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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from to .
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Commission File No. 0-20957
Sun Bancorp, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 52-1382541
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
226 Landis Avenue, Vineland, New Jersey 08360
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (856) 691-7700
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the closing price of the registrant's Common Stock
on March 23, 2000, was approximately $48.8 million.
As of March 23, 2000, there were issued and outstanding 10,086,635
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, 1999. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders. (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 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, 1999, the Company had
total assets of $1.98 billion, total deposits of $1.29 billion and total
shareholders' equity of $91.1 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 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").
Through the Banks, the Company provides community banking services
through 73 financial service centers in southern and central New Jersey, New
Castle County, Delaware and in Philadelphia, Pennsylvania. The Banks offer
comprehensive lending, depository and financial services to their customers and
marketplace. The Banks' lending services to businesses include commercial and
industrial loans and commercial real estate loans. The Banks' commercial deposit
services include checking accounts and cash management products such as
electronic banking, sweep accounts, lockbox services, PC banking and controlled
disbursement services. The Banks' lending services to consumers include
residential mortgage loans, home equity loans and installment loans. The Banks'
consumer services include checking accounts, savings accounts, money market
deposits, certificates of deposit and individual retirement accounts. Through a
third party arrangement, the Banks also offer mutual funds, securities
brokerage, annuities and investment advisory services.
Expansion Strategy
The Company's Board of Directors and management believe there is a
demand for locally based and managed community banks that can provide
comprehensive, competitive and responsive commercial and retail banking services
to meet the borrowing, depository and other financial services needs of the
small and medium sized business and consumers in the communities the Company
serves. Beginning in 1993, the Company embarked upon an expansion of its
operations and retail market share in central and southern New Jersey through
mergers, acquisitions and expansion of facilities and financial services.
Through its acquisition and expansion program, the Company has
successfully completed the acquisition of two commercial banks with a total of
$119 million in assets, as the well as nine branch purchase transactions in
which the Company acquired a total of 51 branches, $820 million of deposits and
$146 million of loans in southern and central New Jersey and New Castle County,
Delaware.
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The Company's expansion in southern and central New Jersey has also
included the opening of seven de novo financial service centers, including its
first supermarket office. In 1999, the Company opened twelve new financial
service centers in locations previously occupied by regional competitors. These
new financial service centers have significantly enhanced the Company's market
presence in the New Jersey counties of Camden, Mercer, Monmouth and Ocean.
The Company's expansion into contiguous portions of Delaware was
achieved in December 1998 with Sun Delaware's assumption of $169 million in
deposits (including eight branch locations) and purchase of $128 million of
loans from Household Bank, fsb, the successor to Beneficial National Bank. The
demographics of this market and the opportunities for Sun Delaware are similar
to the markets and communities the Company currently serves in southern and
central New Jersey.
During 1999, the Company continued to increase its market penetration
in southern and central New Jersey. In January 1999, Sun New Jersey acquired two
branch office locations, with combined deposits of approximately $16 million,
from Summit Bank in the New Jersey counties of Cumberland and Gloucester. In
September 1999, Sun New Jersey acquired 14 branch locations, assumed
approximately $230 million in deposits and purchased approximately $51,000 in
account loans from First Union National Bank. This was an in-market acquisition,
principally in the New Jersey counties of Cumberland and Cape May, which
enhanced Sun New Jersey's market share in those counties. Due to the overlap
with existing financial service center locations and to reduce the associated
operating expenses, Sun New Jersey consolidated six of the facilities.
During July 1999, the Company consummated the sale of 2,150,000 shares
of its common stock and an additional 322,500 shares in accordance with the
exercise of an over-allotment option by the underwriters. The Company used the
proceeds from the sales of its common stock, in part, to contribute capital to
Sun New Jersey in connection with the First Union branch acquisition in
September 1999.
The Company has also experienced a significant level of loan growth.
Its loan portfolio increased from $83.4 million at December 31, 1993 to $900.7
million at December 31, 1999. Much of the Company's loan growth is attributable
to the hiring 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 were able to increase its customer base and the
number of loan originations. An additional reason for the Company's loan growth
is that its lending officers live in the communities in which they work and
understand the local business environment and the economic conditions and trends
of their markets. The Company also has established a number of regional advisory
boards, consisting of prominent local business and community representatives who
refer significant business opportunities to the Company. The Company's efforts
to increase its lending to businesses along the central and southern New Jersey
seashore (i.e., seasonal lending) have contributed to its loan growth.
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Through the acquisition of two mortgage origination companies, the
Company undertook an expansion of its lending to include residential lending.
The Company acquired Allegiance Mortgage Company located in Cherry Hill, New
Jersey in July 1998, and Eastern Financial, Inc. located in Northfield, New
Jersey in February 1999. Both were merged into Sun Mortgage Company, a
subsidiary of Sun New Jersey. In an effort to reduce costs and increase
oversight of this division, the operations of Sun Mortgage Company were moved to
the Company's main offices in Vineland, New Jersey. In addition, the Company is
in the process of terminating the existence of Sun Mortgage Company as a
separate entity. Any origination of fixed-rate and adjustable rate mortgage
loans for sale into the secondary market will be conducted by the Bank in the
future.
Concurrent with its expansion, the Company's earnings have grown from
$1.1 million for 1993 to $9.7 million for 1999. On a per share basis, earnings
have increased from $0.39 per share on a diluted basis for 1993 to $1.06 per
share on a diluted basis for 1999. The Company has reached these levels of
earnings despite non-cash intangible amortization expense amounting to $6.4
million in 1999.
To support and manage its expanded operations and to provide management
resources to support further expansion and growth, the Company has recruited and
hired experienced commercial loan officers, and also credit, compliance, loan
review and operations personnel, and senior level executives. Additionally, to
provide its customers with enhanced services that include telephone banking,
personal computer home banking and sophisticated cash management for commercial
customers, the Company has enhanced and expanded its operational and management
information systems, including telecommunications, computer and technology-based
systems.
While the Company continues to monitor the adequacy of management and
resources available to support its recent growth, there can be no assurance that
the Company will be successful in managing all elements related to its growth.
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 73 branch offices located in the
southern and central New Jersey counties of Atlantic, Burlington, Camden, Cape
May, Cumberland, Gloucester, Hunterdon, Mercer, Middlesex, Monmouth, Ocean,
Salem and Somerset, New Castle County, Delaware and Philadelphia, Pennsylvania
("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.
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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 the Banks' reputation for customer service as
their major competitive advantage in attracting and retaining customers in their
respective market areas. The Banks also benefit from their community
orientation, as well as their established deposit base and level of core
deposits.
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.
Substantially all loans are originated in the Banks' primary market area.
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
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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. During 1999, residential mortgages were
originated through Sun Mortgage Company. Currently, 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
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 1999 was approximately $5.0 million.
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.
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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 state. After all of the required information is obtained, a
credit decision is made. 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 Bank 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.
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, 1999, the
Banks had approximately $215.0 million in commercial loan commitments
outstanding.
Credit Risk, Credit Administration and Loan Review. Credit risk
represents the possibility that a customer or counterparty may not perform in
accordance with contractual terms. The Banks incur credit risk whenever they
extend credit to, or enter into other
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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. The credit administration department 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 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. While
management 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. During 1999, the Company's mortgage
banking activities were conducted principally through Sun Mortgage Company, a
subsidiary of Sun New Jersey. Sun Mortgage Company's activities included the
origination of fixed-rate and adjustable rate residential real estate loans
(generally consisting of one-to-four family first mortgage loans), for sale into
the secondary mortgage market. Sun Mortgage Company's total residential real
estate loan production during 1999 was $39.0 million.
Currently, mortgage banking activities are conducted through the Banks.
In the future, the Banks may also consider purchasing, as well as selling, loan
servicing rights.
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. 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 areas through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits, term certificate
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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 solicit funds
outside the States of New Jersey, Delaware, or Pennsylvania, 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 Federal Home Loan Bank (the "FHLB") of
New York to supplement its supply of lendable funds. Sun Delaware may obtain
advances from the FHLB of Pittsburgh. Such advances must be secured by a pledge
of the Banks' stock in the FHLB of New York or Pittsburgh, respectively, and a
portion of the Banks' 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, 1999, Sun New Jersey had $119.7 million in secured
FHLB advances, and Sun Delaware had no FHLB advances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Borrowings" in the Company's 1999 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 1999.
Competition
The Banks face substantial competition both in attracting deposits and
in lending funds. The States of New Jersey and Delaware and the county of
Philadelphia, Pennsylvania have high densities 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, New
Castle County, Delaware and Philadelphia, Pennsylvania.
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 Banks' market area.
Competition for funds also include a number of insurance
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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 than 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, 1999, the Company had 549 full-time and 117 part-time
employees. The Company's employees are not represented by a collective
bargaining group. The Company believes that its relationship with its employees
is good.
SUPERVISION AND REGULATION
Introduction
Bank holding companies and banks are extensively regulated under both
federal and state law. The 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 sources of the Company's
revenue and cash flow are management fees and 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.
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").
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act
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defines "financial in nature" to include securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities; and activities that the
Federal Reserve Board has determined to be closely related to banking. A
qualifying national bank also may engage, subject to limitations on investment,
in activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development, and real estate
investment, through a financial subsidiary of the bank. The Act also prohibits
new unitary thrift holding companies from engaging in nonfinancial activities or
from affiliating with a nonfinancial entity.
Capital Requirements. The Federal Reserve has 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 requirements. 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 has the right to examine any company which
controls a bank, the cost of which examination may be assessed against and paid
by the company. Such examination may 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, provided,
however, that such acquisition is permitted by applicable law of the United
States or any other state.
12
<PAGE>
Under Chapter 8 to Title 5 of the Delaware Code, the Company is
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 were to become a Delaware bank holding company, the
State Bank Commissioner of Delaware would have supervision over the Company and
the Commissioner would have the right to examine the Company, including its
nonbank subsidiaries. Such an examination would be conducted jointly,
concurrently or in lieu of examinations made by a federal bank regulatory
agency.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
company is expected to serve as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength" policy for subsidiary banks, the Federal Reserve
has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fund fully the
dividends, and the prospective rate of earnings retention appears to be
consistent with the corporation's capital needs, asset quality and overall
financial condition.
The 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. 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 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 $31.3 million at December 31, 1999. 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
13
<PAGE>
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.
Acquisitions. 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.
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. Under the current regulations, the Company is
assessed a premium on BIF-insured deposits. Most members of BIF pay a lower
premium to the FDIC. After 1999, assessments for BIF and SAIF members should be
the same. It is expected that these continuing assessments for both SAIF and BIF
members will be used to repay outstanding Financing Corporation bond
obligations.
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, 1999, 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 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
14
<PAGE>
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, 1999, the Banks' total and Tier 1 risk-based capital
ratios and leverage ratios exceeded the minimum regulatory capital requirements.
15
<PAGE>
Item 2. Properties
- ------------------
The Company operates from its main office in Vineland, New Jersey and
73 branch offices. Sun New Jersey and Sun Delaware lease their main offices and
38 branch offices. The remainder of the branch offices are owned by Sun New
Jersey.
Item 3. Legal Proceedings
- -------------------------
The Company or the Banks are periodically involved in various claims
and lawsuits, 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
Company's and 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 Stockholder Matters
- --------------------------------------------------------------------------------
The information contained under the caption "Price Range of Common
Stock and Dividends" in the Company's 1999 Annual Report to Shareholders, filed
as Exhibit 13 to this Report (the "Annual Report"), is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained under the caption "Selected Financial Data"
in the Company's Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Gap Analysis"
in the Company's Annual Report is incorporated herein by reference.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of Sun Bancorp, Inc. included in
the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I - Election of
Directors" in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first table under the caption "Proposal I -
Election of Directors" in the Proxy Statement.
(c) Changes in Control
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.
17
<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the section captioned "Additional
Information About Directors and Executive Officers - Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) The following consolidated financial statements and
the report of independent auditor of the Registrant
included in the Registrant's Annual Report to
Shareholders are incorporated herein by reference and
also in Item 8 hereof.
Independent Auditors' Report
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998.
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements
(2) There are no financial statements schedules that are
required to be included in Part II, Item 8.
(b) The following reports on Form 8-K were filed during the quarter
ended December 31, 1999:
On November 8, 1999, the Company filed a current report on Form 8-K
dated October 26, 1999 (Items 5 and 7) to report the Company's adoption of a
repurchase plan covering up to 9% or 906,000 shares of the Company's common
stock in the open market.
18
<PAGE>
<TABLE>
<CAPTION>
(c) Exhibits
The following exhibits are filed as part of this report:
<S> <C>
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 ***
10.3 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.****
10.5 Purchase and Assumption Agreement dated May 10, 1999 by and between Sun
New Jersey and First Union National Bank*****
11 Computation regarding earnings per share******
13 Annual Report to Shareholders for the Year Ended December 31, 1999
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule (electronic filing only)
</TABLE>
- ---------------------
* 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 Current Report on Form 8-K
dated July 20, 1998.
***** Incorporated by reference to the Company's Current Report on Form
8-K dated May 10, 1999.
****** 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, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 23, 2000.
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 23, 2000.
<TABLE>
<CAPTION>
<S> <C>
/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/Jeffrey S. Brown /s/Sidney R. Brown
- ------------------------------------- -----------------------------------------------
Jeffrey S. Brown Sidney R. Brown
Director Vice Chairman, Secretary and Treasurer
/s/Anne E. Koons
- ------------------------------------- -----------------------------------------------
Peter Galetto, Jr. Anne E. Koons
Director Director
- ------------------------------------- -----------------------------------------------
Ike Brown Adolph F. Calovi
Director Director
/s/Robert F. Mack
- -------------------------------------
Robert F. Mack
Executive Vice President
(Principal Accounting Officer)
</TABLE>
EXHIBIT 10.3
<PAGE>
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.
--------------------------
1,035,370 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.
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
1
<PAGE>
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 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)
2
<PAGE>
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 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
3
<PAGE>
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
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
with any such law, rule or regulation or to avoid any such penalty.
4
<PAGE>
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 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
5
<PAGE>
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.
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.
6
<PAGE>
(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 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.
7
<PAGE>
(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.
(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.
8
EXHIBIT 13
<PAGE>
Sun Bancorp, Inc.
1999 ANNUAL REPORT
<PAGE>
[PHOTOGRAPH OMITTED]
<PAGE>
Sun has all the big-bank services, but a small-bank attitude.
They understand my business and it makes a big difference...
The big banks just don't get it - how important it is to businesses in unique
industries to have a banker who understands that industry. Sun has local lenders
who know the area and what it takes to do business here. I can pick up the phone
and have someone to talk to who knows what I'm talking about. Sun is really
willing to work with a customer. It's hard to find that anymore!
