642 $ 404 $ 135 $ 525
Home equity 252 168 62 279 30
Residential real estate 230 335 572 64 20
Installment 202 168 105 67 7
------- ------- ------- ------ ------
Total $ 886 $ 1,313 $ 1,143 $ 545 $ 582
======= ======= ======= ====== ======
Total non-accrual and 90-day past due loans $ 2,494 $ 2,210 $ 2,420 $ 3,203 $ 2,483
Real estate owned 292 270 756 876 1,033
------- ------- ------- -------- -------
Total non-performing assets $ 2,786 $ 2,480 $ 3,176 $ 4,079 $ 3,516
======= ======= ======= ======== =======
Total non-accrual and 90-day past due loans to net loans 0.36% 0.52% 0.82% 1.74% 1.84%
Total non-accrual and 90-day past due loans to total assets 0.16% 0.20% 0.55% 0.87% 1.14%
Total non-performing assets to net loans 0.40% 0.58% 1.07% 2.22% 2.61%
Total non-performing assets to total assets 0.18% 0.23% 0.73% 1.10% 1.62%
Total allowance for loan losses to total non-performing loans 286.41% 189.77% 107.23% 64.47% 64.72%
</TABLE>
Interest income that would have been recorded on loans on non-accrual status,
under the original terms of such loans, would have totaled $142,709 for the year
ended December 31, 1998.
Foreclosed Real Estate - Real estate acquired by the Company 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, 1998, the Company had a net amount of $292,000 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 Company'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.
18
<PAGE>
The following table sets forth information with respect to the Company's
allowance for losses on loans at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for losses on loans, beginning of year $ 4,194 $ 2,595 $ 2,065
Charge-offs:
Commercial 26 307
Mortgage 203 37 9
Installment 68 65 85
------- ------- -------
Total charge-offs 297 102 401
Recoveries ------- ------- -------
Commercial 18 22 6
Mortgage 4
Installment 15 14 21
------- ------- -------
Total recoveries 33 36 31
------- ------- -------
Net charge-offs 264 66 370
Allowance acquired with branch purchase 1,000
Provision for loan losses 2,213 1,665 900
------- ------- -------
Allowance for losses on loans, end of year $ 7,143 $ 4,194 $ 2,595
======= ======= =======
Net loans charged off as a percent of average loans 0.05% 0.02% 0.16%
outstanding ======= ======= =======
</TABLE>
The following table sets forth the allocation of the Company's allowance for
loan losses by loan category and the percent of loans in each category to total
loans receivable at the dates indicated. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses that may occur within the loan category since the total loan loss
allowance is a valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of year
applicable to:
Commercial and industrial $4,929 78.72 % $2,278 80.21 % $1,301 74.98 %
Residential real estate 164 6.90 129 6.82 139 10.65
Home equity 382 4.46 752 4.80 490 7.40
Installment 466 9.92 391 8.17 167 6.97
Unallocated 1,202 - 644 - 498 -
------ ------ ------ ------ ------ ------
Total allowance $7,143 100.00 % $4,194 100.00 % $2,595 100.00 %
====== ====== ====== ====== ====== ======
</TABLE>
Investment Securities - Most of the Company's investment portfolio is held at
the Sun's wholly owned subsidiary, Med-Vine, Inc. ("Med-Vine"). Total investment
securities increased $73.5 million, or 13%, from $576.3 million at December 31,
1997 to $649.8 million at December 31, 1998. During 1997, the net change in the
investment portfolio was due in most part to an increase in the amount of
structured transactions. The Company used repurchase agreements from the FHLB,
which totaled approximately $291.8 million at December 31, 1998, to match fund
or partially match fund investment securities for an incremental profit in a
structured transaction. The purpose of the structured transaction is to increase
net interest income and partially offset the increase in interest expense
resulting from the issuance of Trust Preferred Securities.
The Company's investment policy is established by senior management and approved
by the Board of Directors. Med-Vine's investment policy is identical to that of
the Company. 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 Company has
classified its entire portfolio of debt investment securities as available for
sale. As a result, these securities are carried at their estimated fair value
based on quoted market prices.
19
<PAGE>
The following table sets forth the carrying value of the Company's portfolio of
investment securities available for sale at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ----------------------------- --------------------------------
Net Net
Unrealized Estimated Unrealized Estimated Net Estimated
Amortized Gains Fair Amortized Gains Fair Amortized Unrealized Fair
Cost (Losses) Value Cost (Losses) Value Cost Losses Value
--------- -------- -------- --------- --------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 48,997 $ 551 $49,548 $53,113 $ (106) $53,007 $ 51,955 $(921) $ 51,034
Government agency and
mortgage-backed
securities 532,269 (1,585) 530,684 449,771 390 450,161 63 - 63
State and political
subdivision securities 39,770 270 40,040 41,738 ( 16) 41,722 20,168 (329) 19,839
Other securities 1,149 - 1,149 6,313 ( 35) 6,278 20,075 (232) 19,843
-------- ------ ------- -------- ----- -------- ------- ----- -------
Total securities
available for sale $ 622,185 $ (764) $621,421 $ 550,935 $ 233 $ 551,168 $ 92,261 $1,482 $ 90,779
======== ====== ======= ======== ===== ======== ======= ===== =======
</TABLE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Company's portfolio of
investment securities available for sale at December 31, 1998. All debt
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 Five to Ten Years More than Ten Total
---------------- ------------ ----------------- -------------- -----
Years Years
----- -----
Weighted Weighted Weighted Weighted Weighted
Carrying Average CarryingAverage 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 $17,072 5.55 % $32,476 5.43 % $49,548 5.47 %
Government agency and
mortgage-backed Securitites 11,966 5.71 $ 60,286 6.34 % $ 458,432 6.42 % 530,684 6.40
Municipal obligations 718 4.14 620 4.43 38,702 5.18 40,040 5.15
Other securities 944 5.17 150 5.34 5 5.25 - 1,149 5.19
------- ------ -------- -------- --------
Total $ 18,784 5.48 % $44,592 5.51 % $ 60,911 6.32 % $ 497,134 6.33 % $ 621,421 6.25 %
======= ====== ======== ======== ========
</TABLE>
Deposits - Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market, 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
Company regularly evaluates the internal cost of funds, surveys rates offered by
competing institutions, reviews the Company's cash flow requirements for lending
and liquidity, and executes rate changes when deemed appropriate. The Company
does not obtain funds through brokers, nor does it solicit funds outside the
States of New Jersey or Delaware.
Deposits at December 31, 1998 totaled $1.0 billion, an increase of $330.0
million, or 47%, over the December 31, 1997 balance of $695.4 million. Demand
deposits, including NOW accounts and money market accounts, increased $155.3
million, or 58%, at December 31, 1998, to $423.9 million, compared with December
31, 1997. Savings deposits increased $22.3 million to $140.2 million at December
31, 1998, from $117.9 million at December 31, 1997. Certificates of deposit
under $100,000 increased $73.9 million from December 31, 1997, to $317.2 million
at December 31, 1998. Certificates of deposit of $100,000 or more increased
$78.5 million to $144.1 million at December 31, 1998. The increase in all
categories of deposits during 1998 was due in large part to the acquisition of
deposits in connection with the branch office purchases. They were also affected
by promotional rates offered on certain certificates of deposit during the year
in response to rates offered by other financial institutions in the Company's
market areas.
20
<PAGE>
The following table sets forth average deposits by various types of demand and
time deposits:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------
1998 Avg. Cost 1997 Avg. Cost 1996 Avg. Cost
---- --------- ---- --------- ---- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
deposits $ 152,875 $ 85,985 $ 65,556
Interest-bearing demand deposits 139,617 2.35% 78,383 1.95% 62,270 1.78%
Savings deposits 117,017 2.16 72,927 2.13 65,393 2.23
Time deposits 358,359 5.45 240,064 5.57 170,875 5.49
--------- -------- --------
Total $ 767,868 3.30% $ 477,359 3.45% $ 364,094 3.28%
========= ======== ========
</TABLE>
The following table indicates the amount of certificates of deposit of $100,000
or more by remaining maturity at December 31, 1998. Dollar amounts are shown in
thousands.
Three months Over three through Over six through Over
or less six months twelve months twelve months Total
------- ---------- ------------- ------------- -----
$ 79,779 $ 12,583 $ 45,159 $ 6,579 $ 144,100
Borrowings - Borrowed funds increased $21.4 million at December 31, 1998, to
$337.7 million, from $316.3 million at December 31, 1997. The increase was a
result of an increase of $15.3 million in securities sold under agreements to
repurchase with customers and an increase of $81.0 million in securities sold
under agreements to repurchase with the FHLB. The Company also had a market
advance with the FHLB of $4.4 million and other borrowings of $1.2 million. This
was partially offset by the repayment of an overnight line of credit with the
FHLB of $17.0 million, repayment of advances with the FHLB of $58.0 million and
the repayment of federal funds purchased from correspondents of $5.5 million.
For the years ended December 31, 1998 and 1997 the maximum month-end amount of
advances borrowed from the FHLB was $70.5 million and $75.0 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, 1998 and 1997 the maximum month-end amount of securities sold
under agreements to repurchase with customers was $52.6 million and $29.8
million, respectively. The Company purchased federal funds from correspondent
banks, on an overnight basis. For the years ended December 31, 1998 and 1997,
the maximum month-end amount of federal funds purchased from correspondents was
$18.4 million and $10.0 million, respectively. The Company engaged in structured
transactions designed to offset the interest expense incurred in connection with
the issuance of the Trust Preferred Securities. For the years ended December 31,
1998 and 1997, the maximum month-end amount of securities sold under agreements
to repurchase with the FHLB was $291.8 million and $210.8 million, respectively.
The following table sets forth certain information regarding FHLB advances,
interest rates, approximate average amounts outstanding and their approximate
weighted average rates at the dates indicated.
