-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tqxd8IvJ4FDnjYrkddIRgMJBjguHOPlQgiVtULSkUvuXBjqcz624EsIn4/Atud5l zDnS1pJ6tJnvQrG4/GYOrw== 0000946275-98-000221.txt : 19980401 0000946275-98-000221.hdr.sgml : 19980401 ACCESSION NUMBER: 0000946275-98-000221 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN BANCORP INC /NJ/ CENTRAL INDEX KEY: 0001017793 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL BANKS, NEC [6029] IRS NUMBER: 521382541 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20957 FILM NUMBER: 98583151 BUSINESS ADDRESS: STREET 1: 226 LANDIS AVENUE CITY: VINELAND STATE: NJ ZIP: 08360 BUSINESS PHONE: 6096917700 MAIL ADDRESS: STREET 1: 226 LANDIS AVE CITY: VINELAND STATE: NJ ZIP: 08360 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required) For the fiscal year ended December 31, 1997 --------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required) For the transition period from to . ----------------- --------------- Commission File No. 0-20957 Sun Bancorp, Inc. -------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) New Jersey 52-1382541 - ----------------------------------------------- ------------------- (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 226 Landis Avenue, Vineland, New Jersey 08360 - ----------------------------------------------- -------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (609) 691-7700 -------------- Securities registered under to Section 12(b) of the Exchange Act: None ------ Securities registered under to Section 12(g) of the Exchange Act: Common Stock, $1.00 par value ----------------------------- (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 . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the registrant's Common Stock on March 26, 1998 was approximately $116.4 million. As of March 26, 1998, there were issued and outstanding 6,022,481 shares of the registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 1997. (Parts I, II and IV) 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for the Fiscal Year ended December 31, 1997. (Part III) 1 PART I SUN BANCORP, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS," INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FORM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATE, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES, ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED IN THE FOREGOING. THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD- LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY. Item 1. Business - ----------------- General The Company is a one-bank holding company headquartered in Vineland, New Jersey engaged primarily in commercial and consumer banking services through its sole bank subsidiary, Sun National Bank (the "Bank"). The Company's principal business is to serve as a holding company for the Bank and was incorporated in 1985. The Company's other subsidiary, Sun Capital Trust (the "Trust"), was formed solely to facilitate the issuance of preferred securities and the sale of the Company's Junior Subordinated Debentures. In April 1995, the Company changed its name from Citizens Investments, Inc. 2 to its present name. The Bank has one wholly-owned subsidiary, Med-Vine, Inc., a Delaware corporation, which was formed in 1992 to hold a majority of the Company's investment portfolio. The Company is focused on a strategy to expand its franchise throughout southern and central New Jersey. Continued consolidation of the banking industry, and a regionalization of decision-making authority by larger banking institutions resulted in many area businesses and individuals in the Bank's market being underserved. The opportunities provided in this market prompted the Board and management to actively pursue strategic acquisitions. The Bank offers a wide variety of commercial and consumer lending and deposit services through its 39 branch offices located throughout southern and central New Jersey. The commercial loans offered by the Bank include short- and long-term business loans, lines of credit, non-residential mortgage loans, and real estate construction loans. Consumer loans include home equity loans, residential real estate loans, and installment loans. The Bank also offers deposits and personal banking services, including commercial banking services, retail deposit services such as certificates of deposit, money market accounts, savings accounts, ATM access, cash management services and individual retirement accounts, and securities brokerage and investment advisory services through a third-party arrangement. Market Area The Bank has been, and intends to continue to be, a community-oriented financial institution, offering a wide variety of financial services to meet the needs of the communities it serves. The Bank conducts its business through 39 branch offices and one loan administration office located in the southern and central New Jersey counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Mercer, Middlesex, Monmouth, Ocean, Salem and Somerset ("primary market area"). The Bank's deposit gathering base and lending area is concentrated in the communities surrounding its offices. The Bank is a community-based financial institution headquartered in Cumberland County, New Jersey. The city of Vineland is approximately 30 miles southeast of Philadelphia, Pennsylvania, and 30 miles southeast of Camden, New Jersey. The Philadelphia International Airport is approximately 45 minutes from Vineland. The central and southern New Jersey areas are among the fastest growing population areas in New Jersey and has a significant number of retired residents who have traditionally provided the Bank with a stable source of deposit funds. The economy of the Bank's primary market area is based upon a mixture of the agriculture, transportation, manufacturing and tourism trade. These areas are also home to commuters working in New Jersey suburban areas around New York and Philadelphia. Management considers the Bank's reputation for customer service as its major competitive advantage in attracting and retaining customers in its market area. The Bank also believes it benefits from its community orientation, as well as its established deposit base and level of core deposits. Lending Activities General The principal lending activity