Jeffrey Reichle
President, Lunds Fisheries
Cape May, NJ
<TABLE>
<CAPTION>
ANOTHER RECORD YEAR
SELECTED FINANCIAL DATA
At or for the Years Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Assets $ 1,980,861 $ 1,515,404 $ 1,099,973 $ 436,795 $ 369,895
Cash and investments 948,898 739,274 610,339 117,388 164,251
Loans receivable (net) 900,671 689,852 427,761 295,501 183,634
Deposits 1,291,326 1,025,398 695,388 385,987 335,248
Borrowings and securities sold
under agreements to repurchase 528,752 337,665 316,314 21,253 8,000
Guaranteed preferred beneficial
interest in Company's
subordinated debt 57,838 58,650 28,750
Shareholders' equity 91,104 78,333 54,632 27,415 24,671
Selected Results of Operations:
Interest income $ 114,254 $ 82,789 $ 46,699 $ 28,981 $ 20,698
Net interest income 53,174 37,695 22,291 16,447 13,011
Provision for loan losses 2,089 2,213 1,665 900 808
Net interest income after
provision for loan losses 51,085 35,482 20,626 15,547 12,203
Non-interest income 9,751 7,400 2,236 1,746 1,651
Non-interest expense 46,855 30,367 16,958 12,918 9,895
Net income 9,714 8,784 4,171 3,013 2,819
Per Share Data:
Net income
Basic $ 1.14 $ 1.30 $ 0.82 $ 0.64 $ 0.63
Diluted $ 1.06 $ 1.14 $ 0.74 $ 0.60 $ 0.59
Book Value $ 9.93 $ 10.43 $ 8.23 $ 5.69 $ 5.46
Selected Ratios:
Return on average assets 0.58 % 0.75 % 0.66 % 0.74 % 1.03 %
Return on average equity 11.08 % 14.29 % 12.89 % 11.99 % 12.42 %
Ratio of equity to assets 3.57 % 5.17 % 4.97 % 6.28 % 6.67 %
Other Data and Ratios(1):
Cash basis earnings per share:
Basic $ 1.63 $ 1.68 $ 0.93 $ 0.69 $ 0.65
Diluted $ 1.52 $ 1.48 $ 0.84 $ 0.64 $ 0.60
Cash basis:
Return on average assets 0.84 % 0.94 % 0.74 % 0.80 % 1.07 %
Return on average equity 15.89 % 19.71 % 14.58 % 12.89 % 12.81 %
</TABLE>
(1) - The Company's cash basis data and ratios are determined by adding back to
reported net income the non-cash amortization of intangibles, net of associated
tax benefits.
1
<PAGE>
To Our Shareholders and Friends:
Just six short years ago, Sun Bancorp developed a growth strategy that,
when fully implemented, will position Sun as one of the predominant community
banks in central and southern New Jersey and expand its presence into the
neighboring states of Delaware and Pennsylvania. We are very pleased to report
that Sun continued to carry out that strategy in 1999...by seizing opportunities
and producing another year of growth. As you read this annual report, you will
see that our geographic boundaries have expanded, our products and services have
been tailored to the needs of our customers and the commitments we have made to
the communities we serve have never been stronger.
Another year of growth opportunities...
Sun completed two acquisitions of branch offices from other financial
institutions in 1999. In January, Sun acquired two offices from Summit Bank, and
in September, it acquired 14 branches from First Union National Bank. Both of
these purchases strengthened Sun's presence in central and southern New Jersey.
In April, Sun opened a loan production office in Philadelphia,
signaling our entrance into the Pennsylvania marketplace. By December this
office had moved to a prominent location in center-city Philadelphia, expanding
into a full-service financial service center. Our well-publicized grand opening
was attended by the newly elected Philadelphia Mayor John Street. We have been
gratified by the acceptance we have received from the Philadelphia business
community. The Philadelphia office, staffed by an experienced team of banking
professionals, has, in short order, exceeded all of our expectations.
Also during 1999, 14 de novo financial service centers were opened in
New Jersey that were former offices considered "excess" from the merger of First
Union and CoreStates Banks. Normally, it takes a few years of growth before new
offices reach profitability. We are pleased to report that nearly all of these
new financial service centers are ahead of our original levels of expectation
and a few are already profitable.
In connection with our acquisition of branches from First Union, Sun
raised $37 million in capital through a public offering of common stock in July.
In December, we were pleased to open our newest financial service
center in Bridgeton, New Jersey. Our renovation of an historic landmark in the
city was a source of real community pride. As a result, we have received
wonderful support from the leaders of the city and from many new customers in
the Bridgeton community.
By year-end, Sun Bancorp operated 73 financial service centers in three
states.
Strengthening our core business...
Continuing the momentum it had gained over the last few years, Sun
continued to advance its core business during 1999. Commercial loan demand,
strong in past years, has grown even stronger due to Sun's staff of seasoned
lending professionals. Sun's cash management division, introduced a few years
ago, has developed an extremely successful package of services to the business
community and has grown significantly.
In addition, we have added "Everything Under the Sun for Small
Business," a unique package of products and services designed to meet the needs
of smaller businesses in our market area. It has been a huge success in the
short time it has been offered.
2
<PAGE>
As Sun becomes more focused on its retail business, more frequent
advertising campaigns through the various media have made Sun more visible...and
have effectively communicated our message to the individuals and the businesses
located in the communities we serve. We intend to continue the development of
our name recognition throughout 2000...building a brand that is a recognized
leader in providing all the services of a large bank without sacrificing
community-bank relationships.
While not all of our expectations were attained during 1999, management
and the board of directors have closely monitored Sun's progress and have made
decisions based on achieving the greatest benefit for Sun and its shareholders.
As part of this ongoing effort, our mortgage banking subsidiary was recently
consolidated into Sun National Bank and, beginning in 2000, the origination of
residential mortgage loans will be coordinated through our consumer lending
division.
Improving our communication...
As the size and geographic breadth of our market grew in 1999, we
implemented programs to increase and strengthen internal communications. Sun
began a quarterly newsletter, filled with photographs and facts, that is
distributed to all employees. It informs them of new products and services,
corporate events and interesting information about the people who work here.
Record financial performance...
The twelve months ended December 31, 1999 marked a record financial
performance for Sun. During the past year, total assets grew almost 31% to $1.98
billion. Net loans increased almost 31% to $901 million, while total deposits
grew almost 26% to $1.3 billion and total capital increased more than 16% to $91
million.
Net interest income for the year ended December 31, 1999 totaled $53.2
million compared to $37.7 million for 1998, an increase of $15.5 million or 41%.
Net income for the year ended December 31, 1999 amounted to $9.7 million
compared to $8.8 million for 1998, an increase of $931,000, or 10.6%.
Positioned for a bright future...
We believe community banking will face many challenges as we begin the
new millennium. These challenges present an extraordinary opportunity for us to
meet the increasingly complex needs of the individuals and businesses in the
communities we serve.
We continue to be a customer-focused, community-oriented, grass-roots
organization, while also being able to develop sophisticated products and
services that serve a broad spectrum of the marketplace. We are steadfastly
determined to deliver our distinct brand of personalized, professional service
to each of our customers.
Our past achievements have been accomplished by a staff of
hard-working and professional bankers. We sincerely appreciate their
contribution to Sun's success. As always, we are also appreciative of the
continued support of our shareholders and friends.
Sincerely,
/s/Bernard A. Brown /s/Philip W. Koebig, III /s/Sidney R. Brown
- ---------------------- ------------------------- --------------------
Bernard A. Brown Philip W. Koebig, III Sidney R. Brown
Chairman President and Chief Vice Chairman
Executive Officer
[MAP OMITTED]
[PHOTOGRAPH OMITTED]
From left to right:
Philip W. Koebig, III
President and Chief
Executive Officer;
Bernard A. Brown,
Chairman;
Sidney R. Brown,
Vice President
3
<PAGE>
GROWTH IS ABOUT SERVING CUSTOMERS BETTER...
1999 was a year of record growth as Sun expanded its financial service center
network into 30 communities with the opening of 14 new offices, 16 acquired
offices and consolidating 6 locations within our market area. By year's end, the
Sun network had grown to 73 financial service centers in three states.
While growth provides the scale needed to be a competitive force in the new
century, the true core of Sun's present future success is an uncompromising
focus on people. Your board of directors and management team strongly believe
that the future big winners in banking will be those who can deliver what
customers want faster, more conveniently and with a level of value-added
personal service that builds enduring relationships.
Increasing consumer dissatisfaction with big-bank depersonalization and
inflexibility is opportunity calling for a bank well-positioned to attract those
customers. It requires an energy and commitment that must resonate throughout
the bank. Directors, advisory board, management and staff must mobilize as a
team to deliver a level of service that separates Sun from any competition.
It requires innovative products to meet the complex, changing needs of both
small and large customers. It requires a staff that is more knowledgeable, more
highly-trained, more committed to the vision than any competitor's staff. It
requires passion for excellence and innovation in every department, at every
level, every day.
Your board of directors and management team are committed to foster and nourish
this passion. Throughout these pages, listen to our staff who live this
commitment every day... and to the customers who feel its impact. This is the
future we're building - one exceptionally satisfied customer at a time.
"People in Delaware like to do business with people they know, and they know
me..." "Sun's senior staff in Delaware is locally trained... and so accessible,
it surprises customers. Many Delaware banks have lost touch with serving the
day-to-day needs of commercial customers...and that's Sun's greatest strength.
We're the ideal business bank for small and mid-size commercial clients."
[PHOTOGRAPH OMITTED]
Charles F. Brown,
Regional Vice President,
Commercial Lending
Sun National Bank, Delaware
[PHOTOGRAPH OMITTED]
"Philadelphia
is a BIG market
hungering for a more flexible,
customer-sensitive bank
with great products and service..."
The potential of the market is reflected in our closing $42 million in loans
there before even opening our full-service office...achieving profitability
within only a few months of opening.
Kevin J. Gallagher, President & CEO
Sun National Bank in PA
4
<PAGE>
[PHOTOGRAPH OMITTED] Restored
lobby of our
historic
"new"
Bridgeton
Financial
Service
Center
[PHOTOGRAPH OMITTED]
"Sun has the big-bank products customers
want...With the hometown bank atmosphere
customers love..."
"Before joining Sun I checked out the product line at every bank in this region.
Sun's products were definitely the best in meeting the real needs of customers.
Sun is about building relationships with customers - and no bank, including the
megabanks, has more tools to make the relationship valuable to customers -
personal or business. Plus it's all delivered in an atmosphere where the staff
knows you by name!
Jody Hirata, Vice President
Business Development
Cumberland and Salem
Counties, NJ
5
<PAGE>
At Sun, We're About Business...
During 1999 Sun National Bank expanded its market position as a premier business
bank - focusing on serving the needs of small to medium-size business and local
governments. At the core of that positioning is a five-prong strategy that
differentiates Sun from its competitors:
1. A network of regional advisory boards comprised of local business leaders
who provide referrals and keep Sun's management attuned to the unique needs
of each region.
2. A focus on Building an elite tem of regional lenders, the best in the
field, who live in the communities they serve.
3. Development of sophisticated cash management and PC banking capabilities
that are so valuable to business and government customers, they secure
relationships.
4. "Everything Under The Sun For Small Business" - providing capabilities
usually reserved for large corporate customers.
5. Exceptional customer service at every level of contact - from branch
personnel, lenders, officers, accounting and administrative staff.
The success of this strategy can be found in the intensity of the words
expressed by staff and customers alike:
- --------------------------------------------------------------------------------
"The big bank we switched from didn't
take small business very seriously. Sun
made us feel important..."
[PHOTOGRAPH OMITTED]
" `Everything Under The Sun For Small Business' is an incredible package of
services for small business. Our Overnight Sweep Account is just like the large
corporate clients have...and we especially love the PC Banking. We move money
between our two companies so easily now - even after hours. Sun's rates are also
very competitive and the service is just outstanding. Everyone treats us like a
VIP customer."
East Coast
Hockey League
Princeton, NJ
"Our cash management package is,
without question, the best out there -
bar none..."
"We help our government, corporate and small business customers manage their
cash more effectively than any other bank in our market. Customers are amazed at
the convenience of 24/7 PC banking and surprised that even small business can
have an Overnight Sweep Account. We love to compete with the big banks. We match
their technology, beat their prices and, when it comes to service, there's no
contest. 80% of our business comes from customers transferring from other banks
where the service was simply unacceptable> Sun is about great customer service."
John Hancq, Vice President, [PHOTOGRAPH OMITTED]
Cash Management, Corporate
Vineland, NJ
6
<PAGE>
"When Judi Tyndall
moved to Sun, she told
us Sun has the best
small business services
of any bank. She was
100% correct..."
"Judi Tyndall, the branch manager in Ventnor, convinced us to switch all our
accounts to Sun. It was a smart move. Sun's PC Banking and Cash Management
services make life so much easier while they make money for us. It's wonderful
to be able to do payroll and make deposits at 7am or midnight. It saves a lot of
time plus Judi is always there when we need her. We're extremely pleased."
Dr. Kenneth Berger, Owner
Angie Arhontoulis, Comptroller,
Family Vision Care
Atlantic City, NJ
[PHOTOGRAPH OMITTED]
"After a nine month search
for a new bank, Sun was
clearly the best choice and
that choice has proven to
be right on target..."
"Sun's Cash Management and PC Banking services were clearly superior - in
technology, cost effectiveness and operationally. We don't have a large staff
and Sun provides a level of service that makes our internal processes efficient
even at our low staffing level. Sun is a throwback to that old style of banking.
We're not a number. We talk to live people one-on-one and everyone we deal with
treats us the same way.
We made a good choice."
Mayor Gregory J. Pulitit, (R) [PHOTOGRAPH OMITTED]
Richard Krawczn, CMFO (L)
Director of Finance
Lawrence Township, NJ
7
<PAGE>
People Are Our Most Important Asset...
During 1999 Sun intensified its programs to help staff members grow, to
encourage and reward excellence and to provide a workplace that is both
enjoyable and energizing.
Training programs at every level are helping to build a knowledgeable staff who
can deliver Sun's increasingly more sophisticated services. A program of
communication was formalized during 1999 - including biweekly "Flash Reports"
distributed to all staff members to keep everyone up-to-date on important bank
news... and a quarterly newsletter that enables the staff to share news and
experiences. These bright, motivated professionals, found throughout our staff,
are the future of Sun and that future is in strong hands.
"This is an exciting bank and an
exciting time to be a part of it..."
[PHOTOGRAPH OMITTED]
"Sun is so much more customer friendly, innovative and forward-looking than any
other bank I've seen. All the growth is wonderful...but what excites me the most
about Sun is its attitude toward customers. We're about personal service you
just don't find anymore. Plus we're extremely creative in lending to meet
community needs...including earning a reputation of being very
minority-friendly, looking for ways to make loans and working with new
businesses."
Darren Mitchell, Assistant Vice President and
FSC Manager, Atlantic City, NJ
- --------------------------------------------------------------------------------
"Great customer service is about attitude...
listening...caring...following through...
working as a team..."
"We handle over 5,000 customer service calls a month and every call is a change
to "sell" Sun as the right bank for that customer. We listen to each customer
and respond in a positive, timely manner and do everything we say we're going to
do. Our customer service staff is carefully selected and highly trained because
they represent the bank on the front line every day...and they do a terrific
job!"