December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
FHLB advances outstanding at end of year $ 75,000 $ 10,000
Interest rate 6.93% 7.38%
Approximate average amount outstanding $ 20,205 $ 7,726 $ 5,265
Approximate weighted average rate 5.87% 5.67% 5.44%
FHLB repurchase agreements outstanding
at end of year $291,756 $210,751
Interest rate 5.33% 6.01%
Approximate average amount outstanding $240,806 $ 75,101
Approximate weighted average rate 5.57% 5.71%
FHLB amortizing advances outstanding at
end of year $ 4,386
Interest rate 5.68%
Approximate average amount outstanding $ 682
Approximate weighted average rate 5.52%
21
<PAGE>
Deposits are the primary source of funds for the Company's lending activities,
investment activities and general business purposes. Should the need arise, the
Company 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 Company has the ability to offer securities
sold under agreements to repurchase.
Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
On March 17, 1997, the Company's subsidiary, Sun Capital Trust ("Sun Trust I")
issued $25 million of 9.85% Preferred Securities ("Sun Trust I Preferred
Securities") with a stated value and liquidation preference of $25 per share.
The proceeds from the sale of the Sun Trust I Preferred Securities were utilized
by Sun Trust I to invest in $25 million of 9.85% Junior Subordinated Debentures
(the "Sun Trust I Debentures") of the Company, due in March, 2027. On April 9,
1997, the underwriters for the Sun Trust I Preferred Securities exercised their
right to purchase an additional $3.75 million of the Sun Trust I Preferred
Securities on the same terms as the original issuance to cover over-allotments.
The proceeds from the sale of the Sun Trust I Preferred Securities were utilized
by Sun Trust I to invest in $3.75 million of the Sun Trust I Debentures of the
Company.
The Sun Trust I Preferred Securities represent preferred undivided beneficial
interests in the assets of Sun Trust I which consist solely of the Sun Trust I
Debentures. The distributions payable on each Sun Trust I Preferred Security are
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 obligations of Sun Trust I
under the Sun Trust I Preferred Securities (including the payment of
distributions and certain other payments relating to the Preferred Securities).
The Sun Trust I 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
Sun Trust I 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 Sun Trust I Debentures in whole or in
part.
On November 3, 1998, the Company's subsidiary, Sun Capital Trust II ("Sun Trust
II") issued $29.9 million of 8.875% Preferred Securities ("Sun Trust II
Preferred Securities") with a stated value and liquidation preference of $10 per
share. The proceeds of the sale of the Sun Trust II Preferred Securities were
utilized by Sun Trust II to invest in $29.9 million of 8.875% Junior
Subordinated Debentures (the "Sun Trust II Debentures") of the Company, due
December 2028.
The Sun Trust II Preferred Securities represent preferred undivided beneficial
interests in the assets of Sun Trust II which consist solely of the Sun Trust II
Debentures. The distributions payable on each Sun Trust II Preferred Security
are fixed at a rate per annum of 8.875% of the stated liquidation amount per Sun
Trust II Preferred Security, is cumulative and is payable quarterly. The Company
has fully, irrevocably and unconditionally guaranteed the obligations of Sun
Trust II under the Sun Trust II Preferred Securities (including the payment of
distributions and certain other payments relating to the Preferred Securities).
The Sun Trust II Debentures mature on December 31, 2028. 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
Sun Trust II Debentures upon the occurrence of certain events and (iii) in whole
or in part at any time on or after December 31, 2003, contemporaneously with the
optional redemption by the Company of the Sun Trust II Debentures in whole or in
part.
The obligations of the Company under the guarantees issued by the Company for
the benefit of the holders of Sun Trust I and Sun Trust II Preferred Securities
and under the Sun Trust I and Sun Trust II Debentures are subordinate and junior
in right of payment to all senior indebtedness and rank pari passu with each
other.
22
<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, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998, and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche, LLP
- -----------------------------------
DELOITTE & TOUCHE, LLP
Philadelphia, Pennsylvania
February 1, 1999
23
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 54,815,533 $ 34,060,747
Federal funds sold 34,700,000 -
-------------- --------------
Cash and cash equivalents 89,515,533 34,060,747
Investment securities available for sale (amortized cost -
$622,185,201; 1998 and $550,935,416; 1997) 621,421,370 551,168,003
Loans receivable (net of allowance for loan losses -
$7,142,838; 1998 and $4,193,801; 1997) 689,852,210 427,761,049
Restricted equity investments 28,337,450 25,110,350
Bank properties and equipment, net 26,006,645 24,479,854
Real estate owned, net 292,300 270,114
Accrued interest receivable 10,500,529 6,752,163
Excess of cost over fair value of assets acquired, net 42,960,603 26,174,146
Deferred taxes 2,384,826 1,314,043
Other assets 4,131,597 2,882,356
-------------- --------------
TOTAL $1,515,403,063 $1,099,972,825
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,025,397,734 $ 695,387,536
Advances from the Federal Home Loan Bank 4,385,908 75,000,000
Loan payable 1,160,000
Federal funds purchased 5,500,000
Securities sold under agreements to repurchase 332,118,594 235,813,503
Other liabilities 15,358,004 4,889,487
-------------- --------------
Total liabilities 1,378,420,240 1,016,590,526
-------------- --------------
Guaranteed preferred beneficial interest in company's subordinated debt 58,650,000 28,750,000
COMMITMENTS AND CONTINGENT LIABILITIES (Note 17)
SHAREHOLDERS' EQUITY
Preferred stock, none issued - -
Common stock, $1 par value, 25,000,000 shares authorized, issued and
outstanding: 7,165,360 in 1998 and 4,013,791 in 1997 7,165,360 4,013,791
Surplus 61,710,207 38,850,245
Retained earnings 10,242,636 11,614,755
Accumulated other comprehensive income (504,128) 153,508
Treasury stock at cost, 15,000 shares (281,252) -
-------------- --------------
Total shareholders' equity 78,332,823 54,632,299
-------------- --------------
TOTAL $ 1,515,403,063 $ 1,099,972,825
============== ==============
</TABLE>
- ------------------------------------------------------------------------
See notes to consolidated financial statements
24
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $47,018,743 $33,643,097 $21,784,982
Interest on taxable investment securities 33,422,143 11,777,885 5,732,949
Interest on non-taxable investment securities 1,990,679 1,015,662 1,242,657
Dividends on restricted equity investments 1,902,482 616,400 151,787
Interest on federal funds sold 339,225 645,602 68,366
----------- ----------- -----------
Total interest income 84,673,272 46,698,646 28,980,741
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 25,322,262 16,458,025 11,953,591
Interest on short-term funds borrowed 16,430,412 5,673,562 580,412
Interest on guaranteed preferred beneficial interest
in company's subordinated debt 3,341,923 2,275,795 -
----------- ------------ -----------
Total interest expense 45,094,597 24,407,382 12,534,003
----------- ------------ -----------
Net interest income 39,578,675 22,291,264 16,446,738
PROVISION FOR LOAN LOSSES 2,213,302 1,665,000 900,000
----------- ----------- ----------
Net interest income after provision for loan losses 37,365,373 20,626,264 15,546,738
----------- ----------- ----------
OTHER INCOME:
Service charges on deposit accounts 3,278,040 1,549,021 1,057,139
Other service charges 87,256 49,057 115,999
Gain (loss) on sale of fixed assets 18,300 (53,136) 45,207
Gain on sale of loans 112,361 990
Gain on sale of investment securities 1,037,134 207,037 206,538
Other 984,272 483,202 320,890
----------- ------------ -----------
Total other income 5,517,363 2,236,171 1,745,773
----------- ------------ -----------
OTHER EXPENSES:
Salaries and employee benefits 13,932,029 7,862,198 6,237,118
Occupancy expense 3,274,688 1,735,137 1,407,875
Equipment expense 2,233,540 1,300,234 817,696
Professional fees and services 526,378 328,349 352,970
Data processing expense 2,151,439 1,474,247 1,085,874
Amortization of excess of cost over fair value of assets acquired 3,909,856 1,504,713 826,701
Postage and supplies 820,332 483,496 420,120
Insurance 315,683 273,732 196,110
Provision for losses on real estate owned 14,963
Other 3,204,457 1,981,017 1,573,404
------------ ------------ -----------
Total other expenses 30,368,402 16,958,086 12,917,868
------------ ------------ -----------
INCOME BEFORE INCOME TAXES 12,514,334 5,904,349 4,374,643
INCOME TAXES 3,730,800 1,733,000 1,362,000
------------ ------------ -----------
NET INCOME $ 8,783,534 $ 4,171,349 $ 3,012,643
============ =========== ===========
Basic earnings per share $ 1.36 $ 0.86 $ 0.68
======= ======= =======
Diluted earnings per share $ 1.20 $ 0.78 $ 0.63
======= ======= =======
Weighted average shares 6,442,541 4,837,910 4,459,916
============ =========== ==========
</TABLE>
- -------------------------------------------------------------------
See notes to consolidated financial statements
25
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Shares Total
----- ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $1,651,175 $ 17,197,275 $ 5,406,774 $ 415,572 $ 24,670,796
Comprehensive income:
Net income 3,012,643
Net change in unrealized loss on securities
available for sale, net of taxes of
($717,967) (1,393,701)
Comprehensive income 1,618,942
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
--------- ----------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 1,848,929 18,124,359 8,419,417 (978,129) 24,414,576
Comprehensive income:
Net income 4,171,349
Net change in unrealized loss on securities
available for sale, net of taxes of
$582,965 1,131,637
Comprehensive income 5,302,986
Exercise of stock options 3,531 34,237 37,768
Issuance of common stock 1,094,428 20,787,283 21,881,711
Stock dividends 1,066,903 (92,511) (974,392)
Cash paid for fractional interest
resulting from stock dividend - (3,123) (1,619) - (4,742)
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 4,013,791 38,850,245 11,614,755 153,508 54,632,299
Comprehensive income:
Net income 8,783,534
Net change in unrealized loss on securities
available for sale, net of taxes of
($338,782) (657,636)
Comprehensive income 8,125,898
Exercise of stock options 6,328 28,339 34,667
Issuance of common stock 836,287 14,992,175 15,828,462
Stock dividends 2,308,954 7,844,005 (10,152,959) -
Cash paid for fractional interest
resulting from stock dividends (4,557) (2,694) (7,251)
Purchase of treasury stock - - - - $ (281,252) (281,252)
---------- ----------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 $7,165,360 $ 61,710,207 $10,242,636 $ (504,128) $ (281,252) $78,332,823
========== ============ =========== =========== =========== ===========
</TABLE>
- -------------------------------------------------
See notes to consolidated financial statements
26
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $8,783,534 $4,171,349 $3,012,643
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,213,302 1,665,000 900,000
Provision for losses on real estate owned 14,963
Depreciation and amortization 847,097 529,734 484,059
Amortization of excess cost over fair value of assets acquired 3,909,856 1,504,713 826,701
Gain on sale of loans (112,361) (990)
Gain on sale of investment securities available for sale (1,037,134) (207,037) (206,538)