of the Bank is the origination of commercial real estate loans, commercial business and industrial loans, home equity loans, mortgage loans and, to a much lesser extent, installment loans. All loans are originated in the Bank's primary market area. 3 Commercial and Industrial Loans The Bank originates several types of commercial and industrial loans. Included as commercial loans are short- and long-term business loans, lines of credit, non-residential mortgage loans and real estate construction loans. The primary focus of the Bank is on the origination of commercial loans secured by real estate. The majority of the Bank's customers for these loans are small- to medium-sized businesses located in the southern and central parts of New Jersey. Commercial Real Estate Loans Loans secured by commercial properties generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. A significant portion of the Bank's commercial real estate and commercial and industrial loan portfolio includes a balloon payment feature. A number of factors may affect a borrower's ability to make or refinance a balloon payment, including without limitation the financial condition of the borrower at the time, the prevailing local economic conditions, and the prevailing interest rate environment. There can be no assurance that borrowers will be able to make or refinance balloon payments when due. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, the Company may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may be subject to a greater extent than residential loans to adverse conditions in the real estate market or economy. Home Equity Loans The Bank originates home equity loans, secured by first or second mortgages owned or being purchased by the loan applicant. Home equity loans are consumer revolving lines of credit. The interest rate charged on such loans is usually a floating rate related to the prime lending rate. Home equity loans may provide for interest only payments for the first two years with principal payments to begin in the third year. A home equity loan is typically originated as a fifteen-year note that allows the borrower to draw upon the approved line of credit during the same period as the note. The Bank generally requires a loan-to-value ratio in the range of 70% to 80% of the appraised value, less any outstanding mortgage. Residential Real Estate Loans The Bank uses outside loan correspondents to originate residential mortgages. These loans are originated using the Bank's underwriting standards, rates and terms, and are approved according to the Bank's lending policy prior to origination. Prior to closing, the Bank usually has commitments to sell these loans, at par and without recourse, in the secondary market. Secondary market sales are generally scheduled to close shortly after the origination of the loan. The majority of the Bank's residential mortgage loans consist of loans secured by owner-occupied, single-family residences. The Bank's mortgage loan portfolio consists of both fixed-rate and adjustable- 4 rate loans secured by various types of collateral as discussed below. Management generally originates residential mortgage loans in conformity with Federal National Mortgage Association ("FNMA") standards so that the loans will be eligible for sale in the secondary market. Management expects to continue offering mortgage loans at market interest rates, with substantially the same terms and conditions as it currently offers. The Bank's residential mortgage loans customarily include due-on-sale clauses, which are provisions giving the Bank the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Bank's fixed-rate mortgage portfolio. The Bank usually exercises its rights under these clauses. Installment Loans The Bank originates installment or consumer loans secured by a variety of collateral, such as new and used automobiles. The Bank makes a very limited number of unsecured installment loans. Through a merger in 1994, the Bank acquired a credit card portfolio which it intends to reduce as current customers pay off their lines of credit. Loan Solicitation and Processing Loan originations are derived from a number of sources such as loan officers, customers, borrowers and referrals from real estate brokers, accountants, attorneys and regional advisory boards. Upon receipt of a loan application, a credit report is ordered and reviewed to verify specific information relating to the loan applicant's creditworthiness. For residential mortgage loans, written verifications of employment and deposit balances are requested by the Bank. The Bank requires that an appraisal of the real estate intended to secure the proposed loan is undertaken by a certified independent appraiser approved by the Bank and licensed by the State. After all of the required information is obtained, the Bank then makes its credit decision. Depending on the type, collateral and amount of the credit request, various levels of approval may be necessary. In general, loans of $100,000 or more must be presented at an Officers' Loan Committee which has the authority to approve unsecured loans to $750,000 and secured loans to $1.5 million. The Officers' Loan Committee is comprised of the Bank's CEO, senior lending officer and regional lending officers. Credit requests in excess of the approval authority of the Officers' Loan Committee must also be presented to the Bank's Board of Directors for approval. Loans under $100,000 are generally approved by various levels of Bank management. All loans require the approval of at least two lending officers. Title insurance policies are required on all first mortgage loans. Hazard insurance coverage is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable. Loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. Generally, title insurance endorsed to the Bank is required on all first mortgage loans. 