Ana Manzano-Cruz Assistant Cashier - Customer Service
Vineland, NJ - Corporate
[PHOTOGRAPH OMITTED]
"Commercial lending at Sun is about
finding a way to make the deal..."
"I worked for a lot of banks over the years. The megabanks are just too rigid,
too slow, too isolated to meet the fast-changing needs of small to medium-sized
businesses. Commercial lending at Sun is about flexibility, access to the
decision makers, quickness and creativity. It's an exciting environment for
lenders. Sun is absolutely the most business-friendly bank I've seen."
Cathy Carothers,
Vice President,
Government
Guaranteed
Loans
[PHOTOGRAPH OMITTED]
8
<PAGE>
[PHOTOGRAPH OMITTED]
"In 18 years of business, I've tried to work with other
banks, but they just didn't understand construction.
Sun's the first bank that really got to know us..."
"I like Sun's flexibility and the favorable rates on borrowing, but I especially
like the personal contact with an officer whenever I need it. You can get
something accomplished quickly. It's sure not like that in the big banks. Sun's
people are much more knowledgeable, more qualified and more pleasant than at nay
other bank I've experienced. What a difference the right bank can make."
Clyde Lattimer
Clyde Lattimer & Sons
Berlin, NJ
[PHOTOGRAPH OMITTED]
"A growing business like ours needs a banker
who understands the business.
We need allies...
and Sun's been there..."
"I was a banker myself for many years so I'm not impressed easily. Sun does it
the right way - getting to know a business so well so the loan officer
understands why financing is needed... and also providing the business with
powerful tools to effectively manage the business with powerful tools to
effectively manage the business. Sun's PC Banking is `whiz-bang' technology, it
makes it possible for a small business owner like me to stay on top of all my
financial activity instantly whenever I want. Sun's definitely my bank."
Bob Johnson
Kaffe Magnum Opus
Vineland, NJ
9
<PAGE>
FORWARD-LOOKING STATEMENTS
THE COMPANY MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING
STATEMENTS" INCLUDING STATEMENTS CONTAINED IN THIS REPORT AND IN OTHER
COMMUNICATIONS BY THE COMPANY WHICH ARE MADE IN GOOD FAITH PURSUANT TO THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, INVOLVE RISKS AND
UNCERTAINTIES AND 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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables,
except per share amounts, are in thousands)
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 deposits from the general public and investing such funds in a
variety of loans, including 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, 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 central and southern New Jersey through internal
growth and mergers and acquisitions. The Board of Directors 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, 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 1999, the Company completed three transactions. In January, Sun acquired
approximately $16 million in deposits and two branch offices in southern New
Jersey from Summit Bank, Hackensack, New Jersey. Also in January, Sun acquired
Eastern Financial, a residential mortgage lender located in Northfield, New
Jersey. Eastern was subsequently merged into Sun Mortgage Company. In September,
Sun acquired approximately $230 million in deposits, $51,000 in account loans
and 14 branches from First Union National Bank. These branches are located in
central and southern New Jersey. Simultaneous with the acquisition, six of the
branches were consolidated. To provide capital support for this branch purchase
transaction, in July the Company raised approximately $37 million in equity from
the sale of common stock.
In April, Sun opened a loan production office in Philadelphia, Pennsylvania that
was subsequently made a full-service financial service center. In addition to
the Philadelphia office, Sun opened 14 de novo offices in central and southern
New Jersey throughout 1999.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1999 was $9.7 million, or $1.06 per
share, in comparison to $8.8 million, or $1.14 per share for the year ended
December 31, 1998. The increase in net income was attributable to an increase in
net interest income of $15.6 million and an increase in non-interest income of
$2.3 million. These increases were partially offset by increases in non-interest
expense of $16.5 million, provision for loan losses of $124,000 and income tax
expense of $536,000 compared to the previous year.
Net income for the year ended December 31, 1998 was $8.8 million, or $1.14 per
share, in comparison to $4.2 million, or $0.74 per share, for the year ended
December 31, 1997. The increase in net income was generally attributable to a
significant increase in net interest income of $14.9 million and an increase of
$5.2 million in non-interest income. These increases were partially offset by an
increase in non-interest expenses of $13.4 million, an increase in the provision
for loan losses of $548,000 and an increase in income tax expense of $2.0
million in comparison to the results of operations for 1997.
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 interest rate earned on interest-earning assets and the volume and
interest rate paid on interest-bearing liabilities.
11
<PAGE>
The following table sets forth a summary of average balances with corresponding
interest income and interest expense as well as average yield and cost
information for the periods presented. Average balances are derived from daily
balances.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ------------------------------- ---------------------------
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) $ 786,237 $ 67,611 8.60 % $ 494,856 $ 45,135 9.12 % $ 355,540 $ 32,643 9.18 %
Investment securities (2) 730,170 47,572 6.52 575,191 38,311 6.66 218,645 13,917 6.37
Federal funds sold 6,174 293 4.75 7,996 339 4.24 11,618 646 5.55
--------- ------ ------- ------ ------- ------
Total interest-earning assets 1,522,581 115,476 7.58 1,078,043 83,785 7.77 585,803 47,206 8.06
Non-interest-earning assets 145,896 94,746 49,645
---------- ---------- ---------
Total assets $1,668,477 $ 1,172,789 $ 635,448
========== =========== =========
Interest-bearing liabilities:
Interest-bearing deposit
accounts $ 882,011 34,487 3.91 % $ 614,993 25,322 4.12 % $ 391,374 16,458 4.21 %
Borrowed money 410,389 21,043 5.13 301,345 16,430 5.45 98,702 5,674 5.75
Interest on guaranteed preferred
beneficial interest in
Company's subordinated debt 58,558 5,550 9.48 33,911 3,342 9.85 22,571 2,276 10.08
--------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 1,350,958 61,080 4.52 950,249 45,094 4.75 512,647 24,408 4.76
------ ------ ------
Non-interest-bearing liabilities 229,814 161,080 90,440
---------- ---------- ---------
Total liabilities 1,580,772 1,111,329 603,087
Shareholders' equity 87,705 61,460 32,361
---------- ---------- ---------
Total liabilities and
shareholders' equity $1,668,477 $1,172,789 $ 635,448
========== ========== =========
Net interest income $54,396 $38,691 $22,798
======= ======= =======
Interest rate spread (3) 3.06 % 3.03 % 3.30 %
==== ==== ====
Net yield on interest
earning assets (4) 3.57 % 3.59 % 3.89 %
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabilities 112.70 % 113.45 % 114.27 %
====== ====== ======
</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.
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,
-----------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------------ --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------ --------------------------------------
Rate/ Rate /
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 26,572 $(2,578) $(1,518) $22,476 $12,796 $ (218) $ (86) $ 12,492
Investment securities 10,288 (809) (218) 9,261 22,699 644 1,051 24,394
Federal funds sold (76) 40 (10) (46) (200) (154) 47 (307)
-------- ------- ------- ------- ------- ------ ------- --------
Total interest-earning assets $ 36,784 $(3,347) $(1,746) $31,691 $35,295 $ 272 $ 1,012 $ 36,579
======== ======= ======= ======= ======= ====== ======= ========
Interest expense:
Deposit accounts $10,581 $(1,277) $ (136) $ 9,165 $ 9,446 $ (334) $ (248) $ 8,864
Borrowings 5,649 (972) (64) 4,613 11,715 (295) (664) 10,756
Guaranteed preferred beneficial
interest in Company's subordinated debt 2,394 (128) (58) 2,208 1,177 (51) (60) 1,066
-------- ------- ------- ------- ------- ------ ------- --------
Total interest-bearing liabilities $ 18,624 $(2,377) $ (261) $15,986 $22,338 $ (680) $ (972) $ 20,686
======== ======= ======= ======= ======= ====== ====== ========
Net change in interest income $ 18,160 $ (970) $(1,485) $15,705 $12,957 $ 952 $ 1,984 $ 15,893
======== ======= ======= ======= ======= ====== ======= ========
</TABLE>
12
<PAGE>
Net interest income (on a tax-equivalent basis) increased $15.7 million or 41%
to $54.4 million for 1999 compared to $38.7million for 1998. The increase is due
primarily to the growth of average interest-earning assets from $1.1 billion for
1998 to $1.5 billion for 1999, augmented slightly by an increase in the interest
rate spread from 3.03% for 1998 to 3.06% for 1999. A change in the mix of
interest-earning assets and interest-bearing liabilities had a slightly negative
impact on the net interest margin, which declined two basis points to 3.57% for
1999.
The increase in average interest-earning assets of $444.5 million reflects an
increase of $291.4 million in average loans and $155.0 million in average
investment securities, slightly offset by a decrease of $1.8 million in average
federal funds sold. These assets were funded by an increase of $400.7 million of
average interest-bearing liabilities and an increase of $68.7 million of average
non-interest bearing liabilities. The increase in interest-bearing liabilities
reflects the 1999 acquisition of branches and deposits, the growth of deposits
at existing offices, the opening of new financial service centers and increases
in borrowings and guaranteed preferred beneficial interests in the Company's
subordinated debt.
The slight increase in interest rate spread as of December 31, 1999, compared to
December 31, 1998, was due to a higher percentage of average loans receivable to
average interest-earning assets. Average loans receivable comprised 51.6% of
average interest-earning assets for 1999 compared to 45.9% for 1998.
The decrease in the average yield on loans for 1999 reflects a decrease in
interest on loans resulting from the lowering of the prime rate during the
fourth quarter of 1998 and continuing through the middle of the third quarter of
1999. The prime rate did not increase until mid-November, 1999. The decrease in
the average yield on investment securities was due primarily to the investment
in U.S. government agency securities made during 1999.
The decrease in the average cost of interest-bearing liabilities is due
principally to a decrease in the average cost of interest-bearing deposits from
4.12% for 1998 to 3.91% for 1999 as a result of a decrease in interest rates on
core deposits. The lower average cost of interest-bearing liabilities in 1999 is
also due to a decrease in the cost of borrowed money and a decrease in the
average cost of the Company's trust preferred securities described below.
In 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 for $29.9 million of 8.875% Junior
Subordinated Debentures of the Company due in December 2028. During 1999, the
Company repurchased approximately $310,000 of these securities.
Net interest income increased $15.9 million or 70% to $38.7 million for 1998
compared to $22.8 million for 1997. The increase is due primarily to the growth
of average interest-earning assets from $585.8 million for 1997 to $1,078.0
million for 1998, partially offset by a decline in the interest rate spread from
3.30% for 1997 to 3.03% for 1998. The decline in the interest rate spread had a
corresponding impact on the net interest margin, which declined 30 basis points
to 3.59% for 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 in average
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
for 1998 compared with 37.3% for 1997. The interest rate spread and net interest
margin decreased for 1998 compared to 1997 due to a decrease in the yield on
average interest-earning assets from 8.06% for 1997 to 7.77% for 1998.
As general market interest rates were relatively stable during 1997, the
increase in the yield on loans for 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% for 1997 to 4.12% for 1998. The lower cost of
interest-bearing liabilities for 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 toward 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.
13
<PAGE>
Provision for Loan Losses. For the year ended December 31, 1999, the provision
for loan losses amounted to $2.1 million, a decrease of $124,000 compared to
$2.2 million for 1998. The continued level of this provision is the result of
increase in the Company's loan portfolio of approximately $210.8 million to
$900.7 million at December 31, 1999 compared with $689.9 million at December 31,
1998, resulting primarily from growth in commercial loans. The Company recorded
a provision for loan losses of $2.2 million for 1998 compared with a provision
of $1.7 million for 1997. The increase in the provision for loan losses for 1998
compared to 1997 was attributable to an increase in the size of the loan
portfolio due to internal loan growth and loans acquired from Household Bank,
f.s.b. 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.
Non-Interest Income. Other income increased $2.4 million for the year ended
December 31, 1999 compared to the year ended December 31, 1998. The increase was
primarily a result of higher service charges on deposit accounts and a larger
deposit base, augmented by an increase in income from mortgage banking
operations, and slightly offset by lower gains on the sale of investment
securities during 1999. The amount of service charges on deposit accounts
increased to $4.6 million for 1999 compared to $3.3 million for 1998. The income
from mortgage banking operations was $2.7 million for 1999 compared to $1.9
million for 1998. The gain on sale of investment securities was $79,000 for 1999
compared to $1.0 million for 1998.
Other income increased $5.2 million for the year ended December 31, 1998
compared to the year ended December 31, 1997. The increase was primarily a
result of higher service charges on deposit accounts and a larger deposit base
and income from mortgage banking operations 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 for 1998 compared to $1.5
million for 1997. Income from mortgage banking operations amounted to $1.9
million for 1998 compared to none for 1997. The gain on sale of fixed assets was
$18,000 for 1998 compared to a $53,000 loss for 1997. The gain on sale of loans
was $112,000 for 1998 compared to $1,000 for 1997. The gain on sale of
investment securities was $1.0 million for 1998 compared to $207,000 for 1997.
Non-Interest Expenses. Other expenses increased approximately $16.5 million, to
$46.9 million for the year ended December 31, 1999 as compared to $30.4 million
for the same period for 1998. The increase was a result of operating a larger
organization resulting from internal growth and acquisitions. Of the increase,
$6.4 million was in salaries and employee benefits, $2.1 million in occupancy
expense, $1.9 million in equipment expense, $1 million in data processing
expense, $2.5 million in amortization of excess of cost over fair value of
assets acquired and $1.6 million in miscellaneous expenses. The increase in
other expenses reflects the Company's support of its continued expansion during
1999. 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 for 1998 and 1999.
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
for 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 support of its expanded operations. Salaries and
benefits increased due to additional staff positions resulting from 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
for 1997 and 1998.
Income Tax Expense. Income taxes increased $536,000, from $3.7 million to $4.3
million for the years ended December 31, 1998 and December 31, 1999,
respectively. 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. The increases were due to increased pre-tax income.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
A major source of the Company's funding is its retail deposit branch network,
which management believes will be sufficient to meet the Company's 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, 2000 total $558.2 million. The Company may
renew these certificates, attract new replacement deposits, or replace such
funds with borrowed funds. 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 $69.4 million at December 31, 1999, the Company
has additional secured borrowing capacity with the FHLB and other sources. 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 the Company's 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, 1999
totaled $2.7 million compared to $19.3 million for the year ended December 31,
1998. Net cash provided by operating activities for the year ended December 31,
1998 totaled $19.3 million, an increase of $14.8 million compared to the year
ended December 31, 1997.
Net cash used in investing activities for the year ended December 31, 1999
totaled $514.8 million, an increase of $154.1 million compared to the year ended
December 31, 1998 of $360.7 million. The increase was primarily due to an
increase in the purchase of investment securities and restricted equity
investments of $135.8 million, a decrease in maturities of investment securities
of $64.2 million, a decrease in the sale of investment securities of $158.4
million, a decrease in the sale of mortgage-backed securities of $58.4 million,
an increase in loans of $76.1 million. These were partially offset by a decrease
in the purchase of mortgage-backed securities of $195.7 million, an increase in
the maturity of mortgage-backed securities of $24.3 million and decrease in
loans acquired in branch acquisitions of $129.3 million.