(Gain) loss on sale of bank properties and equipment (18,300) 53,136 (29,298)
Deferred income taxes (732,001) (826,472) (147,401)
Change in assets and liabilities which (used) provided cash:
Accrued interest and other assets (4,997,607) (5,142,161) (1,175,180)
Accounts payable and accrued expenses 10,468,517 2,748,960 164,483
----------- ---------- ----------
Net cash provided by operating activities 19,324,903 4,511,195 3,829,469
----------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (259,702,232) (250,235,143) (190,820,977)
Purchases of mortgage-backed securities available for sale (208,192,867) (307,630,314)
Purchases of restricted equity securities (3,227,100) (20,308,400) (3,399,700)
Proceeds from maturities of investment securities available for sale 90,960,062 8,716,550 99,213,685
Proceeds from maturities of mortgage-backed securities available for sale 84,168,079 4,354,398 125,716
Proceeds from sale of investment securities available for sale 164,508,606 67,133,964 93,679,375
Proceeds from sale of mortgage-backed securities available for sale 58,413,047 19,346,213 50,782,881
Proceeds from sale of loans 3,446,878 220,000
Net increase in loans (138,312,933) (113,795,707) (112,767,037)
Increase in loans resulting from branch acquisitions (129,326,047) (20,348,684)
Purchase of bank properties and equipment (2,348,807) (1,241,818) (1,359,295)
Increase in bank properties and equipment resulting from branch acquisitions (523,405) (11,786,574)
Proceeds from sale of bank properties and equipment 149,278 35,576 42,606
Excess of cost over fair value of branch assets acquired (20,696,313) (22,313,641)
(Increase) decrease in real estate owned, net (22,186) 470,551 120,674
------------ ----------- ----------
Net cash used in investing activities (360,705,940) (647,383,029) (64,382,072)
------------ ----------- ----------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits 135,459,013 52,877,747 50,739,109
Increase in deposits resulting from branch acquisitions 194,551,185 256,522,884
Net borrowings under line of credit and repurchase agreements 20,190,999 301,060,455 21,253,048
Increase in borrowings resulting from branch acquisition 1,160,000
Principal payments on borrowed funds (6,000,000) (8,000,000)
Proceeds from exercise of stock options 34,667 37,768 1,126,984
Payments for fractional interests resulting from stock dividend (7,251) (4,742) (2,146)
Treasury stock purchased (281,252)
Proceeds from issuance of guaranteed preferred beneficial interest in Company's
subordinated debt 29,900,000 28,750,000
Proceeds from issuance of common stock 15,828,462 21,881,711 -
------------ ----------- -----------
Net cash provided by financing activities 396,835,823 655,125,823 65,116,995
------------ ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 55,454,786 12,253,989 4,564,392
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 34,060,747 21,806,758 17,242,366
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $89,515,533 $34,060,747 $21,806,758
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 42,826,631 $ 23,323,935 $ 12,743,696
Income taxes paid $ 5,471,287 $ 1,450,000 $ 1,577,757
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans to real estate owned $ 242,787 $ 389,867 $ 424,644
</TABLE>
- --------------------------------------------------
See notes to consolidated financial statements
28
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. NATURE OF OPERATIONS
Sun Bancorp, Inc. (the "Company") is registered as a multi-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 ("Sun Trust I"), Sun Capital Trust II ("Sun
Trust II"), Sun National Bank, Delaware ("Sun Delaware"), Sun National Bank
("Sun") and Sun's wholly owned subsidiaries, Med-Vine, Inc. and Sun Mortgage
Company. All significant inter-company balances and transactions have been
eliminated.
The Company and Sun have their administrative offices in Vineland, New
Jersey. Sun Delaware has its administrative office in Wilmington, Delaware. At
December 31, 1998, the Company had fifty financial service centers located
throughout central and southern New Jersey and New Castle County, Delaware. The
Company's principal business is to serve as a holding company for Sun and Sun
Delaware (collectively, the "Banks"). 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. Sun
Trust I and Sun Trust II are Delaware business trusts which hold the Junior
Subordinated Debentures issued by the Company. The Banks are in the business of
attracting customer deposits through their 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 Banks' primary regulatory agency
is the Office of the Comptroller of the Currency ("OCC"). Med-Vine, Inc. is a
Delaware holding company that holds the majority of Sun's investment portfolio.
The principal business of Med-Vine, Inc. is investing. Sun Mortgage Company is a
Cherry Hill, New Jersey-based company that provides mortgage-banking services.
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 the 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 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. The Company had no investment securities classified as held to
maturity at December 31, 1998 and 1997.
Available for Sale - Debt 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.
Restricted Equity Securities - Equity securities of bankers' banks are
classified as restricted equity securities because ownership is restricted and
there is not an established market for their resale. These securities are
carried at cost and are periodically evaluated for impairment.
29
<PAGE>
Interest Income on Loans - Interest on commercial, real estate and
installment loans is credited to operations based upon the principal amount
outstanding. Interest accruals are generally discontinued when a loan becomes 90
days past due or when principal or interest is considered doubtful of
collection. When interest accruals are discontinued, interest credited to income
in the current year is reversed, and interest accrued in the prior year is
charged to the allowance for loan losses.
Allowance for Loan Losses - The allowance for loan losses is determined
by management based upon past experience, 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. For leasehold improvements, depreciation is computed by the
straight-line method based on the estimated useful lives of the assets or the
term of the lease, whichever is shorter.
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 $7,452,435 and $3,542,579 at December 31, 1998 and 1997, respectively. It is
amortized by the straight-line method over 15 years for bank acquisitions and
over 7 to 10 years for branch acquisitions.
Long-Lived Assets - Management evaluates the carrying amount of
long-lived assets and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, management
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. Measurement of an impaired loss for long-lived assets
and intangibles would be based on the fair value of the asset. At December 31,
1998 and 1997, 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.
Treasury Stock - Stock held in treasury by the Company is accounted for
using the cost method which treats stock held in treasury as a reduction to
total shareholders' equity.
Other Comprehensive Income - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income. This Statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. The Company implemented
SFAS No. 130 effective January 1, 1998. The implementation did not have an
effect on the Company's financial position, operations or cash flow. As
required, the Company has reclassified their 1997 financial statements. Amounts
categorized as other comprehensive income represent net unrealized gains or
losses on investment securities available for sale, net of income taxes.
30
<PAGE>
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 FASB issued SFAS No. 128,
Earnings Per Share, which was effective for periods ended after December 15,
1997. This statement establishes standards for computing and presenting earnings
per share (EPS) and superseded 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 April 21, 1998, May 20, 1997 and September 17, 1996
the Company's Board of Directors declared special 5% stock dividends, which were
paid on May 26, 1998, June 25, 1997 and October 30, 1996, respectively, to
shareholders of record on May 5, 1998, June 2, 1997 and October 15, 1996,
respectively. Accordingly, earnings per share for the years ended December 31,
1997 and 1996 have been restated to reflect the increased number of shares
outstanding.
Stock split - On February 17, 1998 and August 28, 1997, the Company's
Board of Directors declared a three-for-two stock split effected in the form of
a 50% stock dividend payable on March 18, 1998 and September 25, 1997,
respectively, to shareholders of record on March 4, 1998 and September 11, 1997,
respectively. Accordingly, earnings per share for the years ended December 31,
1997 and 1996 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 that 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.
The Company discloses 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 1998, SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, was issued.
This statement requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, and should not be applied retroactively to
financial statements of prior periods. Management of the Company does not
believe this statement will have a material impact on the Company's results of
operations or financial condition when adopted.
In October 1998, SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, was issued. This statement requires that after
the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold that
investment. This statement is effective for the first fiscal quarter beginning
after December 15, 1998. Management of the Company does not believe this
statement will have a material impact on the Company's results of operations or
financial condition when adopted.
Reclassifications - Certain reclassifications have been made in the
1997 and 1996 consolidated financial statements to conform to those
classifications used in 1998.
3. ACQUISITIONS
On December 17, 1998, the Company acquired eight branch offices of
Beneficial Bank from Household Bank f.s.b., Prospect Heights, Illinois. The
offices were simultaneously merged into Sun Delaware. Sun Delaware acquired
approximately $169,402,000 of deposit liabilities plus accrued interest,
$406,000 in equipment, $125,191,000 in net loans and $1,687,000 in cash. Sun
Delaware paid a premium of $24,000,000, including $4,100,000 of loan premium.
The loan premium is being amortized over the lives of the loans and the
remaining premium is being amortized over ten years.
On July 29, 1998, Sun purchased Allegiance Mortgage Company, Cherry
Hill, N.J. in exchange for 28,302 shares of the Company's common stock. The
transaction was accounted for as a pooling of interests.
31
<PAGE>
On February 26, 1998, Sun purchased the Eatontown branch from First
Savings Bank, Woodbridge, NJ. Sun acquired approximately $25,228,000 of deposit
liabilities plus accrued interest, $118,000 in equipment, $34,000 in loans and
$119,000 in cash. Sun paid a premium of $1,085,000, which is being amortized
over seven years.
On November 20, 1997, Sun purchased eleven branches from The Bank of
New York. Sun 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. Sun
paid a premium of approximately $15,501,000, which is being amortized primarily
over seven years.
On July 24, 1997, Sun purchased three branches from Oritani Savings
Bank. Sun 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. Sun paid a premium of $2,151,000, which is being amortized over seven
years.