5 Loan Commitments When a commercial loan is approved, the Bank issues a written commitment to the loan applicant. The commitment indicates the loan amount, term and interest rate and is valid for approximately 45 days. Approximately 90% of the Bank's commitments are accepted or rejected by the customer before the expiration of the commitment. At December 31, 1997, the Bank had approximately $84.3 million in commercial loan commitments outstanding. Credit Risk, Credit Administration and Loan Review Credit risk represents the possibility that a customer or counterparty may not perform in accordance with contractual terms. The Bank incurs credit risk whenever it extends credit to, or enters into other transactions with, its customers. The risks associated with extensions of credit include general risk, which is inherent in the lending business, and risk specific to individual borrowers. Credit administration is responsible for the overall management of the Bank's credit risk and the development, application and enforcement of uniform credit policies and procedures the principal purpose of which is to minimize such risk. One objective of credit administration is to identify and, to the extent feasible, diversify extensions of credit by industry concentration, geographic distribution and the type of borrower. Loan review and other loan monitoring practices provide a means for the Bank's management to ascertain whether proper credit, underwriting and loan documentation policies, procedures and practices are being followed by the Bank's loan officers and are being applied uniformly throughout the Bank. Within the last year, the Bank has taken a number of steps to enhance its credit administration and loan review functions in an effort to better manage its credit risk, especially in light of the Bank's rapid growth. While the Bank continues to review these and other related functional areas, there can be no assurance that the steps the Bank has taken to date will be sufficient to enable it to identify, measure, monitor and control all credit risk. Investment Securities Activities General The investment policy of the Bank is established by senior management and approved by the Board of Directors. It is based on asset and liability management goals and is designed to provide a portfolio of high quality investments that optimize interest income within acceptable limits of safety and liquidity. The Bank's investments consist primarily of federal funds, securities issued or guaranteed by the United States Government or its agencies, states and political subdivisions and corporate bonds. Sources of Funds General Deposits are the major source of the Bank's funds for lending and other investment purposes. In addition to deposits, the Bank derives funds from the amortization, prepayment or sale of loans, maturities or sale of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. Deposits Consumer and commercial deposits are attracted principally from within the Bank's primary market area through the offering of a broad selection of deposit instruments including checking, regular 6 savings, money market deposits, term certificate accounts and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Bank regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Bank's cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate. The Bank does not obtain funds through brokers, nor does it solicit funds outside the State of New Jersey. Cash Management Services The Company now offers a menu of cash management services designed to meet the more sophisticated needs of its commercial customers. Headed by an experienced cash management executive, the Cash Management Department offers products such as electronic banking, sweep accounts, lockbox services, PC banking and controlled disbursement services. Many of these services are provided through third-party vendors with links to the Company's data center. Competition The Bank faces substantial competition both in attracting deposits and in lending funds. The State of New Jersey has a high density of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Bank, all of which are competitors of the Bank to varying degrees. In order to compete with the many financial institutions serving its primary market area, the Bank's operating goal is to continue to provide a broad range of financial services with a strong emphasis on customer service to individuals and businesses in southern and central New Jersey. The competition for deposits comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional and money center banks in the Bank's market area. Competition for funds also include a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional and money center banks, and mortgage-bankers many of whom have far greater resources then the Bank. Non-bank competition, such as investment brokerage houses, has intensified in recent years for all banks since non-bank competitors are not subject to same regulatory burdens as banks. Personnel At December 31, 1997, the Company had 281 full-time and 68 part-time employees, all of whom were on the payroll of the Bank. The Bank's employees are not represented by a collective bargaining group. The Bank believes that its relationship with its employees is good. SUPERVISION AND REGULATION Introduction Bank holding companies and banks are extensively regulated under both federal and state law. The following information describes certain aspects of that regulation applicable to the Company and the Bank, and does not purport to be complete. The discussion is qualified in its entirety by reference to all particular statutory or regulatory provisions. 7 The Company is a legal entity separate and distinct from the Bank. Accordingly, the right of the Company, and consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings of the Bank is necessarily subject to the prior claims of creditors of the Bank, except to the extent that claims of the Company in its capacity as creditor may be recognized. The principal source of the Company's revenue and cash flow is dividends from the Bank. There are legal limitations on the extent to which a subsidiary bank can finance or otherwise supply funds to its parent holding company. The Company General. As a registered holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended ("BHCA") and is subject to supervision and regular inspection by the Federal Reserve. The BHCA requires, among other things, the prior approval of the Board of Governors of the Federal Reserve System ("Federal Reserve") in any case where the Company proposes to (i) acquire all or substantially all of the assets of any bank, (ii) acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or (iii) merge or consolidate with any other bank holding company. Acquisitions/Permissible Business Activities. The Bank has the ability, subject to certain restrictions, including state opt-out provisions, to acquire by acquisition or merger branches outside its home state. The establishment of new interstate branches is possible in those states with laws that expressly permit it. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets. Under the BHCA, the Company is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any nonbanking corporation. Further, the Company may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries, and may not acquire voting control of nonbanking corporations except those corporations engaged in businesses or furnishing services that the Federal Reserve deems to be closely related to banking. Source of Strength Policy. Under Federal Reserve policy, a bank holding company is expected to serve as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank. Consistent with its "source of strength" policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. The Bank General. The Bank is subject to supervision and examination by the OCC. In addition, the Bank is insured by and subject to certain regulations of the FDIC and is a member of the FHLB. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be granted and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. 8 Dividend Restrictions. Dividends from the Bank constitute the principal source of income to the Company. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $10.0 million at December 31, 1997. In addition, the OCC has the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The ability of the Bank to pay dividends in the future is presently, and could be further, influenced by bank regulatory and supervisory policies. Affiliate Transaction Restrictions. The Bank is subject to federal laws that limit the transactions by subsidiary banks to or on behalf of their parent company and to or on behalf of any nonbank subsidiaries. Such transactions by a subsidiary bank to its parent company or to any nonbank subsidiary are limited to 10% of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of such bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also prohibits banks from purchasing "low-quality" assets from affiliates. FDIC Insurance Assessments. Substantially all of the deposits of the Bank are insured by the Bank Insurance Fund ("BIF") and the remaining deposits are insured by the Savings Association Insurance Fund ("SAIF"), all of which are subject to Federal Deposit Insurance Corporation ("FDIC") insurance assessments. The amount of FDIC assessments paid by individual insured depository institutions is based on their relative risk as measured by regulatory capital ratios and certain other factors. During 1995, the FDIC's Board of Directors significantly reduced premium rates assessed on deposits insured by the BIF. Under the current regulations, the Company is assessed a premium on BIF-insured deposits. Enforcement Powers of Federal Banking Agencies. Federal banking agencies possess broad powers to take corrective and other supervisory action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends on whether the institution in question is considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". At December 31, 1997, the Company and the Bank exceeded the required ratios for classification as "well capitalized." The classification of depository institutions is primarily for the purpose of applying the federal banking agencies' prompt corrective action and other supervisory powers and is not intended to be, and should not be interpreted as, a representation of the overall financial condition or prospects of any financial institution. The agencies' prompt corrective action powers can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities; including restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval and, ultimately, appointing a receiver for the institution. Among other things, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and only an "adequately capitalized" depository institution may accept brokered deposits with prior regulatory approval. Capital Guidelines. Under the risk-based capital guidelines applicable to the Company and the Bank, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off- balance-sheet activities) is 8.00%. At least half of the total capital must be "Tier 1" or core capital, which primarily includes common shareholders' equity and qualifying preferred stock, less goodwill and other disallowed tangibles. "Tier 2" or supplementary capital includes, among other items, certain 9 cumulative and limited-life preferred stock, qualifying subordinated debt and the allowance for credit losses, subject to certain limitations, less required deductions as prescribed by regulation. In addition, the federal bank regulators established leverage ratio (Tier 1 capital to total adjusted average assets) guidelines providing for a minimum leverage ratio of 3% for bank holding companies and banks meeting certain specified criteria, including that such institutions have the highest regulatory examination rating and are not contemplating significant growth or expansion. Institutions not meeting these criteria are expected to maintain a ratio which exceeds the 3% minimum by at least 100 to 200 basis points. The federal bank regulatory agencies may, however, set higher capital requirements when particular circumstances warrant. Under the federal banking laws, failure to meet the minimum regulatory capital requirements could subject a bank to a variety of enforcement remedies available to federal bank regulatory agencies. At December 31, 1997, the Bank's and the Company's respective total and Tier 1 risk-based capital ratios and leverage ratios exceeded the minimum regulatory capital requirements. Legislative Proposals and Reforms In recent years, significant legislative proposals and reforms affecting the financial services industry have been discussed and evaluated by Congress. Such proposals include legislation to revise the Glass-Steagall Act and the BHCA to expand permissible activities for banks, principally to facilitate the convergence of commercial and investment banking. Certain proposals also sought to expand insurance activities of banks. It is unclear whether any of these proposals, or any form of them, will be reintroduced in the current Congress and become law. Consequently, it is not possible to determine what effect, if any, they may have on the Company and the Bank. Item 2. Properties - ------------------ The Company and the Bank operate from their main office and 39 branch offices. The Bank leases its main office and 13 branch offices. The remainder of the branch offices are owned by the Bank. Item 3. Legal Proceedings - ------------------------- There are various claims and lawsuits in which the Company or the Bank are periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Bank's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year. 