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 million, an increase in the sale of
mortgage-backed securities of $39.1 million and a decrease 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 provided by financing activities for the year ended December 31, 1999
totaled $492.0 million, an increase of $95.1 million compared to $396.8 million
for the year ended December 31, 1998. The increase was a result of an increase
of deposits assumed in branch acquisitions of $52.1 million, an increase of
$176.7 million in net advances under line of credit and repurchase agreements
and $24.3 million of net proceeds from the issuance of common stock. This was
partially offset by a decrease in net deposits of $116.2 million and an increase
of $9.9 million in treasury stock purchased.
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 $655.1 million
for the year ended December 31, 1997. 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.
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 1999, the
Company raised approximately $37.0 million of additional equity capital through
a public offering of shares of its common stock.
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.
15
<PAGE>
The trust preferred securities qualify 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 intention 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. Subject to market
conditions and other factors, the Company may have 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, 1999
for the Company, Sun and Sun Delaware.
<TABLE>
<CAPTION>
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
At December 31, 1999 Actual Purposes Provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Company $124,463 10.95% $ 90,932 8.00% N/A
Sun $103,506 10.02% $ 82,640 8.00% $103,299 10.00%
Sun Delaware $ 16,988 15.73% $ 8,640 8.00% $ 10,800 10.00%
Tier I Capital (to Risk Weighted Assets):
Company $ 97,443 8.57% $ 45,481 4.00% N/A
Sun $ 95,655 9.26% $ 41,324 4.00% $ 61,986 6.00%
Sun Delaware $ 16,106 14.91% $ 4,321 4.00% $ 6,481 6.00%
Leverage Ratio:
Company $ 97,443 5.18% $ 75,246 4.00% N/A
Sun $ 95,665 5.67% $ 67,489 4.00% $ 84,361 5.00%
Sun Delaware $ 16,106 10.20% $ 6,316 4.00% $ 7,895 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 longer
maturities 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
25% 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 monitor the Company's 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 300 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, 1999, 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
16
<PAGE>
by $367.5 million, representing a negative cumulative one-year gap ratio of
18.55%. 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.
The following table summarizes the maturity and repricing characteristics of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 1999. 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 40% 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 25% of
interest-bearing demand deposits and 50% of savings deposits to the over 5 year
category.
<TABLE>
<CAPTION>
Maturity/Repricing Time Periods
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Loans receivable $ 334,254 $ 66,384 $ 342,844 $ 165,911 $ 909,393
Investment securities 425,356 24,500 95,542 378,766 921,164
Federal funds sold -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 759,610 90,884 435,386 544,677 1,830,557
---------- ---------- ---------- ---------- ----------
Interest-bearing demand deposits 96,363 19,490 110,290 68,979 295,122
Savings deposits 3,654 11,061 61,582 77,544 153,841
Time certificates under $100,000 101,304 279,118 37,048 4,005 421,475
Time certificates $100,000 or more 87,968 89,850 11,281 101 189,200
Federal Home Loan Bank advances 115,510 98 772 3,361 119,741
Federal funds purchased 5,700 5,700
Other borrowed funds -- -- 1,160 -- 1,160
Securities sold under agreements to repurchase 407,851 -- -- -- 407,851
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 818,350 399,617 222,133 153,990 1,594,090
---------- ---------- ---------- ---------- ----------
Periodic Gap $ (58,740) $ (308,733) $ 213,253 $ 390,687 $ 236,467
========== ========== ========== ========== ==========
Cumulative Gap $ (58,740) $ (367,473) $ (154,220) $ 236,467
========== ========== ========== ==========
Cumulative Gap Ratio (2.97)% (18.55)% (7.79)% 11.94%
========== ========== ========== ==========
</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 require 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 $465.5 million, or 31%, from $1.52 billion at
December 31, 1998 to $1.98 billion at December 31, 1999; and by $415.4 million,
or 38%, from $1.10 billion at December 31, 1997 to $1.52 billion at December 31,
1998. 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 1998 and 1999 acquisitions and
internal growth during the year. Comparing balances from December 31, 1999 to
December 31, 1998, the Company's cash and cash equivalents decreased $20.1
million, investment securities increased $213.3 million, net loans receivable
increased $210.8 million, restricted equity investments increased $16.5 million,
bank properties and equipment increased $5.8 million, accrued interest
receivable increased $4.5 million, the excess of cost over fair value of assets
acquired increased $17.8 million and deferred taxes increased $15.4 million.
Total liabilities increased $453.5 million, or 33%, to $1.83 billion from
December 31, 1998 to December 31, 1999. Deposits increased $265.9 million,
advances from the FHLB increased $115.4 million, federal funds purchased
increased $5.7 million and securities sold under agreements to repurchase
increased $75.7 million from December 31, 1998 to December 31, 1999. As a result
of repurchases of trust preferred securities in 1999, the guaranteed preferred
beneficial interest in the Company's subordinated debt declined slightly to
$57.8 million at December 31, 1999 compared to $58.7 million at December 31,
1998. Shareholders' equity increased $12.8 million, or 16%, to $91.1 million at
December 31, 1999, from December 31, 1998. The increase was due to the Company's
earnings during 1999 and the sale of additional shares of common stock, offset
by an increase in accumulated other comprehensive loss and an increase in
treasury stock.
17
<PAGE>
Loans - Net loans receivable increased $210.8 million, or 31%, from December 31,
1998 to December 31, 1999, due primarily to internally generated commercial loan
growth. Approximately $202.1 million of this increase was in commercial loans,
primarily commercial real estate loans. This significant increase was a result
of a wider market area, the efforts from a larger commercial lending staff and
competitive pricing of loans. Installment loans increased $9.9 million and
residential real estate loans increased $417,000 million. During 1998 and 1999,
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 those loans.
Beginning in 2000, the origination of residential mortgage loans will be
conducted through the Banks' consumer lending divisions. Set forth below is
selected data relating to the composition of the Company's loan portfolio by
type of loan on the dates indicated.
<TABLE>
<CAPTION>
ANALYSIS OF LOAN PORTFOLIO
At December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ----------------- --------- ----- -------------
Amount % Amount % Amount % Amount % Amount %
------ ------ ------ ------ -------- ------ ------ ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Commercial and industrial $750,707 83.35 $548,646 79.53 $346,475 81.00 $223,116 75.51 $118,874 64.73
Home equity 26,619 2.96 31,068 4.50 20,725 4.84 22,070 7.47 25,129 13.68
Residential real estate 52,986 5.88 48,119 6.98 29,454 6.89 31,777 10.75 29,287 15.95
Installment 79,081 8.78 69,162 10.03 35,301 8.25 21,133 7.15 12,409 6.76
Less: Loan loss allowance 8,722 0.97 7,143 1.04 4,194 0.98 2,595 0.88 2,065 1.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans $900,671 100.00 $689,852 100.00 $427,761 100.00 $295,501 100.00 $183,634 100.00
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Type of Security:
Residential real estate:
1-4 family $118,837 13.20 $123,263 17.87 $ 83,169 19.44 $ 84,036 28.44 $ 68,904 37.52
Other 8,954 0.99 9,726 1.41 11,098 2.59 11,115 3.76 6,295 3.43
Commercial real estate 199,437 22.14 242,700 35.18 204,053 47.70 166,893 56.48 85,239 46.40
Commercial business loans 528,513 58.68 269,406 39.06 107,963 25.25 20,455 6.93 13,822 7.54
Consumer 38,817 4.31 40,362 5.85 22,240 5.20 15,229 5.15 11,214 6.11
Other 14,835 1.65 11,538 1.67 3,432 0.80 368 0.12 225 0.12
Less: Loan loss allowance 8,722 0.97 7,143 1.04 4,194 0.98 2,595 0.88 2,065 1.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans $900,671 100.00 $689,852 100.00 $427,761 100.00 $295,501 100.00 $183,634 100.00
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the estimated maturity of the Company's loan
portfolio at December 31, 1999. 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
------------ ----------- ----------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 176,409 $ 359,221 $ 215,077 $ (7,244) $ 743,463
Home equity 21,505 25 5,089 (327) 26,292
Residential real estate 4,876 1,199 46,911 (254) 52,732
Installment 14,255 23,052 41,774 (897) 78,184
--------- --------- --------- -------- ---------
$ 217,045 $ 383,497 $ 308,851 $ (8,722) $ 900,671
========= ========= ========= ======== =========
</TABLE>
The following table sets forth the dollar amount of all loans due after December
31, 2000, which have pre-determined interest rates and which have floating or
adjustable interest rates.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
Commercial and industrial $463,426 $114,872 $578,298
Home equity 5,114 5,114
Residential real estate 35,530 8,580 44,110
Installment 63,529 1,297 64,826
-------- -------- --------
$562,485 $129,863 $692,348
======== ======== ========
18
<PAGE>
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.
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. 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 1999, the Company continued to experience low
levels of non-performing assets. Total non-performing assets increased $2.1
million from $2.8 million at December 31, 1998 to $4.9 million at December 31,
1999. The ratio of non-performing assets to net loans increased to .55% at
December 31, 1999 compared to .40% at December 31, 1998. For 1998,
non-performing assets increased by $306,000, from $2.5 million at December 31,
1997 to $2.8 million at December 31, 1998. 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.
Non-Performing Assets
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Commercial and industrial $2,085 $ 979 $ 116 $ 354 $1,721
Home equity 8 241 466 337 295
Residential real estate 250 182 253 586 607
Installment 237 206 62 -- 35
------ ------ ------ ------ ------
Total $2,580 $1,608 $ 897 $1,277 $2,658
====== ====== ====== ====== ======
Accruing loans that are contractually past due 90 days or more:
Commercial and industrial $ 880 $ 202 $ 642 $ 404 $ 135
Home equity 339 252 168 62 279
Residential real estate 303 230 335 572 64
Installment 280 202 168 105 67
------ ------ ------ ------ ------
Total $1,802 $ 886 $1,313 $1,143 $ 545
====== ====== ====== ====== ======
Total non-accrual and 90-day past due loans $4,382 $2,494 $2,210 $2,420 $3,203
Real estate owned 535 292 270 756 876
------ ------ ------ ------ ------
Total non-performing assets $4,917 $2,786 $2,480 $3,176 $4,079
====== ====== ====== ====== ======
Total non-accrual and 90-day past due loans to net loans 0.49% 0.36% 0.52% 0.82% 1.74%
Total non-accrual and 90-day past due loans to total assets 0.22% 0.16% 0.20% 0.55% 0.87%
Total non-performing assets to net loans 0.55% 0.40% 0.58% 1.07% 2.22%
Total non-performing assets to total assets 0.25% 0.18% 0.23% 0.73% 1.10%
Total allowance for loan losses to total non-performing loans 199.05% 286.41% 189.77% 107.23% 64.47%
</TABLE>
Interest income that would have been recorded on loans on non-accrual status,
under the original terms of such loans, would have totaled $283,000 for the year
ended December 31, 1999.
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 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, 1999, the Company had a net amount of $535,000 classified as
real estate owned.
19
<PAGE>
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.
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,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for losses on loans, beginning of year $7,143 $4,194 $2,595 $2,065 $1,607
Charge-offs:
Commercial 15 26 307 286
Mortgage 210 203 37 9 73
Installment 311 68 65 85 67
------ ------ ------ ------ ------
Total charge-offs 536 297 102 401 426
------ ------ ------ ------ ------
Recoveries
Commercial 18 22 6 33
Mortgage 10 4 28
Installment 16 15 14 21 15
------ ------ ------ ------ ------
Total recoveries 26 33 36 31 76
------ ------ ------ ------ ------
Net charge-offs 510 264 66 370 350
Allowance acquired with branch purchase 1,000
Provision for loan losses 2,089 2,213 1,665 900 808
------ ------ ------ ------ ------
Allowance for losses on loans, end of year $8,722 $7,143 $4,194 $2,595 $2,065
====== ====== ====== ====== ======
Net loans charged off as a percent of average loans outstanding 0.06% 0.05% 0.02% 0.23% 0.23%
====== ====== ====== ====== ======
</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,
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- --------------- --------------- ----------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of year applicable to:
Commercial and industrial $7,244 82.55 % $6,131 78.72 % $2,922 80.21 % $ 1,799 74.98 % $1,289 64.02 %
Residential real estate 327 2.93 164 6.90 129 6.82 139 10.65 403 15.96
Home equity 254 5.83 382 4.46 752 4.80 490 7.40 319 13.34
Installment 897 8.69 466 9.92 391 8.17 167 6.97 54 6.68
------ ------ ------ ------ ------ ------ ------- ------ ------ ------
Total allowance $8,722 100.00 % $7,143 100.00 % $4,194 100.00 % $ 2,595 100.00 % $2,065 100.00 %
====== ====== ====== ====== ====== ====== ======= ====== ====== ======
</TABLE>
Investment Securities - Most of the Company's investment portfolio is held at
Sun's wholly owned subsidiary, Med-Vine, Inc. ("Med-Vine"). Total investment
securities increased $213.3 million, or 34%, from $621.4 million at December 31,
1998 to $834.7 million at December 31, 1999. The Company used repurchase
agreements from the FHLB, which totaled approximately $350.7 million and $291.8
million at December 31, 1999 and 1998, respectively, 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.
20
<PAGE>
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. As a result of the increase in interest rates on
a substantially fixed-rate investment portfolio, the estimated fair value of
investment securities showed a significant decline from previous periods.
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,
------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- -------------------------------------
Net Net Net
Unrealized Estimated Unrealized Estimated Unrealized Estimated
Amortized Gains Fair Amortized Gains Fair Amortized Gains Fair
Cost (Losses) Value Cost (Losses) Value Cost (Losses) Value
---- -------- ----- ---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Obligations $ 63,730 $ (1,200) $ 62,530 $ 48,997 $ 551 $ 49,548 $ 53,113 $ (106) $ 53,007
Government agency and
mortgage-backed securities 748,022 (35,727) 712,295 532,269 (1,585) 530,684 449,771 390 450,161
Municipal obligations 59,520 (4,764) 54,756 39,770 270 40,040 41,738 (16) 41,722
Other securities 5,096 -- 5,096 1,149 -- 1,149 6,313 (35) 6,278
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $876,368 $(41,691) $834,677 $622,185 $ (764) $621,421 $550,935 $ 233 $551,168
======== ======== ======== ======== ======== ======== ======== ======== ========
</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, 1999. All debt
securities are classified as being available for sale; therefore, the carrying
value is the estimated fair value.