On June 5, 1997, Sun purchased four branches from First Union National
Bank. Sun 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. Sun
paid a premium of approximately $4,661,000, which is being amortized over seven
years.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized costs of investment securities available for sale and the
approximate fair values at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury Obligations $ 48,997,186 $ 551,250 $ 49,548,436
State and Municipal Obligations 39,770,114 441,233 $ (171,624) 40,039,723
Other bonds 1,149,109 - 1,149,109
U.S. Government agencies and
mortgage-backed securities 532,268,792 854,368 (2,439,058) 530,684,102
------------ ---------- ---------- -------------
Total $ 622,185,201 $ 1,846,851 $(2,610,682) $ 621,421,370
============ ========== ========== =============
December 31, 1997
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
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
US. Government agencies and
mortgage-backed securities 449,770,918 629,512 (239,059) 450,161,371
------------ ---------- ---------- ------------
Total $ 550,935,416 $ 767,677 $ (535,090) $ 551,168,003
============ ========== ========== ============
</TABLE>
During 1998, the Company sold $222,921,653 of securities available for sale
resulting in a gross gain of $1,133,383. 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
32
<PAGE>
The maturity schedule of the investment in debt securities available for sale at
December 31, 1998 is as follows:
Amortized Estimated
Cost Market Value
--------------- --------------
Due in one year or less $ 18,719,051 $ 18,784,108
Due after one year through five years 44,136,680 44,591,874
Due after five years through ten years 59,142,467 59,606,450
Due after ten years 150,470,852 149,441,904
------------ -----------
272,469,050 272,424,336
Mortgage-backed securities 349,716,151 348,997,034
------------ -----------
$ 622,185,201 $621,421,370
============ ===========
At December 31, 1998, $61,742,001 of U.S. Treasury Notes and U.S.
Government Agency securities were pledged to secure public deposits.
5. LOANS
The components of loans as of December 31, 1998 and 1997 were as follows:
December 31,
---------------------------------------
1998 1997
Commercial and industrial $ 548,645,189 $ 346,475,157
Real estate-residential mortgages 79,187,565 50,178,260
Installment 69,162,294 35,301,433
------------- -------------
Total gross loans 696,995,048 431,954,850
Allowance for loan losses (7,142,838) (4,193,801)
------------- -------------
Net loans $ 689,852,210 $ 427,761,049
============= =============
Non-accrual loans $ 1,607,961 $ 896,902
============= =============
There were no irrevocable commitments to lend additional funds on
non-accrual loans at December 31, 1998. The reduction in interest income
resulting from non-accrual loans was $142,709, $115,144 and $151,614 for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest income
recognized on these loans for the years ended December 31, 1998, 1997 and 1996
was $32,976, $40,334 and $15,414, 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 non-related party transactions. The aggregate
dollar amount of these loans to related parties as of December 31, 1998 and
1997, along with an analysis of the activity for the years ended December 31,
1998 and 1997, is summarized as follows:
For the Years Ended
December 31,
-----------------------------------
1998 1997
Balance, beginning of year $ 19,799,609 $ 11,437,134
Additions 6,291,984 11,317,202
Repayments (6,954,801) (2,954,727)
------------ ------------
Balance, end of year $ 19,136,792 $ 19,799,609
============ ============
33
<PAGE>
Under approved lending decisions, the Company had commitments to lend
additional funds totaling approximately $119,626,628 and $84,302,101 at December
31, 1998 and 1997, 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
Company evaluates each customer's creditworthiness on an individual basis. The
type and amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the borrower.
Most of the Company's business activity is with customers located within
its local market area. Generally, commercial real estate, residential real
estate and other assets secure loans. The ultimate repayment of loans is
dependent, to a certain degree, on the local economy and real estate market.
34
<PAGE>
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,
------------------------------------------
1998 1997 1996
Balance, beginning of year $ 4,193,801 $ 2,595,312 $ 2,064,640
Charge-offs (297,496) (102,408) (400,387)
Recoveries 33,231 35,897 31,059
----------- ----------- -----------
Net charge-offs (264,265) (66,511) (369,328)
Increase due to branch acquisition 1,000,000
Provision for loan losses 2,213,302 1,665,000 900,000
----------- ----------- -----------
Balance, end of year $ 7,142,838 $ 4,193,801 $ 2,595,312
=========== =========== ===========
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of estimated losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118 issued by the FASB. A loan is considered to be impaired when, based upon
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan.
An insignificant delay or insignificant shortfall in amount of payments does not
necessarily result in the loan being identified as impaired. For this purpose,
delays less than 90 days are considered to be insignificant.
Impairment losses are included in the provision for loan losses. 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 follow:
December 31, 1998 December 31, 1997
----------------- -----------------
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 $ 1,251,004 $ 1,158,800
----------------- ---------------
Total impaired loans $ 1,251,004 $ 1,158,800
================= ===============
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average impaired loans $ 1,114,803 $ 1,244,522 $ 596,519
================ ================ =============
Interest income recognized on impaired loans $ 61,044 $ 106,715 $ 18,284
================ ================ =============
Cash basis interest income recognized on impaired loans $ 33,849 $ 82,544 $ 15,414
================ ================ =============
</TABLE>
Interest payments on impaired loans are typically applied to principal unless
the ability to collect the principal amount is fully assured, in which case
interest is recognized on the cash basis.
35
<PAGE>
Commercial loans and commercial real estate loans are placed on non-accrual at
the time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Generally, commercial loans are charged off no later
than 120 days delinquent unless the loan is well secured and in the process of
collection, or other extenuating circumstances support collection. Residential
real estate loans are typically placed on non-accrual at the time the loan is 90
days delinquent. Other consumer loans are typically charged off at 90 days
delinquent. In all cases, loans must be placed on non-accrual or charged off at
an earlier date if collection of principal or interest is considered doubtful.
7. RESTRICTED EQUITY INVESTMENTS
The cost of restricted equity investments at December 31, 1998 and 1997 was as
follows:
December 31,
---------------------------------
1998 1997
Federal Reserve Bank stock $ 3,075,600 $ 1,367,100
Federal Home Loan Bank stock 25,178,600 23,660,000
Atlantic Central Bankers Bank stock 83,250 83,250
----------- -----------
Total $ 28,337,450 $ 25,110,350
=========== ===========
8. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment at December 31, 1998 and 1997 consist of the
following major classifications:
December 31,
----------------------------------
1998 1997
Land $ 6,054,045 $ 5,923,238
Buildings 13,924,579 13,520,232
Leasehold improvements and equipment 9,620,815 7,485,262
------------ ------------
29,599,439 26,928,732
Accumulated depreciation and amortization (3,592,794) (2,448,878)
------------ ------------
Total $ 26,006,645 $ 24,479,854
============ ============
9. REAL ESTATE OWNED
Real estate owned consisted of the following:
December 31,
-----------------------------------
1998 1997
Commercial properties $ 218,085 $ 128,031
Residential properties 74,215 142,083
---------- ----------
292,300 270,114
Allowance - -
---------- ----------
Total $ 292,300 $ 270,114
========== ==========
During 1997 approximately $15,000 was charged against operations to adjust real
estate owned for declines in value. There was no charge in 1998 and 1996.
36
<PAGE>
10. DEPOSITS
Deposits consist of the following major classifications:
December 31,
---------------------------------------
1998 1997
Demand Deposits $ 423,937,652 $ 268,655,067
Savings Deposits 140,168,487 117,879,048
Time Certificates under $100,000 317,191,505 243,257,829
Time Certificates $100,000 or more 144,100,090 65,595,592
------------- -------------
Total $ 1,025,397,734 $ 695,387,536
============= =============
Of the total demand deposits, approximately $211,652,000 and $149,499,000 are
non-interest bearing at December 31, 1998 and 1997, respectively.
A summary of certificates by year of maturity is as follows:
Year Ended December 31,
1999 $ 401,720,865
2000 38,538,602
2001 8,526,076
Thereafter 12,506,052
--------------
Total $ 461,291,595
==============
A summary of interest expense on deposits is as follows:
Year Ended December 31,
--------------------------------------------
1998 1997 1996
Savings Deposits $ 2,529,822 $ 1,555,491 $ 1,455,043
Time Certificates 19,517,519 13,370,984 9,382,920
Interest-Bearing Demand Deposits 3,274,921 1,531,550 1,115,628
----------- ----------- -----------
Total $ 25,322,262 $ 16,458,025 $ 11,953,591
=========== =========== ============
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank ("FHLB") advances at December 31, 1998 and 1997 were
$4,385,908 and $75,000,000, respectively. Advances are collateralized under a
blanket collateral lien agreement. The amount outstanding at December 31, 1998
represents two amortizing advances: a balance of $1,791,624 at 5.404% due
October 8, 2008 with a monthly payment of $12,285 and a balance of $2,594,284 at
5.867% due November 26, 2018 with a monthly payment of $18,428. At December 31,
1997, $17,000,000 was borrowed under an overnight line of credit at an interest
rate of 7.125% and $58,000,000 was borrowed under a one-month advance that
matured in January 1998 at an interest rate of 6.875%. Interest expense on
advances was $1,224,122, $438,268 and $286,316 for the years ended December 31,
1998, 1997 and 1996, respectively.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
During 1998 and 1997 the Company entered into repurchase agreements with the
FHLB. At December 31, 1998, the amount outstanding was $291,756,000, maturing in
January 1999 and bearing an average interest rate of 5.33%. 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 $13,417,861 and $4,285,478 for the years ended December 31, 1998
and 1997,
37
<PAGE>
respectively. Collateral for the repurchase agreements were U.S. Government
Agency Collateralized Mortgage Obligations. The market value of the collateral
at December 31, 1998 was approximately $301,596,000.
During 1998 and 1997, the Company entered into overnight repurchase agreements
with customers. At December 31, 1998 and 1997, the amounts outstanding were
$40,362,594 and $25,062,502, respectively. At December 31, 1998, the amounts
were borrowed at interest rates ranging from 4.56% to 5.50%. At December 31,
1997, the amounts were borrowed at interest rates ranging from 4.75% to 6.275%.
Collateral for customer repurchase agreements were U.S. Treasury Notes. The
market value of the collateral was equal to the amounts outstanding.