<TABLE>
<CAPTION>
One to Five Five to Ten More than Ten
One Year or Less Years Years Years Total
----------------- ----------------- ----------------- ------------------- ----------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Obligations $18,912 5.55 % $38,915 5.16 % $ 4,703 5.44 % $62,530 5.30 %
Government agency and
mortgage-backed securities 38,333 6.86 126,237 7.21 $547,725 7.13 % 712,295 7.13
Municipal obligations 5,498 3.71 1,165 4.59 48,093 5.10 54,756 4.96
Other securities 5,021 5.29 75 5.17 - - 5,096 5.28
------- ------- -------- -------- -------
Total $29,431 5.16 % $78,488 5.99 % $130,940 7.15 % $595,818 6.96 % $834,677 6.84 %
======= ======= ======== ======== ========
</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.
Management 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 appropriate. The Company
does not obtain funds through brokers, nor does it solicit funds outside the
States of New Jersey, Delaware or Pennsylvania.
Deposits at December 31, 1999 totaled $1.29 billion, an increase of $265.9
million, or 26%, over the December 31, 1998 balance of $1.03 billion. Demand
deposits, including NOW accounts and money market accounts, increased $102.9
million, or 24%, at December 31, 1999, to $526.8 million, compared with December
31, 1998. Savings deposits increased $13.7 million to $153.8 million at December
31, 1999, from $140.2 million at December 31, 1998. Certificates of deposit
under $100,000 increased $104.3 million from December 31, 1998, to $421.5
million at December 31, 1999. Certificates of deposit of $100,000 or more
increased $45.1 million to $189.2 million at December 31, 1999. The increase in
all categories of deposits during 1999 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.
21
<PAGE>
The following table sets forth average deposits by various types of demand and
time deposits:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Avg. Cost Amount Avg. Cost Amount Avg. Cost
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand $ 221,316 $152,875 $85,985
deposits
Interest-bearing demand deposits 229,353 2.63 % 139,617 2.35 % 1.95 %
78,383
Savings deposits 143,522 1.86 117,017 2.16 2.13
72,927
Time deposits 509,136 5.07 358,359 5.45 240,064 5.57
--------- -------- --------
Total $1,103,327 3.13% $767,868 3.30 % $477,359 3.45 %
========== ======== =========
</TABLE>
The following table indicates the amount of certificates of deposit of $100,000
or more by remaining maturity at December 31, 1999.
Three months or less $ 87,966
Over three through six months 40,119
Over six through twelve months 49,732
Over twelve months 11,383
--------
Total $189,200
========
Borrowings - Borrowed funds increased $196.8 million in 1999, to $534.5 million
at December 31, 1999, from $337.7 million at December 31, 1998. The increase was
a result of an increase of $115.4 million in advances from the FHLB, an increase
of $16.9 million in securities sold under agreements to repurchase with
customers and an increase of $54.6 million in securities sold under agreements
to repurchase with the FHLB. Included in the FHLB advances, is a market rate
advance of $15.5 million. It also had other borrowings of $1.2 million and
federal funds purchased of $5.7 million. For the years ended December 31, 1999
and 1998, the maximum month-end amount of advances borrowed from the FHLB was
$119.7 million and $70.5 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, 1999 and 1998, the maximum
month-end amount of securities sold under agreements to repurchase with
customers was $68.9 million and $52.6 million, respectively. The Company
purchased federal funds from correspondent banks, on an overnight basis. For the
years ended December 31, 1999 and 1998, the maximum month-end amount of federal
funds purchased from correspondents was $22.9 million and $18.4 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, 1999 and 1998, the
maximum month-end amount of securities sold under agreements to repurchase with
the FHLB was $369.6 million and $291.8 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.
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
FHLB advances outstanding at end of year $115,478 $ 75,000
Interest rate 5.10% 6.93%
Approximate average amount outstanding $ 33,512 $20,205 $ 7,726
Approximate weighted average rate 5.32% 5.87% 5.67%
FHLB repurchase agreements outstanding at end of year $350,662 $291,756 $210,751
Interest rate 5.93% 5.33% 6.01%
Approximate average amount outstanding $304,051 $240,806 $75,101
Approximate weighted average rate 5.21% 5.57% 5.71%
FHLB amortizing advances outstanding at end of year $ 4,263 $ 4,386
Interest rate 5.68% 5.68%
Approximate average amount outstanding $ 4,325 $ 682
Approximate weighted average rate 5.68% 5.52%
</TABLE>
22
<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
In 1997, the Company's subsidiary, Sun Capital Trust ("Sun Trust I") issued
$28.75 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.
In 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.
During 1999, the Company repurchased 17,100 shares of Sun Trust I preferred
securities and 38,500 shares of Sun Trust II preferred securities for
approximately $812,000.
For more information regarding guaranteed preferred beneficial interest in
Company's subordinated debt, refer to Note 24 of the Notes to Consolidated
Financial Statements contained herein.
Year 2000
Like many financial institutions, the Company relies on computers to conduct its
business and information systems processing. Industry experts were concerned
that on January 1, 2000, some computers might not be able to interpret the new
year properly, causing computer malfunctions. Some banking industry experts
remain concerned that some computers may not be able to interpret additional
dates in the year 2000 properly. The Company has operated and evaluated its
computer operating systems following January 1, 2000 and has not identified any
errors or experienced any computer system malfunctions. The Company will
continue to monitor its information systems to assess whether its systems are at
risk of misinterpreting any future dates and has developed appropriate
contingency plans to prevent any potential system malfunction or correct any
system failures. The Company has not been informed of any such problem
experienced by its vendors or its customers, nor by any of the municipal
agencies that provide services to the Company.
Nevertheless, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem, particularly at some of the Company's
vendors. The Company will continue to monitor its significant vendors of goods
and services with respect to Year 2000 problems they may encounter as those
issues may effect the Company's ability to continue operations, or might
adversely affect the Company's financial position, results of operations and
cash flows. The Company does not believe at this time that these potential
problems will materially impact the ability of the Company to continue its
operations, however, no assurance can be given that this will be the case.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sun Bancorp, Inc.
Vineland, New Jersey
We have audited the accompanying consolidated statements of financial condition
of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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
in the United State of America. 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, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted the United State of
America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 17, 2000
24
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 69,425 $ 54,816
Federal funds sold - 34,700
---------- ----------
Cash and cash equivalents 69,425 89,516
Investment securities available for sale (amortized cost -
$876,368; 1999 and $622,185; 1998) 834,677 621,421
Loans receivable (net of allowance for loan losses -
$8,722; 1999 and $7,143; 1998) 900,671 689,852
Restricted equity investments 44,796 28,337
Bank properties and equipment, net 31,845 26,007
Real estate owned, net 535 292
Accrued interest receivable 14,977 10,501
Excess of cost over fair value of assets acquired, net 60,718 42,961
Deferred taxes 17,768 2,385
Other assets 5,449 4,132
---------- ----------
TOTAL $1,980,861 $1,515,404
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,291,326 $1,025,398
Advances from the Federal Home Loan Bank 119,741 4,386
Loan payable 1,160 1,160
Federal funds purchased 5,700
Securities sold under agreements to repurchase 407,851 332,119
Other liabilities 6,141 15,358
----------- ---------
Total liabilities 1,831,919 1,378,421
----------- ---------
Guaranteed preferred beneficial interest in Company's subordinated debt 57,838 58,650
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 5 and 18)
SHAREHOLDERS' EQUITY
Preferred stock, none issued
- -
Common stock, $1 par value, 25,000,000 shares authorized, issued and
outstanding: 10,080,202 in 1999 and 7,165,360 in 1998 10,080 7,165
Surplus 105,798 61,710
Retained earnings 13,170 10,243
Accumulated other comprehensive loss (27,516) (504)
Treasury stock at cost, 901,951 shares in 1999 and 15,000 shares in 1998 (10,428) (281)
---------- ----------
Total shareholders' equity 91,104 78,333
---------- ----------
TOTAL $1,980,861 $1,515,404
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
25
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 67,611 $ 45,135 $ 32,643
Interest on taxable investment securities 41,670 33,422 11,778
Interest on non-taxable investment securities 2,463 1,991 1,016
Dividends on restricted equity investments 2,217 1,902 616
Interest on federal funds sold 293 339 646
--------- --------- ---------
Total interest income 114,254 82,789 46,699
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 34,487 25,322 16,458
Interest on short-term funds borrowed 21,043 16,430 5,674
Interest on guaranteed preferred beneficial interest
in Company's subordinated debt 5,550 3,342 2,276
--------- --------- ---------
Total interest expense 61,080 45,094 24,408
--------- --------- ---------
Net interest income 53,174 37,695 22,291
PROVISION FOR LOAN LOSSES 2,089 2,213 1,665
--------- --------- ---------
Net interest income after provision for loan losses 51,085 35,482 20,626
--------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts 4,601 3,278 1,549
Other service charges 119 87 49
Gain (loss) on sale of fixed assets 148 18 (53)
Gain on sale of loans held for sale 18 112 1
Gain on sale of investment securities 79 1,037 207
Income from mortgage banking operations 2,695 1,884
Other 2,091 984 483
--------- --------- ---------
Total other income 9,751 7,400 2,236
--------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 20,326 13,932 7,862
Occupancy expense 5,409 3,274 1,735
Equipment expense 4,093 2,234 1,300
Professional fees and services 541 526 328
Data processing expense 3,175 2,151 1,474
Amortization of excess of cost over fair value of assets acquired 6,402 3,910 1,505
Postage and supplies 1,525 820 483
Insurance 519 316 274
Provision for losses on real estate owned 23 15
Other 4,842 3,204 1,982
--------- --------- ---------
Total other expenses 46,855 30,367 16,958
--------- --------- ---------
INCOME BEFORE INCOME TAXES 13,981 12,515 5,904
INCOME TAXES 4,267 3,731 1,733
--------- --------- ---------
NET INCOME $ 9,714 $ 8,784 $ 4,171
========= ========= =========
Basic earnings per share $ 1.14 $ 1.30 $ 0.82
========= ========= =========
Diluted earnings per share $ 1.06 $ 1.14 $ 0.74
========= ========= =========
Weighted average shares - basic 8,538,809 6,764,668 5,079,807
========= ========= =========
Weighted average shares - diluted 9,186,225 7,680,410 5,599,896
========= ========= =========
</TABLE>
- ----------------------------------------------------------------------------
See notes to consolidated financial statements
26
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Loss Stock Total
----- ------- -------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $1,849 $ 18,125 $8,419 $ (978) $27,415
Comprehensive income:
Net income 4,171
Net change in unrealized loss on securities
available for sale, net of taxes of $583 1,132
Comprehensive income 5,303
Exercise of stock options 4 34 38
Issuance of common stock 1,094 20,787 21,881
Stock dividends 1,067 (93) (974)
Cash paid for fractional interest
resulting from stock dividend - (3) (2) - (5)
------- ------- ------- -------- -------
BALANCE, DECEMBER 31, 1997 4,014 38,850 11,614 154 54,632
Comprehensive income:
Net income 8,784
Net change in unrealized loss on securities
available for sale, net of taxes of ($339) (658)
Comprehensive income 8,126
Exercise of stock options 6 29 35
Issuance of common stock 836 14,992 15,828
Stock dividends 2,309 7,844 (10,153) -
Cash paid for fractional interest
resulting from stock dividends (5) (2) (7)
Purchase of treasury stock - - - - $(281) (281)
------- ------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 7,165 61,710 10,243 (504) (281) 78,333
Comprehensive loss:
Net income 9,714
Net change in unrealized loss on securities
Available for sale, net of taxes of ($13,915) (27,012)
Comprehensive loss (17,298)
Exercise of stock options 4 18 22
Issuance of common stock 2,549 37,612 36 40,197
Stock dividends 362 6,461 (6,823) -
Cash paid for fractional interest
resulting from stock dividends (3) (3)
Purchase of treasury stock - - - - (10,147) (10,147)
------- ------- ------- -------- -------- -------
BALANCE, DECEMBER 31, 1999 $10,080 $105,798 $ 13,170 $(27,516) $(10,428) $ 91,104
======= ======== ======== ======== ======== =======
</TABLE>
- ------------------------------------------------
See notes to consolidated financial statements
27
<PAGE>
SUN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,714 $ 8,784 $ 4,171
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,089 2,213 1,665
Provision for losses on real estate owned 23 15
Depreciation and amortization 1,225 847 530
Amortization of excess of cost over fair value of assets acquired 6,402 3,910 1,505
Gain on sale of loans held for sale (17) (112) (1)
Proceeds from sale of loans held for sale 1,074 3,447 220
Gain on sale of investment securities available for sale (79) (1,037) (207)
(Gain) loss on sale of bank properties and equipment (148) (19) 53
Deferred income taxes (1,468) (732) (827)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable (4,477) (3,748) (3,901)
Other assets (1,317) (1,249) (1,241)
Other liabilities (9,218) 10,468 2,749
--------- --------- ---------
Net cash provided by operating activities 3,803 22,772 4,731
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (382,306) (259,702) (250,235)
Purchases of mortgage-backed securities available for sale (12,457) (208,193) (307,630)
Purchases of restricted equity securities (16,458) (3,227) (20,308)
Proceeds from maturities of investment securities available for sale 26,718 90,960 8,717
Proceeds from maturities of mortgage-backed securities available for sale 108,499 84,168 4,354
Proceeds from sale of investment securities available for sale 6,080 164,509 67,134
Proceeds from sale of mortgage-backed securities available for sale 58,413 19,346
Net increase in loans (214,468) (138,351) 113,796)
Increase in loans resulting from branch acquisitions (71) (129,326) (20,349)
Purchase of bank properties and equipment (3,637) (2,349) (1,242)
Increase in bank properties and equipment resulting from branch acquisitions (4,962) (524) (11,787)
Proceeds from sale of bank properties and equipment 1,045 149 36
Excess of cost over fair value of branch assets acquired (24,230) (20,696) (22,314)
Purchase price adjustment of branch assets acquired 71
Proceeds from sale of real estate owned 308 16 471
--------- --------- ---------
Net cash used in investing activities (512,065) (364,153) (642,872)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 19,263 135,459 52,878
Increase in deposits resulting from branch acquisitions 246,666 194,551 256,524
Net borrowings under line of credit and repurchase agreements 196,788 20,191 301,060
Increase in borrowings resulting from branch acquisition 1,160
Principal payments on borrowed funds (6,000)
Proceeds from exercise of stock options 22 35 38
Payments for fractional interests resulting from stock dividend (3) (7) (5)
Proceeds from issuance of guaranteed preferred beneficial interest in Company's
subordinated debt 29,900 28,750
Repurchase of guaranteed preferred beneficial interest in Company's subordinated debt (812)
Proceeds from issuance of common stock 40,197 15,828 21,881
Treasury stock purchased (10,147) (281) -
--------- --------- ---------
Net cash provided by financing activities 491,974 396,836 655,126
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,091) 55,455 12,254
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 89,516 34,061 21,807
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 69,425 $ 89,516 $ 34,061
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 61,212 $ 42,827 $ 23,324
Income taxes paid $ 5,724 $ 5,471 $ 1,450
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans to real estate owned $ 574 $ 243 $ 389
</TABLE>
- ----------------------------------------------------------------------------
See notes to consolidated financial statements
28
<PAGE>
SUN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(All dollar amounts presented in the tables, except per share amounts, are in
thousands)
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 intercompany 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, 1999, the Company had 73 financial service centers located
throughout central and southern New Jersey, New Castle County, Delaware and in
Philadelphia, Pennsylvania. 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 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, 1999 and 1998.