13. OTHER BORROWED FUNDS
In connection with the Household acquisition, Sun Delaware assumed a loan
payable in the amount of $1,160,000. The borrowing consists of a single loan
from the City of Wilmington, Delaware (the "City") in accordance with the City's
"Loans-to-Lenders" program that provides low-cost financing to qualified
participants. The loan with the City is a variable rate, interest-only note
adjusted weekly and maturing January 1, 2003. Under the provisions of the
borrowing agreement, the City may elect to convert the loan to a fixed interest
rate at any time. Upon conversion, Sun Delaware would be required to make
payments of principal and interest using an amortization schedule. At December
31, 1998 the interest rate on the loan was 4.30%.
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%.
14. STOCK OPTION PLANS
On December 17, 1997, the Company adopted a Stock Option Plan (the "1997 Plan").
Options granted under the 1997 Plan may be either qualified incentive stock
options or nonqualified options as determined by the Executive Compensation
Committee. Options granted under the 1997 Plan are at the estimated fair value
at the date of grant. There were 315,000 shares of stock reserved for issuance
under the 1997 Plan. In 1998, the Company's Board of Directors adopted an
amendment to the 1997 Plan. In accordance with such amendment, the total number
of shares of common stock authorized for issuance under the 1997 Plan has been
increased from 315,000 to 605,115. In addition, the grant of "reload" options
has been authorized by the amendment. The award of a reload option allows the
optionee to receive the grant of an additional stock option, at the then current
market price, in the event that such optionee exercises all or part of an option
(an "original option") by surrendering already owned shares of common stock in
full or partial payment of the option price under such original option. The
exercise of an additional option issued in accordance with the "reload" feature
will reduce the total number of shares eligible for award under the 1997 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.
Under the 1995 and 1997 Plans, 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 and 1997 Plans allow
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.
38
<PAGE>
Options granted under the 1985, 1995 and 1997 Plans, adjusted for the 5% stock
dividends granted in 1996, 1997 and 1998 and the three-for-two stock splits
granted in 1997 and 1998, are as follows:
Incentive Nonqualified
Options granted and outstanding:
December 31, 1998 at prices ranging
from $2.90 to $22.86 per share 478,283 931,661
======= =======
December 31, 1997 at prices ranging
from $2.90 to $15.88 per share 466,914 639,650
======= =======
December 31, 1996 at prices ranging
from $2.90 to $7.40 per share 369,229 477,645
======= =======
Activity in the stock option plans for the period beginning January 1, 1996 and
ending December 31, 1998 was as follows:
Weighted
Average
Exercise Exercise
Number Price Price
of Shares Per Share Per Share
--------- --------- ---------
Outstanding at January 1, 1996 851,448 $ 4.08
1996:
Granted 282,605 $ 6.72 - $ 7.40 $ 6.72
Exercised (286,023) $ 2.90 - $ 3.66 $ 3.56
Expired (1,156) $ 6.22 $ 6.22
-----------
Outstanding at December 31, 1996 846,874 $ 5.13
1997:
Granted 270,896 $ 8.47 - $15.88 $ 9.52
Exercised (8,616) $ 4.99 - $ 6.22 $ 4.38
Expired (2,590) $ 6.72 $ 6.72
-----------
Outstanding at December 31, 1997 1,106,564 $ 6.25
1998:
Granted 309,885 $15.88 - $22.86 $ 19.83
Exercised (6,505) $ 2.90 - $ 9.52 $ 4.50
----------
Outstanding at December 31, 1998 1,409,944 $ 2.90 - $22.86 $ 9.23
=========
The following table summarizes stock options outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Number of Options Weighted Average Remaining Weighted Average Exercise
Range of Exercise Price Outstanding Contractual Life Price
- ----------------------- ----------------- -------------------------- -------------------------
<S> <C> <C> <C>
$ 2.90 - $ 3.18 183,827 3 $ 2.97
$ 4.99 - $ 6.22 368,828 5 $ 5.08
$ 6.72 - $ 8.47 307,160 7 $ 6.92
$ 9.52 - $ 10.48 235,361 8 $ 9.56
$ 15.88 - $ 15.88 20,633 9 $ 15.88
$ 20.00 - $ 22.86 294,135 10 $ 20.04
---------------
1,409,944 7 $ 9.23
</TABLE>
39
<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 (using the Black-Scholes
model) 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,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported $ 8,783,534 $4,171,349 $3,012,643
Pro forma $ 8,341,974 $3,736,190 $2,461,089
Earnings per share on net income:
Basic As reported $ 1.36 $ 0.86 $ 0.68
Pro forma $ 1.29 $ 0.77 $ 0.55
Diluted As reported $ 1.20 $ 0.78 $ 0.63
Pro forma $ 1.14 $ 0.70 $ 0.51
Weighted average fair value of
options granted during the year $ 1.50 $ 1.69 $ 3.42
</TABLE>
Significant assumptions used to calculate the above fair value of the awards are
as follows:
1998 1997 1996
---- ---- ----
Risk free rate of return 4.40 % 6.16 % 6.44 %
Expected option life 60 months 60 months 60 months
Expected volatility 81 % 24 % 14 %
Expected dividends 0 0 0
15. EMPLOYEE AND DIRECTOR STOCK PURCHASE PLANS
In 1997 the Company adopted an Employee Stock Purchase Plan ("ESPP") and a
Directors Stock Purchase Plan ("DSPP") (collectively, the "Purchase Plans")
wherein 229,753 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 years ended December 31, 1998 and 1997,
there were 2,558 shares and 1,191 shares, respectively, granted and issued
through the ESPP. For the years ended December 31, 1998 and 1997, there were
4,988 shares and 3,896 shares, respectively, granted and issued through the
DSPP.
16. BENEFITS
The Company has 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 $10,000 in 1998 and $9,500 in 1997 and 1996,
respectively. The Company matches 50% of the employee contribution, up to 6% of
compensation. Beginning in 1998, the Company match consisted of a contribution
of Company common stock, at market value. The Company's contribution to the
401(k) Plan was $149,167, $90,619 and $85,722 for the years ended December 31,
1998, 1997 and 1996, respectively. The 1998 contribution is included in
40
<PAGE>
shareholders equity as an issuance of common stock. The Company paid $30,601,
$9,705 and $4,861 during 1998, 1997 and 1996, respectively, to administer the
401(k) Plan.
17. 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 Banks have various commitments and
contingent liabilities, such as customers' letters of credit (including standby
letters of credit of $20,851,843 and $12,335,011 at December 31, 1998 and 1997,
respectively), which are not reflected in the accompanying financial statements.
Standby letters of credit are conditional commitments issued by the Banks 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.
Certain office space of the Company and Sun is 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 $494,833 with
annual increases based on increases in the Consumer Price Index.
In February 1985, Sun entered into an agreement with a partnership comprised of
directors of Sun 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. Sun has exercised its first five-year renewal option. Sun
subleases a portion of the office building.
The following table shows future minimum payments under non-cancelable operating
leases with initial terms of one year or more at December 31, 1998. Future
minimum receipts under sub-lease agreements are not material.
1999 $ 2,011,679
2000 2,011,362
2001 2,026,034
2002 1,995,725
2003 1,868,213
Thereafter 14,873,223
------------
$ 24,786,236
============
Rental expense included in occupancy expense for all operating leases was
$1,162,650, $609,161 and $516,526 for the years ended December 31, 1998, 1997
and 1996, respectively.
18. INCOME TAXES
The income tax provision consists of the following:
December 31,
----------------------------------------------
1998 1997 1996
Current $ 4,462,801 $ 2,559,473 $ 1,509,401
Deferred (732,001) (826,473) (147,401)
---------- ---------- ----------
Total $ 3,730,800 $ 1,733,000 $ 1,362,000
========== ========== ==========
41
<PAGE>
Items that gave rise to significant portions of the deferred tax accounts at
December 31, 1998 and 1997 are as follows:
December 31,
------------------------------
1998 1997
Deferred tax asset:
Allowance for loan losses $ 1,954,643 $ 1,219,106
Deferred loan fees 74,818 83,541
Goodwill amortization 922,915 373,016
Unrealized loss on investment securities 259,703
Other - 225,042
---------- ----------
Total deferred tax asset 3,212,079 1,900,705
Deferred tax liability:
Property (580,114) (450,126)
Unrealized gain on investment securities (79,080)
Other real estate (57,456) (57,456)
Other (189,683) -
---------- ----------
Total deferred tax liability (827,253) (586,662)
---------- ----------
Net deferred tax asset $ 2,384,826 $ 1,314,043
========== ==========
The provision for federal income taxes for the years ended December 31, 1998,
1997 and 1996, differs from that completed at the statutory rate as follows:
December 31,
--------------------------------------------
1998 1997 1996
Tax computed at the statutory rate $ 4,254,870 $ 2,007,479 $ 1,487,379
Increase in charge resulting from:
Goodwill amortization 57,263 57,321 57,327
Tax exempt interest (net) (462,320) (258,994) (340,896)
Other, net (119,013) (72,806) 158,190
---------- ---------- ----------
$ 3,730,800 $ 1,733,000 $ 1,362,000
========== ========== ==========
42
<PAGE>
19. 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.
For the Years Ended
December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Net income $8,783,534 $4,171,349 $3,012,643
Dilutive stock options outstanding 1,409,944 1,106,567 846,875
Average exercise price per share $ 9.23 $ 6.24 $ 5.13
Average market price - diluted basis $24.20 $11.30 $ 8.47
Average common shares outstanding 6,442,541 4,837,911 4,459,917
Increase in shares due to exercise
of options - diluted basis 872,135 495,323 333,427
--------- --------- ---------
Adjusted shares outstanding - diluted 7,314,676 5,333,234 4,793,344
Net income per share - basic $1.36 $0.86 $0.68
Net income per share - diluted $1.20 $0.78 $0.63
20. REGULATORY MATTERS
The ability of the Banks 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 Banks'
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 Banks 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 Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets and certain off-balance sheet items as calculated under regulatory
accounting practices. The Banks' 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 Banks 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, 1998 that the Banks meet all
applicable capital adequacy requirements.