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.
Loans Held for Sale - Included in loans receivable is approximately
$5,000,000 of loans held for sale at December 31, 1999 and 1998. These loans
were carried at the lower of cost or fair value, on an aggregate basis.
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.
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.
29
<PAGE>
Allowance for Loan Losses - The allowance for loan losses is determined by
management based upon past experience, evaluation of estimated loss and
impairment in the loan portfolio, current economic conditions and other
pertinent factors. The allowance for loan losses is maintained at a level that
management considers adequate to provide for estimated losses and impairment
based upon an evaluation of known and inherent risk in the loan portfolio. Loan
impairment is evaluated based on the fair value of collateral. Any reserves
required based on this evaluation are included in the allowance for loan losses.
Allowances for loan losses are based on estimated net realizable value unless it
is probable that loans will be foreclosed, in which case allowances for loan
losses are based on the fair value of the underlying collateral. Management's
periodic evaluation is based upon evaluation of the portfolio, past loss
experience, current economic conditions and other relevant factors. While
management uses the best information available to make such evaluations, future
adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluations.
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.
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.
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
$13,854,000 and $7,452,000 at December 31, 1999 and 1998, respectively. It is
amortized by the straight-line method over fifteen years for bank acquisitions
and over seven to fifteen 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, 1999
and 1998, the Company had not recognized an impairment loss based on this
evaluation.
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.
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.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include amounts due from banks and federal funds sold.
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.
Stock dividend - On May 20, 1999, April 21, 1998 and May 20, 1997, the
Company's Board of Directors declared special 5% stock dividends, which were
paid on June 21, 1999, May 26, 1998 and June 25, 1997, respectively, to
shareholders of record on June 7, 1999, May 5, 1998 and June 2, 1997,
respectively. Accordingly, per share information for the years ended December
31, 1998 and 1997 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, per share information for the year ended December 31,
1997 have been restated to reflect the increased number of shares outstanding.
Other Comprehensive Income - The Company classifies items of other
comprehensive income by their nature and displays 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.
Amounts categorized as other comprehensive income represent net unrealized gains
or losses on
30
<PAGE>
investment securities available for sale, net of income taxes. Reclassifications
are made to avoid double counting in comprehensive income items which are
displayed as part of net income for the period. These reclassifications are as
follows:
<TABLE>
<CAPTION>
Disclosure of reclassification amounts, net of taxes, for the year ended 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net (depreciation) appreciation on securities available for sale arising $(27,064) $(1,342) $ 995
Less: Reclassification adjustment for net gains included in net income 52 684 137
-------- ------- ------
Net unrealized (loss) gain on securities available for sale $(27,012) $ (658) $1,132
======== ======= ======
</TABLE>
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 Statement of Financial
Accounting Standards (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. In June 1999, SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133
was issued. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999, and will not be
applied retroactively to financial statements of prior periods. Management of
the Company is currently evaluating the impact, if any, the adoption of this
statement might have on the Company's results of operations or financial
condition when adopted on January 1, 2001.
Reclassifications - Certain reclassifications have been made in the 1998
and 1997 consolidated financial statements to conform to those classifications
used in 1999.
3. ACQUISITIONS
On September 9, 1999, Sun purchased fourteen New Jersey branch offices from
First Union National Bank. Sun acquired approximately $230,000,000 of deposit
liabilities, approximately $4,700,000 in real estate, equipment and other
assets, $51,000 in loans and approximately $2,633,000 in branch cash. Sun paid a
premium of approximately $23,700,000, which is being amortized over twelve
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.
On January 15, 1999, Sun purchased two branch offices 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 branch
cash. Sun paid a premium of $660,000, which is being amortized over seven years.
On December 17, 1998, the Company acquired eight branch offices of
Beneficial Bank from Household Bank, f.s.b., Prospect Heights, Illinois
("Household"). 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
branch 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 branch cash. Sun paid a premium of $1,085,000, 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 were as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury Obligations $ 63,730 $ 2 $ (1,202) $ 62,530
U.S. Government agencies and
mortgage-backed securities 748,022 31 (35,758) 712,295
State and Municipal Obligations 59,520 (4,764) 54,756
Other 5,096 - - 5,096
-------- ---- -------- --------
Total $876,368 $ 33 $(41,724) $834,677
======== ==== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury Obligations $ 48,997 $ 551 $ 49,548
US. Government agencies and
mortgage-backed securities 532,269 854 $(2,439) 530,684
State and Municipal Obligations 39,770 442 (172) 40,040
Other 1,149 - - 1,149
-------- ------ ------- --------
Total $622,185 $1,847 $(2,611) $621,421
======== ====== ======= ========
</TABLE>
During 1999, the Company sold $6,001,000 of securities available for sale
resulting in a gross gain of $79,000. During 1998, the Company sold $222,922,000
of securities available for sale resulting in a gross gain and gross loss of
$1,133,000 and $96,000, respectively. During 1997, the Company sold $86,480,000
of securities available for sale resulting in a gross gain and gross loss of
$226,000 and $19,000, respectively.
The maturity schedule of the investment in debt securities available for sale is
as follows:
December 31, 1999
-----------------------
Amortized Estimated
Cost Market Value
--------- ------------
Due in one year or less $ 24,598 $ 24,510
Due after one year through five years 78,630 77,323
Due after five years through ten years 135,963 131,018
Due after ten years 214,572 194,365
-------- --------
453,763 427,216
Mortgage-backed securities 422,605 407,461
-------- --------
$876,368 $834,677
======== ========
At December 31, 1999, $93,845,000 of U.S. Treasury Notes and U.S.
Government Agency securities were pledged to secure public deposits.
32
<PAGE>
5. LOANS
The components of loans were as follows:
December 31,
----------------------
1999 1998
Commercial and industrial $ 750,707 $ 548,645
Real estate-residential mortgages 79,605 79,188
Installment 79,081 69,162
--------- ---------
Total gross loans 909,393 696,995
Allowance for loan losses (8,722) (7,143)
--------- ---------
Net loans $ 900,671 $ 689,852
========= =========
Non-accrual loans $ 2,580 $ 1,608
========= =========
There were no irrevocable commitments to lend additional funds on
non-accrual loans at December 31, 1999. The reduction in interest income
resulting from non-accrual loans was $283,000, $143,000 and $115,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Interest income
recognized on these loans for the years ended December 31, 1999, 1998 and 1997
was $145,000, $33,000 and $40,000, 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,
1999 and 1998, along with an analysis of the activity for the years ended
December 31, 1999 and 1998, is summarized as follows:
For the Years Ended
December 31,
--------------------
1999 1998
--------- --------
Balance, beginning of year $ 19,137 $ 19,800
Additions 18,033
6,292
Repayments (6,420) (6,955)
-------- --------
Balance, end of year $ 30,750 $ 19,137
======== ========
Under approved lending decisions, the Company had commitments to lend
additional funds totaling approximately $214,972,000 and $119,627,000 at
December 31, 1999 and 1998, 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.
33
<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,
------------------------------
1999 1998 1997
Balance, beginning of year $ 7,143 $ 4,194 $ 2,595
Charge-offs (536) (297) (102)
Recoveries 26 33 36
------- ------- -------
Net charge-offs (510) (264) (66)
Increase due to branch acquisition 1,000
Provision for loan losses 2,089 2,213 1,665
------- ------- -------
Balance, end of year $ 8,722 $ 7,143 $ 4,194
======= ======= =======
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:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------ ------
<S> <C> <C>
Impaired loans with related reserve for loan losses calculated
under SFAS No. 144 $ - $ -
Impaired loans with no related reserve for loan losses calculated
under SFAS No. 114 $1,251 $1,251
------ ------
Total impaired loans $1,251 $1,251
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average impaired loans $1,025 $1,115 $1,245
====== ====== ======
Interest income recognized on impaired loans $ 32 $ 61 $ 107
====== ====== ======
Cash basis interest income recognized on impaired loans $ 32 $ 34 $ 83
====== ====== ======
</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.
34
<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 was as follows:
December 31,
-------------------
1999 1998
Federal Reserve Bank stock $ 3,076 $ 3,076
Federal Home Loan Bank stock 41,637 25,178
Atlantic Central Bankers Bank stock 83 83
------- -------
Total $44,796 $28,337
======= =======
8. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment consist of the following major classifications:
December 31,
--------------------
1999 1998
Land $ 7,411 $ 6,054
Buildings 16,474 13,925
Leasehold improvements and equipment 13,295 9,621
-------- --------
37,180 29,600
Accumulated depreciation and amortization (5,335) (3,593)
-------- --------
Total $ 31,845 $ 26,007
======== ========
9. REAL ESTATE OWNED
Real estate owned consisted of the following:
December 31,
--------------
1999 1998
Commercial properties $ 463 $ 218
Residential properties 86 74
----- -----
549 292
Allowance (14) --
----- -----
Total $ 535 $ 292
===== =====
During 1999 and 1997, approximately $23,000 and $15,000, respectively, was
charged against operations to adjust real estate owned for declines in value.
There was no charge in 1998.
35
<PAGE>
10. DEPOSITS
Deposits consist of the following major classifications:
December 31,
-----------------------
1999 1998
Demand Deposits $ 526,810 $ 423,938
Savings Deposits 153,841 140,168
Time Certificates under $100,000 421,475 317,192
Time Certificates $100,000 or more 189,200 144,100
---------- ----------
Total $1,291,326 $1,025,398
========== ==========
Of the total demand deposits, approximately $231,688,000 and $211,652,000 are
non-interest bearing at December 31, 1999 and 1998, respectively.
A summary of certificates by year of maturity is as follows:
Year Ended December 31,
2000 $ 558,241
2001 31,681
2002 6,692
Thereafter 14,061
----------
Total $ 610,675
==========
A summary of interest expense on deposits is as follows:
Year Ended December 31,
---------------------------
1999 1998 1997
Savings Deposits $ 2,674 $ 2,530 $ 1,555
Time Certificates
25,786 19,518 13,371
Interest-Bearing Demand Deposits 6,027 3,274 1,532
------- ------- -------
Total $34,487 $25,322 $16,458
======= ======= =======
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank ("FHLB") advances are collateralized under a blanket
collateral lien agreement. Advances were as follows:
December 31,
-------------------
1999 1998
Overnight line of credit $100,000
Market rate advance 15,478
Term amortizing advances 4,263 $ 4,386
-------- --------
Total $119,741 $ 4,386
======== ========
At December 31, 1999 the interest rate on the overnight line of credit was
5.10%. The market rate advance matured February 1, 2000. The interest rate,
which is adjusted daily, was 5.10% at December 31, 1999.
36
<PAGE>
Term amortizing advances represents two advances as follows:
December 31,
--------------------
1999 1998
Original principal $1,800
Interest rate 5.404%
Monthly payment $12
Maturity date October 8, 2008
Balance $1,740 $1,792
Original principal $2,600
Interest rate 5.867%
Monthly payment $18
Maturity date November 26, 2018
Balance 2,523 2,594
----- -----
Total $4,263 $4,386
====== ======
Interest expense on FHLB advances was $2,009,000, $1,224,000 and $438,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
During 1999 and 1998, the Company entered into repurchase agreements with the
FHLB. At December 31, 1999, the amount outstanding was $350,662,000, maturing in
February 2000 and bearing an average interest rate of 5.12%. At December 31,
1998, the amount outstanding was $291,756,000, maturing in January 1999 and
bearing an average interest rate of 5.33%. Interest expense on FHLB repurchase
agreements was $15,883,000, $13,418,000 and $4,285,000 for the years ended
December 31, 1999, 1998 and 1997 respectively. Collateral for the repurchase
agreements were U.S. Government Agency Collateralized Mortgage Obligations. The
market value of the collateral at December 31, 1999 was approximately
$356,788,000.
During 1999 and 1998, the Company entered into overnight repurchase agreements
with customers. At December 31, 1999 and 1998, the amounts outstanding were
$57,189,000 and $40,362,000, respectively. At December 31, 1999, the amounts
were borrowed at interest rates ranging from 2.00% to 4.75%. At December 31,
1998, the amounts were borrowed at interest rates ranging from 4.56% to 5.50%.
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 in 1998, 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, 1999 and 1998, the interest rate on the loan was 5.65% and 4.60%,
respectively.
At December 31, 1999, the Company purchased federal funds in the amount of
$5,700,000 from correspondent banks on an unsecured overnight line of credit at
an interest rate of 3.00% to 4.00%. The Company had no federal funds purchased
at December 31, 1998.
37
<PAGE>
14. STOCK REPURCHASE PLAN
In October 1999, the Board of Directors of the Company authorized the initiation
of a stock repurchase plan covering up to 9%, or 906,000 shares of the Company's
outstanding common stock. The repurchases were made from time to time in
open-market transactions, subject to the availability of the stock. As of
December 31, 1999, the Company had repurchased 901,951 shares for an aggregate
price of approximately $10,429,000.
15. STOCK OPTION PLANS
In 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 635,370 shares of stock reserved for issuance under the
1997 Plan. In 1999, the Company's Boar 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
635,370 to 1,035,370. In addition, the grant of "reload" options is authorized
under the 1997 Plan. 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. At December 31,
1999, there were 411,572 options granted with the "reload" feature. There were
no additional option issued in accordance with the "reload" feature.
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. At December 31, 1999, there were 814,744 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, 1999, there were 336,209 shares of stock
reserved 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 1997 Plan allows for 50%
of options to vest one year after the date of grant, and 50% two years after the
date of grant, subject to employment and other conditions. All shares granted
under the 1985 and 1995 Plans are fully vested.