As of December 31, 1998, the most recent notification from the OCC categorized
Sun as well capitalized under the regulatory framework for prompt corrective
action. Sun Delaware was required to be well capitalized as a condition for the
approval of its charter. To be categorized as well capitalized, the Company and
the Banks must maintain minimum Total Capital, Tier 1 Capital and Leverage
Ratios as set forth in the table below.
43
<PAGE>
<TABLE>
<CAPTION>
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998
Total Capital (to Risk Weighted Assets):
Sun Bancorp, Inc. $ 99,367,578 11.45 % $ 69,427,129 8.00% N/A
Sun National Bank $ 73,349,198 10.06 % $ 58,329,382 8.00% $ 72,911,728 10.00%
Sun National Bank, Delaware $ 14,937,116 12.01 % $ 9,949,786 8.00% $ 12,437,232 10.00%
Tier I Capital (to Risk Weighted Assets):
Sun Bancorp, Inc. $ 61,483,161 7.08 % $ 34,736,249 4.00% N/A
Sun National Bank $ 67,206,360 9.22 % $ 29,156,772 4.00% $ 43,735,158 6.00%
Sun National Bank, Delaware $ 13,937,116 11.21 % $ 4,973,101 4.00% $ 7,459,652 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $ 61,483,161 4.83 % $ 50,917,732 4.00% N/A
Sun National Bank $ 67,206,360 5.36 % $ 50,154,000 4.00% $ 62,692,500 5.00%
Sun National Bank, Delaware $ 13,937,116 6.82 % $ 8,174,262 4.00% $ 10,217,827 5.00%
At December 31, 1997
Total Capital (to Risk Weighted Assets):
Sun Bancorp, Inc. $ 61,249,446 10.75 % $ 45,580,983 8.00% N/A
Sun National Bank $ 59,639,244 10.50 % $ 45,439,424 8.00% $ 56,799,280 10.00%
Tier I Capital (to Risk Weighted Assets):
Sun Bancorp, Inc. $ 46,516,411 8.17 % $ 22,774,253 4.00% N/A
Sun National Bank $ 55,445,443 9.76 % $ 22,723,542 4.00% $ 34,085,313 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $ 46,516,411 5.38 % $ 34,584,692 4.00% N/A
Sun National Bank $ 55,445,443 6.42 % $ 34,545,447 4.00% $ 43,181,809 5.00%
</TABLE>
21. 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.
44
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 89,515,533 $ 89,515,533 $ 34,060,747 $ 34,060,747
Investment securities available for sale 621,421,370 621,421,370 551,168,003 551,168,003
Loans receivable, net 689,852,210 713,307,185 427,761,049 424,641,330
Restricted equity investments 28,337,450 28,337,450 25,110,350 25,110,350
Liabilities:
Demand deposits 423,937,652 423,937,652 268,655,067 268,655,067
Savings deposits 140,168,487 140,168,487 117,879,048 117,879,048
Certificates of deposit 461,291,595 457,139,970 308,853,421 308,603,531
Advances from the Federal Home Loan Bank 4,385,908 4,385,908 75,000,000 75,000,000
Loan payable 1,160,000 1,160,000 - -
Federal funds purchased - - 5,500,000 5,500,000
Securities sold under agreements to 332,118,594 332,118,594 213,813,503 213,813,503
repurchase
</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.
Restricted equity securities - Ownership in equity securities of bankers' banks
is restricted and there is no established market for their resale. The carrying
amount is a reasonable estimate of fair value.
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 Banks'
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 not assignable by either the Banks or the borrowers, they
only have value to the Banks and the borrowers.
No adjustment was made to the entry-value interest rates for changes in credit
performing commercial loans and real estate loans for which there are no known
credit concerns. Management segregates loans in appropriate risk categories.
Management believes that the risk factor embedded in the entry-value interest
rates along with the general reserves applicable to the performing commercial
and real estate loan portfolios for which there are no known credit concerns
result in a fair valuation of such loans on an entry-value basis.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998 and 1997. 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, 1998 and 1997, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
45
<PAGE>
22. 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.
23. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S SUBORDINATED DEBT
On November 3, 1998, Sun Capital Trust II ("Sun Trust II"), a statutory business
trust created under Delaware law that is a subsidiary of the Company, issued
$29.9 million, 8.875% Preferred Securities (the "Sun Trust II Preferred
Securities") with a stated value and liquidation preference of $10 per share.
The obligation of Sun Trust II under the Sun Trust II Preferred Securities
issued are fully and unconditionally guaranteed by the Company. The proceeds
from the sale of the Sun Trust II Preferred Securities were utilized by Sun
Trust II to invest in $29.9 million of 8.875% Junior Subordinated Debentures
(the "Sun Trust II Debentures") of the Company. Sun Trust II Debentures are
unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company, except that they rank
pari passu with the Sun Trust I Debentures described below. The Sun Trust II
Debentures represent the sole assets of Sun Trust II. Interest on Sun Trust II
Preferred Securities is cumulative and payable quarterly in arrears. The Company
has the right to optionally redeem the Sun Trust II Debentures prior to the
maturity date of December 31, 2028, on or after December 31, 2003, 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 Sun Trust II Debentures prior to December
31, 2003. Proceeds from any redemption of the Sun Trust II Debentures would
cause a mandatory redemption of the Sun Trust II Preferred Securities having an
aggregate liquidation amount equal to the principal amount of the Sun Trust II
Debentures redeemed.
In 1997, Sun Capital Trust ("Sun Trust I"), a statutory business trust created
under Delaware law that is a subsidiary of the Company, issued $28.8 million,
9.85% Preferred Securities ("Sun Trust I Preferred Securities") with a stated
value and liquidation preference of $25 per share. The obligations of Sun Trust
I under the Sun Trust I Preferred Securities issued are fully and
unconditionally guaranteed by the Company. The proceeds from the sale of Sun
Trust I Preferred Securities were utilized by Sun Trust I to invest in $25
million of 9.85% Junior Subordinated Debentures (the "Sun Trust I Debentures")
of the Company. The Sun Trust I Debentures are unsecured and rank subordinate
and junior in right of payment to all indebtedness, liabilities and obligations
of the Company, except that they rank pari passu with the Sun Trust II
Debentures. Sun Trust I Debentures represent the sole assets of Sun Trust I.
Interest on Sun Trust I Preferred Securities is cumulative and payable quarterly
in arrears. The Company has the right to optionally redeem Sun Trust I
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 Sun Trust I
Debentures prior to March 31, 2002. Proceeds from any redemption of the Sun
Trust I Debentures would cause a mandatory redemption of the Sun Trust I
Preferred Securities having an aggregate liquidation amount equal to the
principal amount of the Sun Trust I Debentures redeemed.
Under the terms of the Sun Trust I Debentures and Sun Trust II
Debentures (the "Debentures"), the Company has the right, with certain
limitations, to defer the payment of interest on the Debentures at any time for
a period not exceeding twenty consecutive quarterly periods. Consequently,
distributions to the holders of the Preferred Securities would be deferred and
accumulate at 9.85% per annum and at 8.875% per annum, compounded quarterly,
with respect to Sun Trust I Preferred Securities and Sun Trust II Preferred
Securities, respectively.
Sun Trust I and Sun Trust II are wholly owned subsidiaries of the
Company, have no independent operations and issued securities that contained a
full and unconditional guarantee of their parent, the Company.
46
<PAGE>
24. ACQUISITIONS (UNAUDITED)
On January 15, 1999, Sun purchased two branch officers from Summit Bank,
Hackensack, N.J. Sun acquired approximately $15,845,000 of deposit liabilities,
$177,000 in real estate and equipment, $20,000 in loans and $229,000 in cash.
Sun paid a premium of $660,000, which will be amortized over seven years.
On January 22, 1999, Sun acquired Eastern Financial Inc., a full-service
mortgage company located in Northfield, N.J. in exchange for 60,294 shares of
the Company's common stock. The transaction was accounted for as a pooling of
interests.
25. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Statements of Financial Condition December 31,
--------------------------------
1998 1997
Assets
Cash $ 10,991,024 $ 269,709
Investments in subsidiaries 123,627,585 81,619,589
Prepaid expense 2,634,711 1,466,298
Accrued interest and other assets 20,311 28,889
------------- -------------
Total $ 137,273,631 $ 83,384,485
============= =============
Liabilities and Shareholders' Equity
Other liabilities $ 290,808 $ 2,186
------------- -------------
Total liabilities 290,808 2,186
Guaranteed preferred beneficial interest in
subordinated debt 58,650,000 28,750,000
Shareholders' Equity 78,332,823 54,632,299
------------- -------------
Total $ 137,273,631 $ 83,384,485
============= =============
Condensed Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net interest expense $(3,294,405) $ (2,387,201) $ (1,888)
Other income 48,750 15,909
Expenses (243,987) (133,238) (16,271)
---------- ----------- ----------
Loss before equity in undistributed
Income of subsidiaries and income tax expense (3,538,392) (2,471,689) (2,250)
Equity in undistributed income of subsidiaries 12,321,926 6,643,038 3,014,893
Income tax expense - - -
----------- ------------ -----------
Net income $ 8,783,534 $ 4,171,349 $ 3,012,643
=========== ============ ===========
</TABLE>
47
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Operating activities:
Net income $ 8,783,534 $ 4,171,349 $ 3,012,643
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,756
Undistributed income of subsidiaries (12,321,926) (6,643,038) (3,014,893)
Gain on sale of investment securities available for sale (48,750)
Changes in assets and liabilities which (used) provided cash:
Accrued interest and other assets (1,159,835) (1,399,770) (167,241)
Accounts payable and accrued expenses 288,622 (693) 2,879
------------ ------------ -----------
Net cash used in operating activities (4,409,605) (3,920,902) (156,856)
------------ ------------ -----------
Investing activities:
Purchases of investment securities available for sale (1,200,000)
Proceeds from sale of investment securities available for sale 1,248,750
Dividends from subsidiary 3,397,521 1,565,937
Advances to subsidiary (33,741,228) (42,116,000) (7,100,000)
------------ ------------ -----------
Net cash used in investing activities (30,343,707) (40,501,313) (7,100,000)
------------ ------------ -----------
Financing activities:
Net borrowings under line of credit agreement 6,000,000
Repayments of short-term borrowings (6,000,000)
Exercise of stock options 34,667 37,768 1,126,984
Proceeds from issuance of guaranteed preferred beneficial interest
in Company's subordinated debt 29,900,000 28,750,000
Proceeds from issuance of common stock 15,828,462 21,881,711
Purchase of treasury stock (281,251)
Payment for fractional interest resulting from stock split (2,694) (1,619)
Payments for fractional interests resulting from stock dividend (4,557) (3,123) (2,146)
------------ ------------ -----------
Net cash provided by financing activities 45,474,627 44,664,737 7,124,838
------------ ------------ -----------
Increase (decrease) in cash 10,721,315 242,522 (132,018)
Cash, beginning of year 269,709 27,187 159,205
------------ ------------ -----------
Cash, end of year $10,991,024 $ 269,709 $ 27,187
============ ============ ===========
</TABLE>
48
<PAGE>
26. 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,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
1998
Interest income $23,093 $22,763 $19,758 $19,059
Interest expense 12,250 11,870 10,653 10,322
------ ------ ------ ------
Net interest income 10,843 10,893 9,105 8,737
Provision for loan losses 626 577 527 483
Other operating income 1,392 1,421 1,434 1,271
Other expenses 7,867 8,356 7,171 6,974
------ ------ ------ ------
Income before income taxes 3,742 3,381 2,841 2,551
Income taxes 1,117 1,029 839 746
------ ------ ------ ------
Net income $ 2,625 $ 2,352 $ 2,002 $ 1,805
====== ====== ====== ======
Basic earnings per share $ 0.39 $ 0.37 $ 0.32 $ 0.30
====== ====== ====== ======
Diluted earnings per share $ 0.35 $ 0.33 $ 0.28 $ 0.27
====== ====== ====== ======
1997
Interest income $16,107 $12,611 $ 9,733 $ 8,247
Interest expense 8,898 6,817 4,969 3,723
------ ------ ------ ------
Net interest income 7,209 5,794 4,764 4,524
Provision for loan losses 420 420 405 420
Other operating income 862 597 369 408
Other expenses 5,503 4,287 3,600 3,568
------ ------ ------ ------
Income before income taxes 2,148 1,684 1,128 944
Income taxes 654 489 325 265
------ ------ ------ ------
Net income $ 1,494 $ 1,195 $ 803 $ 679
====== ====== ====== ======
Basic earnings per share $ 0.26 $ 0.26 $ 0.17 $ 0.15
====== ====== ====== ======
Diluted earnings per share $ 0.23 $ 0.23 $ 0.16 $ 0.14
====== ====== ====== ======
</TABLE>
Basic and diluted earnings per share are computed independently for each of the
quarters presented. Consequently, the sum of the quarters may not equal the
annual earnings per share.
49
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Shares of the Company's common stock have been quoted on the Nasdaq National
Market under the symbol "SNBC" since November 1997. From August 29, 1996, until
November 1997, the Company's common shares were quoted on the Nasdaq SmallCap
Market, with limited and infrequent trading in the common shares during this
period. The following table sets forth the high and low closing sale prices
(adjusted for stock splits and dividends) for the common stock for the calendar
quarters indicated, as published by the Nasdaq SmallCap and National Markets.
The prices reflect inter-dealer prices, with retail markup, markdown, or
commission, and may not represent actual transactions.
High Low
---- ---
1997
First Quarter $ 9.37 $ 8.26
Second Quarter 10.06 8.67
Third Quarter 13.97 9.42
Fourth Quarter 21.59 13.65
1998
First Quarter 30.71 19.68
Second Quarter 31.00 25.25
Third Quarter 29.50 19.25
Fourth Quarter 21.63 16.50
There were 351 holders of record of the Company's common stock as of March 19,
1999. This number does not reflect the number of persons or entities who held
stock in nominee or "street" name through various brokerage firms. At March 19,
1999, there were 7,228,768 shares of the Company's common stock outstanding.
To date, the Company has not paid cash dividends on its common stock. The
Company paid 5% stock dividends on October 30, 1996, June 25, 1997 and May 26,
1998. The Company declared three for two common share stock splits effected by
means of 50% stock dividends paid in September 1997 and March 1998. Future
declarations of dividends by the Board of Directors will depend upon a number of
factors, including the Company's and the Banks' financial condition and results
of operations, investment opportunities available to the Company or the Banks,
capital requirements, regulatory limitations, tax considerations, the amount of
net proceeds retained by the Company and general economic conditions. No
assurances can be given, however, that any dividends will be paid or, if payment
is made, will continue to be paid.
The ability of the Company to pay dividends is dependent upon the ability of the
Banks to pay dividends to the Company. Because the Banks are depository
institutions insured by the Federal Deposit Insurance Corporation ("FDIC"), they
may not pay dividends or distribute capital assets if either one is in default
on any assessment due the FDIC. In addition, the Office of the Comptroller of
the Currency regulations also imposes certain minimum capital requirements that
affect the amount of cash available for the payment of dividends by the Banks.
Under Federal Reserve policy, the Company is required to maintain adequate
regulatory capital and is expected to act as a source of financial strength to
the Banks and to commit resources to support the Banks in circumstances where it
might not do so absent such a policy. This policy could have the effect of
reducing the amount of dividends declarable by the Company.
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.
50
<PAGE>
CORPORATE DIRECTORY
SUN BANCORP, INC. SUN NATIONAL BANK SUN NATIONAL BANK,
DELAWARE
DIRECTORS DIRECTORS DIRECTORS
Bernard A. Brown Bernard A. Brown Bernard A. Brown
Shirley G. Brown Adolph F. Calovi Sidney R. Brown
Sidney R. Brown Linwood C. Gerber Adolph F. Calovi
Ike Brown Douglas J. Heun, CPA Philip W. Koebig, III
Adolph F. Calovi Philip W. Koebig, III Anne E. Koons
Peter Galetto, Jr. Vito J. Marseglia.
Philip W. Koebig, III Joel B. Martin, CPA
Anne E. Koons Anthony Russo, III
Edward H. Salmon, Ph.D.
William H. Thompson, DDS
Kevin K. Walsh, Ph.D.
Executive Management Executive Management Executive Management
Bernard A. Brown Bernard A. Brown Bernard A. Brown
Chairman of the Board Chairman of the Board Chairman of the Board
Sidney R. Brown Philip W. Koebig, III Philip W. Koebig, III
Vice Chairman of the Board President and CEO Vice Chairman of the Board
Philip W. Koebig, III James S. Killough James S. Killough
President and CEO Executive Vice President Executive Vice President
Robert F. Mack Robert F. Mack Robert F. Mack
Executive Vice President Executive Vice President Executive Vice President
and CFO and Cashier and Cashier
James S. Killough Harry G. Miller Charles H. Ready
Executive Vice President Executive Vice President Executive Vice President
Bart A. Speziali
Executive Vice President
Edward F. Madden
Senior Vice President
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Sr. Vice President Vice Presidents (cont.) Assistant Vice Presidents (cont.)