Options granted under the 1985, 1995 and 1997 Plans, adjusted for the 5% stock
dividends granted in 1997, 1998 and 1999 and the three-for-two stock splits
granted in 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified Total
<S> <C> <C> <C>
Options granted and outstanding:
December 31, 1999 at prices ranging from $2.76 to $21.77 per share 565,330 1,345,056 1,910,386
======= ========= =========
December 31, 1998 at prices ranging from $2.76 to $21.77 per share 502,197 978,241 1,480,438
======= ======= =========
December 31, 1997 at prices ranging from $2.76 to $15.12 per share 490,260 671,633 1,161,893
======= ======= =========
</TABLE>
38
<PAGE>
Activity in the stock option plans for the period beginning January 1, 1997 and
ending December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Exercise
Number Price Price
of Shares Per Share Per Share
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1997 889,218 $ 4.89
1997:
Granted 284,441 $ 8.06 - $15.12 $ 9.07
Exercised (9,047) $ 4.75 - $ 5.92 $ 4.92
Expired (2,719) $ 6.40 $ 6.40
---------
Outstanding at December 31, 1997 1,161,893 $ 5.95
1998:
Granted 325,375 $ 15.12 - $21.77 $18.89
Exercised (6,830) $ 2.76 - $ 9.07 $ 4.29
---------
Outstanding at December 31, 1998 1,480,438 $ 8.79
1999:
Granted 448,670 $ 14.25 - $19.65 $15.23
Exercised (4,153) $ 2.76 - $15.12 $ 5.43
Expired (14,569) $ 15.12 - $18.12 $16.36
---------
Outstanding at December 31, 1999 1,910,386 $ 2.76 - $21.77 $ 10.25
=========
</TABLE>
The following table summarizes stock options outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Number of Options Weighted Average Remaining Weighted Average Exercise
Range of Exercise Price Outstanding Contractual Life Price
- ------------------------ --------------------- ----------------------------- ------------------------------
<S> <C> <C> <C>
$ 2.76 - $ 7.05 867,805 4.07 years $ 4.93
$ 8.07 - $ 9.98 278,386 7.33 years $ 8.99
$ 14.25 - $ 17.98 431,454 9.62 years $14.97
$ 18.57 - $ 21.77 332,741 8.66 years $19.09
---------
1,910,386 6.63 years $10.25
=========
</TABLE>
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:
For the Years Ended
December 31,
------------------------------------
1999 1998 1997
------ ------- ------
Net income: As reported $9,714 $8,784 $4,171
Pro forma $6,914 $7,937 $3,736
Earnings per share:
Basic As reported $1.14 $ 1.30 $0.82
Pro forma $0.81 $ 1.17 $0.74
Diluted As reported $1.06 $ 1.14 $0.74
Pro forma $0.75 $ 1.03 $0.67
Weighted average fair value of options
granted during the year $9.05 $ 7.42 $3.10
39
<PAGE>
Significant assumptions used to calculate the above fair value of the awards are
as follows:
1999 1998 1997
---- ---- ----
Risk free rate of return 5.80 % 4.40 % 6.16 %
Expected option life in months 96 60 60
Expected volatility 46 % 81 % 24 %
Expected dividends 0 0 0
16. 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 Purchase
Plans. 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, 1999
and 1998, there were 5,833 shares and 2,558 shares, respectively, granted and
issued through the ESPP. For the years ended December 31, 1999 and 1998, there
were 7,588 shares and 4,988 shares, respectively, granted and issued through the
DSPP.
17. 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 1999 and 1998, respectively and $9,500
in 1997. 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 $229,000, $149,000 and $91,000 for the years ended December 31,
1999, 1998 and 1997, respectively. The 1999 and 1998 contributions are included
in shareholders' equity as an issuance of common stock. The Company paid
$35,000, $31,000 and $10,000 during 1999, 1998 and 1997, respectively, to
administer the 401(k) Plan.
18. 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 $19,326,000 and $20,852,000 at December 31, 1999 and 1998,
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.
40
<PAGE>
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 2017, provide for a combined annual rental of $525,000 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, 1999. Future
minimum receipts under sub-lease agreements are not material.
2000 $2,678
2001 2,567
2002 2,513
2003 2,394
2004 2,306
Thereafter 15,162
------
Total $27,620
=======
Rental expense included in occupancy expense for all operating leases was
$2,466,000, $1,163,000 and $609,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
19. INCOME TAXES
The income tax provision consists of the following:
December 31,
---------------------------------
1999 1998 1997
Current $ 5,735 $ 4,463 $ 2,559
Deferred (1,468) (732) (826)
------- ------- -------
Total $ 4,267 $ 3,731 $ 1,733
======= ======= =======
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
December 31,
--------------------
1999 1998
Deferred tax asset:
Allowance for loan losses $ 2,717 $ 1,954
Deferred loan fees 83 75
Goodwill amortization 1,753 923
Unrealized loss on investment securities 14,175 260
-------- --------
Total deferred tax asset 18,728 3,212
Deferred tax liability:
Property (698) (580)
Other real estate (58) (57)
Other (204) (190)
-------- --------
Total deferred tax liability (960) (827)
-------- --------
Net deferred tax asset $ 17,768 $ 2,385
======== ========
41
<PAGE>
The provision for federal income taxes differs from that completed at the
statutory rate as follows:
December 31,
-----------------------------
1999 1998 1997
Tax computed at the statutory rate $ 4,893 $ 4,380 $ 2,067
Surtax exemption (86) (125) (59)
Increase (decrease) in charge resulting from:
Goodwill amortization 58 57 57
Tax exempt interest (net) (739) (462) (259)
Other, net 141 (119) (73)
------- ------- -------
Total $ 4,267 $ 3,731 $ 1,733
======= ======= =======
20. EARNINGS PER SHARE
Earnings per share was calculated as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income $ 9,714 $ 8,784 $ 4,171
Dilutive stock options outstanding 1,159,174 1,480,441 1,161,895
Average exercise price per share $ 6.02 $ 8.79 $ 5.94
Average market price - diluted $ 16.30 $ 23.05 $ 10.76
Average common shares outstanding 8,538,809 6,764,668 5,079,807
Increase in shares due to exercise of options - diluted 647,416 915,742 520,089
--------- --------- ---------
Adjusted shares outstanding - diluted 9,186,225 7,680,410 5,599,896
Net income per share - basic $ 1.14 $ 1.30 $ 0.82
Net income per share - diluted $ 1.06 $ 1.14 $ 0.74
</TABLE>
21. 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 Company's and 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.
42
<PAGE>
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, 1999, that the Banks meet all
applicable capital adequacy requirements.
As of December 31, 1999, the most recent notification from the OCC categorized
the Banks' as well capitalized under the regulatory framework for prompt
corrective action. 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.
<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, 1999
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $ 124,463 10.95 % $ 90,932 8.00% N/A
Sun National Bank $ 103,506 10.02 % $ 82,640 8.00% $103,299 10.00%
Sun National Bank, Delaware $ 16,988 15.73 % $8,640 8.00% $ 10,800 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $97,443 8.57 % $ 45,481 4.00% N/A
Sun National Bank $95,655 9.26 % $ 41,324 4.00% $ 61,986 6.00%
Sun National Bank, Delaware $16,106 14.91 % $ 4,321 4.00% $ 6,481 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $97,443 5.18 % $ 75,246 4.00% N/A
Sun National Bank $95,655 5.67 % $ 67,489 4.00% $ 84,361 5.00%
Sun National Bank, Delaware $16,106 10.20 % $ 6,316 4.00% $7,895 5.00%
At December 31, 1998
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $ 99,368 11.45 % $ 69,427 8.00% N/A
Sun National Bank $ 73,349 10.06 % $ 58,329 8.00% $ 72,912 10.00%
Sun National Bank, Delaware $ 14,937 12.01 % $ 9,950 8.00% $ 12,437 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $ 61,483 7.08 % $ 34,736 4.00% N/A
Sun National Bank $ 67,206 9.22 % $ 29,157 4.00% $ 43,735 6.00%
Sun National Bank, Delaware $ 13,937 11.21 % $ 4,973 4.00% $ 7,460 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $ 61,483 4.83 % $ 50,918 4.00% N/A
Sun National Bank $ 67,206 5.36 % $ 50,154 4.00% $ 62,693 5.00%
Sun National Bank, Delaware $ 13,937 6.82 % $ 8,174 4.00% $ 10,218 5.00%
</TABLE>
43
<PAGE>
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 69,425 $ 69,425 $ 89,516 $ 89,516
Investment securities available for sale 834,677 834,677 621,421 621,421
Loans receivable, net 900,671 903,274 689,852 713,307
Restricted equity investments 44,796 44,796 28,337 28,337
Liabilities:
Demand deposits 526,810 526,810 423,938 423,938
Savings deposits 153,841 153,841 140,168 140,168
Certificates of deposit 610,675 607,917 461,292 457,140
Advances from the Federal Home Loan Bank 115,455 115,455
FHLB term amortizing advances 4,263 5,076 4,386 4,421
Loan payable 1,160 1,160 1,160 1,160
Federal funds purchased 5,700 5,700
Securities sold under agreements to repurchase 407,851 407,851 332,119 332,119
</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.
FHLB term amortizing advances - The fair value was estimated by discounting
approximate cash flows of the borrowings to achieve a current market yield.
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
44
<PAGE>
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, 1999 and 1998. 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, 1999 and 1998, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
23. 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 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.
45
<PAGE>
24. 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.
During 1999, the Company repurchased 17,100 shares of Sun Trust I preferred
securities and 38,500 shares of Sun Trust II preferred securities for
approximately $812,000.
46
<PAGE>
25. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Cash $ 1,485 $ 10,991
Investments in subsidiaries 145,000 123,628
Accrued interest and other assets 2,593 2,655
-------- --------
Total $149,078 $137,274
======== ========
Liabilities and Shareholders' Equity
Other liabilities $ 136 $ 291
-------- --------
Total liabilities 136 291
Guaranteed preferred beneficial interest in Company's subordinated debt 57,838 58,650
Shareholders' Equity 91,104 78,333
-------- --------
Total $149,078 $137,274
======== ========
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Net interest expense $ (5,486) $(3,294) $(2,387)
Management fee 2,455
Other income 48
Expenses (2,504) (244) (133)
------ ------- -------
Loss before equity in undistributed
income of subsidiaries and income tax expense (19,414) (3,538) (2,472)
Equity in undistributed income of subsidiaries 9,700 12,322 6,643
Income tax expense - - -
------ ------- -------
$9,714 $ 8,784 $ 4,171
====== ======= =======
</TABLE>
47
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net income $4,165 $ 8,784 $ 4,171
Adjustments to reconcile net income to Net cash (used in) provided by
operating activities:
Undistributed income of subsidiaries (9,700) (12,322) (6,643)
Gain on sale of investment securities available for sale (48)
Changes in assets and liabilities which (used) provided cash:
Accrued interest and other assets 62 (1,160) (1,400)
Accounts payable and accrued expenses (155) 288 (1)
------ ------- -------
Net cash used in operating activities (5,628) (4,410) (3,921)
------ ------- -------
Investing activities:
Purchases of investment securities available for sale (1,200)
Proceeds from sale of investment securities available for sale 1,249
Dividends from subsidiary 5,550 3,397 1,566
Advances to subsidiary (38,685) (33,741) (42,117)
------ ------- -------
Net cash used in investing activities (33,135) (30,344) (40,502)
------ ------- -------
Financing activities:
Repayments of short-term borrowings (6,000)
Exercise of stock options 22 35 38
Proceeds from issuance of guaranteed preferred beneficial interest
in Company's subordinated debt 29,900 28,750
Proceeds from issuance of common stock 40,197 15,828 21,881
Repurchase of guaranteed preferred beneficial interest in Company's
subordinated debt (812)
Purchase of treasury stock (10,147) (281)
Payments for fractional interests resulting from stock dividend (3) (7) (5)
------ ------- -------
Net cash provided by financing activities 29,257 45,475 44,664
------ ------- -------
(Decrease) increase in cash (9,506) 10,721 243
Cash, beginning of year 10,991 270 27
------ ------- -------
Cash, end of year $1,485 $10,991 $ 270
====== ======= =======
</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 (amounts are
in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
1999
Interest income $33,859 $26,608 $25,653 $25,268
Interest expense 18,412 15,829 13,505 13,469
------- ------- ------- -------
Net interest income 15,447 13,779 12,148 11,799
Provision for loan losses 432 470 519 667
Other operating income 2,398 2,456 2,571 2,326
Other expenses 13,919 12,159 10,680 10,097
------- ------- ------- -------
Income before income taxes 3,494 3,606 3,519 3,361
Income taxes 1,087 1,147 1,068 965
------- ------- ------- -------
Net income $ 2,407 $ 2,459 $ 2,451 $ 2,396
======= ======= ======= =======
Basic earnings per share $ 0.25 $ 0.26 $ 0.32 $ 0.32
======= ======= ======= =======
Diluted earnings per share $ 0.24 $ 0.25 $ 0.30 $ 0.29
======= ======= ======= =======
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 $ 0.37 $ 0.35 $ 0.30 $ 0.29
======= ======= ======= =======
Diluted earnings per share $ 0.33 $ 0.31 $ 0.26 $ 0.25
======= ======= ======= =======
</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. 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 National Market. The prices reflect inter-dealer prices,
with retail markup, markdown, or commission, and may not represent actual
transactions.
High Low
---- ---
1999
First Quarter $ 19.05 $ 16.31
Second Quarter 20.12 17.02
Third Quarter 17.75 15.25
Fourth Quarter 16.25 9.50
1998
First Quarter 29.25 18.75
Second Quarter 29.52 24.05
Third Quarter 28.10 18.33
Fourth Quarter 20.60 15.71
There were 387 holders of record of the Company's common stock as of March 25,
2000. 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 25,
2000, there were 10,086,635 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 June 25, 1997, May 26, 1998 and June 1, 1999.
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 impose 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: The Company's Annual report on Form 10-K (excluding
exhibits) for the fiscal year ended December 31, 1999 is available without
charge upon written request to Sun Bancorp, Inc. Shareholder Relations, 226
Landis Avenue, Vineland, NJ 08360.
50
<PAGE>
<TABLE>
<CAPTION>
CORPORATE DIRECTORY
<S> <C> <C>
SUN BANCORP, INC. SUN NATIONAL BANK SUN NATIONAL BANK,
DELAWARE
DIRECTORS DIRECTORS DIRECTORS
Bernard A. Brown Bernard A. Brown Bernard A. Brown
Ike Brown Adolph F. Calovi Sidney R. Brown
Jeffrey S. Brown Linwood C. Gerber Adolph F. Calovi
Sidney R. Brown Douglas J. Heun, CPA Warren C. Engle
Adolph F. Calovi Philip W. Koebig, III Philip W. Koebig, III
Peter Galetto, Jr. Vito J. Marseglia Anne E. Koons
Philip W. Koebig, III Joel B. Martin, CPA
Anne E. Koons Anthony Russo, III
Edward H. Salmon, Ph.D.
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 Warren C. Engle
President and CEO Executive Vice President President and CEO
Robert F. Mack Robert F. Mack James S. Killough
Executive Vice President Executive Vice President Executive Vice President
and CFO and Cashier
Robert F. Mack
James S. Killough Bart A. Speziali Executive Vice President
Executive Vice President Executive Vice President and Cashier
Bart A. Speziali Edward F. Madden William McDonald
Executive Vice President Senior Vice President Executive Vice President
</TABLE>
51
<PAGE>
President & CEO, Philadelphia
Kevin J. Gallagher
Vice Chairman, Philadelphia
Rolf A. Stensrud
Senior Vice Presidents
Stephen H. Brolly, CPA
Walter Fillmore
Director of Corporate
Development
Ronald A. Seagraves
Regional Vice Presidents
B. Knoll Bowman
Charles F. Brown
Robert E. Davis, Jr.