Walter Fillmore Carol A. Pringle Salvatore Panzino
Roy S. Probst Jeannette Piracci
Director of Corporate Gary J. Riordan Jodi Russo
Development James D. Robson Jan M. Sanger
Ronald A. Seagraves Steven A. Ryan John Semple
Harry B. Sauers Kimberlee J. Studzinski
Regional Vice Presidents Richard J. Simone Pauline Vitola
Daniel F. Hires John Skoglund David A. White
James G. Erickson Joseph Walsh Diane E. Wood
Robert E. Davis, Jr. Gary G. Washington
Edward W. Wahl John G. Watkins Assistant Controllers
B. Knoll Bowman Ann O. Wigglesworth Anthony Lombardo
Henry J. Obergfell Cynthia L. Volk
Robert J. LaPalomento Director, Human Resources
Marjorie H. Hart Assistant Cashiers
Vice President and Auditor Patsy M. Bianca
Catherine Romeo Controllers Erika O. Bonsanto
Michael T. LaPlante Grace M. Boyd
Vice Presidents William T. Moyer Darla A. D'Antonio
Diana Ahern Darlene V. Driscoll
Dorothy Antrim Assistant Vice Presidents Nancy Hagan
George Banks Scott Agostini Jesse L. Irvin
Al Bard Kathy Barrella Bernard J. Maloney
Harry Bassford Nancy Baumgartner Ana Manzano-Cruz
James Biggs William J. Bugdon Donna M. McGray
Frank J. Birchler Ronald Burnett Marcia Park
Graham L. Bowers Devon Callan Margarida R. Pereira
Charles F. Brown Judith Coleman Mary Alice Petzinger
Rosemarie C. Carrafiello Linda Convey Michelle Powelczyk
Dennis DeVito Catherine M. Crosby Cecelia M. Rawheiser
Roland J. Dey Mary E. Davis Patricia K Renzi
Ronald J. Durborow Fern K. Dirkes Catherine Shellem
Bruce E. Engle Sharon A. Draine Ronald C. Tennant
Duncan H. Farquhar Bessie M. Evans Lisa Varesio
Sandra Ferrarie Elizabeth Hackney Kathy Watt
Joseph Gleason Etta Hart Charlotte Wigglesworth
John A. Hall Barbara L. Hawryliw Shawn P. Williams
Marjorie H. Hall Bruce Hiller Beverly Wright
John Hancq Susan Hoffman Jean Young
Steve Hoffman J. Philip Hough
Jerry Kanefsky Nina Ingemi Administrative Services Officer
Michael W. Lloyd Candace L. Johnson Ernest Current
William J. MacDonald D. Gail Knight
Mariluz McVey Adriana B. Lindner Marketing Officer
Holly L. Milita Kevin M. Loughlin Allison K. Kruse
Nancy H. Muldowney Larry A. Makela
Carol D. Neff Priscilla A. Miller
Bette L. Nuss Darren Mitchel
Reid Nylander Sally Niece
Kevin O'Donnell Nicoletta A. Paloni
Francis Pontillo
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
ADVISORY BOARD MEMBERS
<S> <C> <C> <C>
ATLANTIC COUNTY BURLINGTON COUNTY CAMDEN COUNTY CAPE MAY COUNTY
- --------------- ----------------- ------------- ---------------
Robert J. Bray Ronald L. Allen Fred S. Berlinsky Curtis Bashaw
Richard T. Gerber Arthur Brooks Richard B. Charny, Esq. Joseph M. Brennan, CPA
Howard Green Thomas Budd Reynold P. Cicalese, CPA William J. Brown
Paula R. Hetzel, Esq. Leonard V. Fox, Jr. Leon D. Dembo, Esq. Michael J. Caruso, DO
Thomas J. Kuhar Philip E. Haines, Esq. Ron Dubrow, CPA Albert Donzanti
Richard S. Mairone, Esq. Eric Johnson Michael P. Edmondson Joseph S. Franco
James J. McCullough Robert Meyer William Green William Kindle
Robert Nichols Frederick Pond Edward Hutchinson Vincent L. LaManna, Jr., Esq
Frank Rich, Jr. Mike Quick Jerome C. Pontillo, Esq. Vincent Orlando
Leo B. Schoffer Joseph P. Schooley William T. Riskie Malcolm Robertson
Frank J. Siracusa Stephen Spitz Dolores White Robert I. Salasin, MD
Richard Traa James C. Wagner Charlie Sansone
Mike Turner HAMMONTON SALEM COUNTY Robert Smeltzer
--------- ------------
Donald B. Vass Arthur R. Brown, Jr. James D. Donnelly, Esq. Thomas L. Scott
Joseph Continisio, Jr. Carl R. Gaskill William Thawley
CUMBERLAND COUNTY Carmen T. Grasso John A. Kugler Lewis J. Tozour
- -----------------
Catherine J. Arpino Russell Lucca Michael S. Warner, CPA Ernie Utsch
Dominick P. Baruffi, II
Fred J. Bernardini, Sr. MERCER COUNTY MONMOUTH COUNTY OCEAN COUNTY
------------- --------------- ------------
Ginger L. Chase Elizabeth A. Allen Robert W. Allison, CPA James D. Caldwell
Harry E. Hearing, CPA Michael D. Briehler James Bourke, CPA Stephen M. Cors
David G. Manders James T. Harveson Michael Bruno, Esq. Steven Eisenberg
Ronald G. Rossi Paul N. Watter John Callahan, CPA Robert Lange
Michael L. Testa, Esq. Carl Cappadona, CPA Richard Larsen, CPA
Scott J. Zucca Joseph Gunteski, CPA Kenneth B. Maxwell
Stephen Kelleher, CPA Joseph T. Mezzina
John Szymanski
</TABLE>
53
<PAGE>
SUN BANCORP, INC. LOCATIONS
Sun National Bank
Financial Service Centers
Atlantic County Burlington County
2028 Atlantic & Arkansas Avenue 220 West Front Street
Atlantic City, New Jersey 08401 Florence, New Jersey 08518
(609)345-8272 (609)499-4960
3900 Atlantic Avenue 380 South Lenola Road
Brigantine, New Jersey 08203 Maple Shade, New Jersey 08052
(609)266-2100 (856)222-0200
3100 Hingston Avenue Route 73 and Brick Road
Egg Harbor Twp., New Jersey 08234 Marlton, New Jersey 08053
(609)272-8200 (856)489-3140
12th Street & First Road 99 Hartford Road
Hammonton, New Jersey 08037 Medford, New Jersey 08055
(609)567-5880 (609)654-7600
599 New Road & Maple Avenue 15-17 Scott Street
Linwood, New Jersey 08221 Riverside, New Jersey 08075
(609)927-9191 (856)461-0461
903 Boulevard, Route 50
Mays Landing, New Jersey 08330 Camden County
(609)625-9152 Route 70 & Cornell Ave.
Cherry Hill, New Jersey 08002
Mainland Plaza (856)910-2424
501 Tilton Road
Northfield, New Jersey 08225 1468 Blackwood Clementon Road
(609)645-3200 Clementon, New Jersey 08021
(856)784-4242
521 New Road & Rhode Island Ave.
Somers Point, New Jersey 08244 430 Gibbsboro Road
(609)653-8200 Lindenwold, New Jersey 08021
(856)346-3800
2201 Route 50
Tuckahoe, New Jersey 08250 47 Centre Street
(609)628-2662 Merchantville, New Jersey 08109
(856)662-3800
54
<PAGE>
Cape May County Mercer County
941 Columbia Avenue 226 South Broad Street
Cape May, New Jersey 08204 Trenton, New Jersey 08608
(609)898-2120 (609)392-3300
1011B Route 9 South Chambers Street & Forest Avenue
Cape May Court House, New Jersey 08210 Trenton, New Jersey 08611
(609)465-7197 (609)396-1900
71 Route 50 1660 North Olden Avenue (Ewing)
Greenfield, New Jersey 08230 Trenton, New Jersey 08638
(609)390-3418 (609)530-9653
108 Roosevelt Boulevard 411 Route 33
Marmora, New Jersey 08223 Hamilton Square
(609)390-3529 Trenton, New Jersey 08619
(609)890-7447
Cumberland County
1026 High Street
Millville, New Jersey 08332 Middlesex County
(856)293-0800 2 Village Boulevard (Forrestal Village)
Princeton, New Jersey 08540
1736 Main Street (609)987-8809
Port Norris, New Jersey 08349
(856)785-1565
Monmouth County
401 Landis Avenue 158 Wyckoff Road
Vineland, New Jersey 08360 Eatontown, New Jersey 07724
(856)205-0700 (732)542-4800
1180 East Landis Avenue
Vineland, New Jersey 08360
(856)205-0900
Gloucester County
#6 Village Center Drive
Swedesboro, New Jersey 08085
(856)467-2111
55
<PAGE>
Ocean County Sun National Bank, Delaware
311 South Main Street Financial Service Centers
Barnegat, New Jersey 08005
(609)698-4300 1101 Governor's Place
Bear, Delaware 19701
504 Route 9 (302)392-4221
Lanoka Harbor, New Jersey 08734
(609)242-8044 2080 New Castle Avenue
New Castle, Delaware 19720
525 Route 72 East (302)254-3569
Manahawkin, New Jersey 08050
(609)597-1800 Liberty Plaza - Possum Park Mall
700 Kirkwood Highway
Radio & Mathistown Road Newark, Delaware 19711
Mystic Island, New Jersey 08087 (302)224-3382
(609)296-1773
One Christina Centre, 17th Floor
1211 Long Beach Boulevard 301 North Walnut St.
Ship Bottom, New Jersey 08008 Wilmington, Delaware 19801
(609)361-8011 (302)254-3560
601 Route 37 West, Suite 300 1300 Market Street
Toms River, New Jersey 08757 Wilmington, Delaware 19801
(732)240-2922 (302)254-3563
540 Route 9 4401 Concord Pike
Tuckerton, New Jersey 08087 Wilmington, Delaware 19803
(609)296-1700 (302)334-4091
1800 W. 4th Street
Salem County Wilmington, Delaware 19805
270 Georgetown Road (302)254-3566
Carney's Point, New Jersey 08069
(856)299-5770 1300 Rocky Run Parkway
Brandywine Commons Shopping Ctr.
175 West Broadway Wilmington, Delaware 19803
Salem, New Jersey 08079 (302)334-4038
(856)935-6560
8 North Main Street Sun Mortgage Company Offices
Woodstown, New Jersey 08098 209 Barclay Pavilion
(856)769-2466 Rt. 70
Cherry Hill, New Jersey 08034
(856)428-5577
Somerset County
1185 Route 206 (Rocky Hill) Eastern Financial Division
Montgomery Twp., New Jersey 08540 1337 Tilton Road
(609)497-0500 Northfield, New Jersey 08225
(609)646-0100
56
EXHIBIT 21
Subsidiaries of the Company
Subsidiaries Percentage Owned Jurisdiction of Incorporation
Sun National Bank, 100% United States
New Jersey
Sun National Bank, 100% United States
Delaware
Med-Vine, Inc.(1) 100% Delaware
Sun Capital Trust I 100% Delaware
Sun Capital Trust II 100% Delaware
Sun Mortgage Company(2) 100% New Jersey
- ------------------------------------
(1) Med-Vine, Inc. is a wholly-owned subsidiary of Sun National Bank, New
Jersey.
(2) Sun Mortgage Company is a wholly-owned subsidiary of Sun National Bank, New
Jersey.
EXHIBIT 23
<PAGE>
INDEPENDENT AUDITOR'S 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, 1999,
appearing in this Annual Report on Form 10-K of Sun Bancorp, Inc. for the year
ended December 31, 1998.
/s/ Deloitte & Touche LLP
- ---------------------------------
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 54,816
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 34,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 621,421
<INVESTMENTS-CARRYING> 621,421
<INVESTMENTS-MARKET> 621,421
<LOANS> 696,995
<ALLOWANCE> 7,143
<TOTAL-ASSETS> 1,515,403
<DEPOSITS> 1,025,398
<SHORT-TERM> 332,119
<LIABILITIES-OTHER> 15,358
<LONG-TERM> 5,546
58,650
0
<COMMON> 7,165
<OTHER-SE> 71,167
<TOTAL-LIABILITIES-AND-EQUITY> 1,515,403
<INTEREST-LOAN> 47,019
<INTEREST-INVEST> 37,315
<INTEREST-OTHER> 339
<INTEREST-TOTAL> 84,673
<INTEREST-DEPOSIT> 25,322
<INTEREST-EXPENSE> 45,095
<INTEREST-INCOME-NET> 39,579
<LOAN-LOSSES> 2,213
<SECURITIES-GAINS> 1,037
<EXPENSE-OTHER> 30,368
<INCOME-PRETAX> 12,514
<INCOME-PRE-EXTRAORDINARY> 12,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,784
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 3.40
<LOANS-NON> 1,608
<LOANS-PAST> 886
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,194
<CHARGE-OFFS> 297
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 7,143
<ALLOWANCE-DOMESTIC> 7,143
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,202
</TABLE>