James G. Erickson
Daniel F. Hires
Robert J. LaPalomento
Henry J. Obergfell
William J. Orsi
Edward W. Wahl
Vice Presidents
Dorothy Antrim
George Banks
Alan Bard
Frank J. Birchler
Graham L. Bowers
Rosemarie C. Carrafiello
Catherine Carothers
Alice Jean Cotter
J. Kevin Danna
Diana DeRocco
Roland J. Dey
Ronald J. Durborow
Bruce E. Engle
Bessie M. Evans
Duncan H. Farquhar
Sandra Ferrarie
Richard Galludet
Paul F. Glanville
Joseph Gleason
John A. Hall
Marjorie H. Hall
John Hancq
Jodi Hirata
Steven Hoffman
Paul Lombard
Michael W. Lloyd
William J. MacDonald
Mariluz McVey
Veronica Morey
Nancy H. Muldowney
Bette L. Nuss
Reid Nylander
Peter Ogden
Carol A. Pringle
Gary J. Riordan
James D. Robson
Holly L. Ryan
Steven A. Ryan
Thomas Simon
Richard J. Simone
John Skoglund
Richard Stoudt
John R. Tordini
John G. Watkins
Ann O. Wigglesworth
Lorraine Williams
Arthur Zirbser
Director, Human Resources
Marjorie H. Hart
Controller
William T. Moyer
Assistant Vice Presidents
Pauline Baker
Vincent Blasi
Erika O. Bonsanto
Mary Jane Brietske
William J. Bugdon
Ronald Burnett
Devon Callan
Charles Check
Richard Clarke
Linda Convey
Catherine M. Crosby
Denise DePula
Fern K. Dirkes
Kathy Ditschman
Theodore Dorn
Sharon A. Draine
Nathan Edmunds
Paul Ekstrom
Nicol Bell-Fidler
Dennis Flannery
Ileana Garcia
Bernadette Grygielko
Elizabeth Hackney
Etta Hart
Bruce Hiller
Susan Hoffman
Nina Ingemi
Candace L. Johnson
Cheryl Kaine
JoAnn Krueger
Dolores Lanza
Terri Lloyd
Kevin M. Loughlin
Larry A. Makela
Bernard J. Maloney
Susan McGowan
Anthony Mignone
Priscilla A. Miller
Darren Mitchell
Sally Niece
Nicoletta A. Paloni
Edward Pastorius
Jeannette Piracci
Alexander Priest
Jodi Russo
Jan M. Sanger
Patricia Sciulli
Elizabeth Tamasi
Eva Teller
Maryann Tillett
Joseph Turturo
Judith Tyndall
Susan A. Vinchiarello
Pauline Vitola
Assistant Controllers
Barbara L. Hawryliw
Anthony Lombardo
Assistant Cashiers
Anthony Albence
Peggy Battaglia
Patsy M. Bianca
Sharon Biondi
Dawn Budd
Shirley Cione
Michael Clark
Ana Manzano-Cruz
Ann Davis
Darlene V. Driscoll
Frank Ellison
Kimberly Evans
Sandra Golaszewski
Darlene Harris
Jesse L. Irvin
Ganesh Kalacharan
Barbara Klecz
Anthony Leva
Nadine McGonigle
Donna M. McGray
Nancy Hagan-Nardy
Denise O'Donnell
Marcia Park
Margarida R. Pereira
Mary Alice Petzinger
Michelle Powelczyk
Cheryl Roberts
Mary Robertson
Carol Scotti
Catherine Shellem
Ronald C. Tennant
Theresa Tucker
Lisa Varesio
Charlotte Wigglesworth
Beverly Wright
Jean Young
Administrative Services Officer
Ernest Current
Marketing Officer
Allison K. Kruse
Security Officer
James Brown
52
<PAGE>
<TABLE>
<CAPTION>
ADVISORY BOARD MEMBERS
<S> <C> <C>
ATLANTIC COUNTY
- --------------- Eric Johnson Albert Donzanti Bonnie Spector
Robert J. Bray Harold R. Levenson, CPA James M. Dwyer Michael L. Testa, Esq.
Arthur R. Brown, Jr. Robert Meyer Joseph S. Franco Lewis Thompson, RMC, CMC
Joseph Continisio, Jr. Mike Quick William Kindle Michael S. Warner, CPA
Richard T. Gerber Joseph P. Schooley Vincent L. LaManna, Jr., Esq Scott J. Zucca
Carmen T. Grasso James C. Wagner Vincent Orlando
Howard Green Paul N. Watter, Esq. Malcolm Robertson
Paula R. Hetzel, Esq. Robert I. Salasin, MD MONMOUTH/OCEAN COUNTY
Thomas J. Kuhar Walter Shoczolek ---------------------
Russell Lucca CAMDEN COUNTY Robert Smeltzer Robert W. Allison, CPA
Richard S. Mairone, Esq. ------------- Thomas L. Scott James Bourke, CPA
James J. McCullough Fred S. Berlinsky William Thawley Michael Bruno, Esq.
Robert Nichols Reynold P. Cicalese, CPA Lewis J. Tozour James D. Caldwell
Robert Polisano Leon D. Dembo, Esq. Ernie Utsch John Callahan, CPA
Frank Rich, Jr. Ronald L. Dubrow, CPA Carl Cappadona, CPA
Leo B. Schoffer Michael P. Edmondson Stephen M. Cors
Richard Traa William Green CUMBERLAND/SALEM COUNTY Steven Eisenberg
Donald B. Vass Edward Hutchinson ----------------------- Peter Falvo, Esq.
Vicki McCall, PC Catherine J. Arpino John Ferringo
Jerome C. Pontillo, Esq. Dominick P. Baruffi, II Dan Harris, CPA
BURLINGTON/MERCER COUNTY Ron Venuto Fred J. Bernardini, Sr. Stephen Kelleher, CPA
- ------------------------ Delores White Ginger L. Chase Alan M. Klatsky, Esq.
Elizabeth A. Allen James D. Donnelly, Esq. Robert Lange
Michael D. Briehler CAPE MAY Crl R. Gaskill Richard Larsen, CPA
Arthur Brooks -------- Thomas C. Gogle James E. Madden, Esq.
Thomas Budd Curtis Bashaw Harry E. Hearing, CPA Kenneth B. Maxwell
Thomas A. DiMartin Joseph M. Brennan, CPA John A. Kugler Joseph T. Mezzina
Leonard V. Fox, Jr. Joseph Bogle David G. Manders Stephen Reed, CPA
Philip E. Haines, Esq. William J. Brown Ronald G. Rossi Martin Steinweiss, MD
James T. Harveson Michael J. Caruso, DO Martin Spector John Szymanski
</TABLE>
53
<PAGE>
FINANCIAL SERVICE CENTER LOCATIONS
Sun National Bank
Atlantic County
2028 Atlantic & Arkansas Avenue
Atlantic City, New Jersey 08401
(609)345-8272
3900 Atlantic Avenue
Brigantine, New Jersey 08203
(609)266-2100
3100 Hingston Avenue
Egg Harbor Twp., New Jersey 08234
(609)272-8200
12th Street & First Road
Hammonton, New Jersey 08037
(609)567-5880
599 New Road & Maple Avenue
Linwood, New Jersey 08221
(609)927-9191
903 Boulevard, Route 50
Mays Landing, New Jersey 08330
(609)625-9152
Mainland Plaza
501 Tilton Road
Northfield, New Jersey 08225
(609)645-3200
521 New Road & Rhode Island Ave.
Somers Point, New Jersey 08244
(609)653-8200
5312 Atlantic & Surrey Ave.
Ventnor, New Jersey 08406
(609)487-3680
Burlington County
1 Lakehurst & Clubhouse Rds.
Browns Mills, New Jersey 08015
(609)735-2801
220 West Front Street
Florence, New Jersey 08518
(609)499-4960
380 South Lenola Road
Maple Shade, New Jersey 08052
(856)222-0200
491 Route 73
Marlton, New Jersey 08053
(856)489-3140
99 Hartford Road
Medford, New Jersey 08055
(609)654-7600
15-17 Scott Street
Riverside, New Jersey 08075
(856)461-0461
Camden County
2260 Route 70 West
Cherry Hill, New Jersey 08002
(856)910-2424
1402 Brace Road
Cherry Hill, New Jersey 08034
(856)616-9882
1280 Blackwood Clementon Road
Clementon, New Jersey 08021
(856)784-4242
430 Gibbsboro Road
Lindenwold, New Jersey 08021
(856)346-3800
47 Centre Street
Merchantville, New Jersey 08109
(856)662-3800
2 South White Horse Pike
Somerdale, New Jersey 08083
(856)782-6533
Cape May County
941 Columbia Avenue
Cape May, New Jersey 08204
(609)898-2120
103 North Main Street
Cape May Court House, New Jersey 08210
(609)463-1341
71 Route 50
Greenfield, New Jersey 08230
(609)390-3418
108 Roosevelt Boulevard
Marmora, New Jersey 08223
(609)390-3529
1900 New Jersey Avenue
North Wildwood, New Jersey 08260
(609)729-3981
4415 Landis Avenue
Sea Isle City, New Jersey 08243
(609)263-4400
2201 Route 50
Tuckahoe, New Jersey 08250
(609)628-2662
1010 Bayshore Avenue
Villas, NJ 08452
(609)886-7945
5611 New Jersey Avenue
Wildwood Crest, NJ 08260
(609)523-2420
Cumberland County
15 South Laurel
Bridgeton, New Jersey 08302
(856)455-8305
1026 High Street
Millville, New Jersey 08332
(856)293-0800
904 West Main Street
Millville, New Jersey 08332
(856)293-9330
1736 Main Street
Port Norris, New Jersey 08349
(856)785-1565
401 Landis Avenue
Vineland, New Jersey 08360
(856)205-0700
1164 East Landis Avenue
Vineland, New Jersey 08360
(856)507-8911
Gloucester County
#6 Village Center Drive (Beckett)
Swedesboro, New Jersey 08085
(856)467-2111
54
<PAGE>
Hunterdon County
616 Milford-Warren Glen Road (Holland)
Milford, New Jersey 08848
(908)995-0460
Mercer County
140 Mercer Street
Hightstown, New Jersey 08520
(609)918-1283
64 East Broad Street
Hopewell, New Jersey 08525
(609)333-0890
2673 Main Street
Lawrenceville, New Jersey 08648
(609)620-9770
226 South Broad Street
Trenton, New Jersey 08608
(609)392-3300
Chambers Street & Forest Avenue
Trenton, New Jersey 08611
(609)396-1900
1660 North Olden Avenue (Ewing)
Trenton, New Jersey 08638
(609)530-9653
411 Route 33 (Hamilton Square)
Trenton, New Jersey 08619
(609)890-7447
Middlesex County
2 Village Boulevard (Forrestal Village)
Princeton, New Jersey 08540
(609)987-8809
Monmouth County
158 Wyckoff Road
Eatontown, New Jersey 07724
(732)542-4800
68 East Main Street
Freehold, New Jersey 07728
(732)683-9060
4074 Route 9
Howell, New Jersey 07731
(732)961-0544
240 Parker Road
Manasquan, New Jersey 08736
(732)292-0881
170 Broad Street
Red Bank, New Jersey 07701
(732)224-8998
Ocean County
311 South Main Street
Barnegat, New Jersey 08005
(609)698-4300
2064 West County Line Road
Jackson, New Jersey 08527
(732)961-1535
504 Route 9
Lanoka Harbor, New Jersey 08734
(609)242-8044
525 Route 72 East
Manahawkin, New Jersey 08050
(609)597-1800
800 Radio Road
Mystic Island, New Jersey 08087
(609)296-1773
1211 Long Beach Boulevard
Ship Bottom, New Jersey 08008
(609)361-8011
601 Route 37 West, Suite 300
Toms River, New Jersey 08757
(732)240-2922
540 Route 9
Tuckerton, New Jersey 08087
(609)296-1700
200 Lacey Road
Whiting, New Jersey 08759
(732)716-1393
Salem County
270 Georgetown Road
Carney's Point, New Jersey 08069
(856)299-5770
175 West Broadway
Salem, New Jersey 08079
(856)935-6560
8 North Main Street
Woodstown, New Jersey 08098
(856)769-2466
Somerset County
1185 Route 206 (Rocky Hill)
Montgomery Twp., New Jersey 08540
(609)497-0500
Philadelphia County, Pennsylvania
1701 Market Street
Philadelphia, Pennsylvania 19103
(215)814-9060
Sun National Bank, Delaware
New Castle County
1101 Governor's Place
Bear, Delaware 19701
(302)392-4221
2080 New Castle Avenue
New Castle, Delaware 19720
(302)254-3569
Liberty Plaza - Possum Park Mall
700 Kirkwood Highway
Newark, Delaware 19711
(302)224-3382
One Christina Centre, 17th Floor
301 North Walnut St.
Wilmington, Delaware 19801
(302)254-3560
1300 Market Street
Wilmington, Delaware 19801
(302)254-3563
4401 Concord Pike
Wilmington, Delaware 19803
(302)334-4091
1800 W. 4th Street
Wilmington, Delaware 19805
(302)254-3566
1300 Rocky Run Parkway
Brandywine Commons Shopping Ctr.
Wilmington, Delaware 19803
(302)334-4038
55
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
Subsidiaries Percentage Owned Jurisdiction of Incorporation
- ------------ ---------------- -----------------------------
Sun National Bank 100% United States
Sun National Bank, 100% United States
Delaware
Med-Vine, Inc.(1) 100% Delaware
Sun Capital Trust 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.
(2) Sun Mortgage Company is a wholly-owned subsidiary of Sun National Bank. The
Company currently intends to terminate the existence of Sun Mortgage
Company by merging it into the Company. The Company's residential mortgage
operations will be conducted through the Banks.
EXHIBIT 23
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-32681 and 333-89839 of Sun Bancorp, Inc. on Forms S-8 of our report dated
February 17, 2000, incorporated by reference in this Annual Report on Form 10-K
of Sun Bancorp, Inc. for the year ended December 31, 1999.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 30, 2000
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 69,425
<INT-BEARING-DEPOSITS> 1,059,638
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 879,473
<INVESTMENTS-CARRYING> 879,473
<INVESTMENTS-MARKET> 879,473
<LOANS> 909,393
<ALLOWANCE> 8,722
<TOTAL-ASSETS> 1,980,861
<DEPOSITS> 1,291,326
<SHORT-TERM> 529,159
<LIABILITIES-OTHER> 6,140
<LONG-TERM> 5,293
57,838
0
<COMMON> 10,080
<OTHER-SE> 81,024
<TOTAL-LIABILITIES-AND-EQUITY> 1,980,861
<INTEREST-LOAN> 67,611
<INTEREST-INVEST> 46,350
<INTEREST-OTHER> 293
<INTEREST-TOTAL> 114,254
<INTEREST-DEPOSIT> 34,487
<INTEREST-EXPENSE> 61,080
<INTEREST-INCOME-NET> 53,174
<LOAN-LOSSES> 2,089
<SECURITIES-GAINS> 79
<EXPENSE-OTHER> 46,855
<INCOME-PRETAX> 13,981
<INCOME-PRE-EXTRAORDINARY> 13,981
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,714
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 3.57
<LOANS-NON> 2,580
<LOANS-PAST> 1,801
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,143
<CHARGE-OFFS> 536
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 8,722
<ALLOWANCE-DOMESTIC> 8,722
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