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------- Information relating to the market for the Company's Common Stock and related shareholder matters appears under "Letter to Shareholders" in the Company's 1997 Annual Report to Shareholders on pages 3 and 4, Note 2 to the Consolidated Financial Statements on Page 33 and Note 25 to the Consolidated Financial Statements on page 50 and is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The above-captioned information appears under "Selected Financial and Other Data" in the Company's 1997 Annual Report to Shareholders on page 2, and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Shareholders on pages 8 through 24, and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- The above-captioned information appears under "GAP Analysis" in the Company's 1997 Annual Report to Shareholders on pages 16 and 17, and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Consolidated Financial Statements of Sun Bancorp, Inc. and its subsidiaries are included in the Registrant's 1997 Annual Report to Shareholders on pages 25 through 50, and are incorporated herein by reference. Item 9. Changes In and Disagreements with Accountants On Accounting and - -------------------------------------------------------------------------------- Financial Disclosure. - -------------------- Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the sections captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I - Election of Directors - General Information and Nominees" and "- Biographical Information" in the Proxy Statement. Item 11. Executive Compensation - -------------------------------- The information contained in the section captioned "Director and Executive Officer Compensation" in the Proxy Statement is incorporated herein by reference. 11 Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the first chart in the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the first chart in the section captioned "Proposal I - Election of Directors" in the Proxy Statement. (c) Management of the Registrant knows of no arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Additional Information About Directors and Executive Officers - Certain Relationships and Related Transactions" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages: Report of Independent Auditors.................................25 Consolidated Statements of Financial Condition.................26 Consolidated Statements of Income..............................27 Consolidated Statements of Shareholders' Equity................28 Consolidated Statements of Cash Flows..........................29-30 Notes to Consolidated Financial Statements.....................31-50 There are no financial statements schedules that are required to be included in Part II, Item 8. (b) A Form 8-K was filed on November 10, 1997 in connection with branch acquisitions by the Bank. A Form 8-K was filed on December 5, 1997 in connection with branch acquisitions by the Bank. 12 (c) Exhibits The following Exhibits are filed as part of this report: 3(i) Certificate of Incorporation of Sun Bancorp, Inc. * 3(ii) Amended and Restated Bylaws of Sun Bancorp, Inc. 10.1 1995 Stock Option Plan * 10.2 Employment Agreement with Adolph F. Calovi** 13 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Consent of Deliotte & Touche, LLP 27 Financial Data Schedule - --------------------- * Incorporated by reference to the Form 10 (File No. 0-20957). ** Incorporated by reference to the Form S-1/A (File No. 333-21903) 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 31, 1998 SUN BANCORP, INC. By: /s/ Adolph F. Calovi -------------------------------------- Adolph F. Calovi President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 31, 1998. /s/ Adolph F. Calovi /s/ Philip W. Koebig, III - ---------------------------------- ------------------------------------- Adolph F. Calovi Philip W. Koebig, III President, Chief Executive Officer Executive Vice President and Director and Director (Principal Executive Officer) /s/ Bernard A. Brown /s/ Sidney R. Brown - ---------------------------------- -------------------------------------- Bernard A. Brown Sidney R. Brown Chairman of the Board and Director Vice Chairman, Secretary and Treasurer /s/ Peter Galetto, Jr. /s/ Anne E. Koons - --------------------------------- -------------------------------------- Peter Galetto, Jr. Anne E. Koons Director Director /s/ Ike Brown /s/ Robert F. Mack - -------------------------------- -------------------------------------- Ike Brown Robert F. Mack Director Executive Vice President (Principal Financial and Accounting Officer) EX-3.II 2 EXHIBIT 3(II) AMENDED AND RESTATED BYLAWS OF SUN BANCORP, INC. AS ADOPTED BY THE BOARD OF DIRECTORS ON MARCH 3, 1998 ARTICLE I - Home Office The home office of Sun Bancorp, Inc. (the "Corporation") shall be located at 226 Landis Avenue, in the City of Vineland, in the County of Cumberland, in the State of New Jersey. The Corporation may also have offices at such other places within or without the State of New Jersey as the board of directors shall from time to time determine. ARTICLE II - Shareholders Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Corporation or at such other place as the board of directors may determine. Section 2. Annual Meeting. A meeting of the shareholders of the Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at such date and time as the board of directors may determine. The board of directors may postpone an annual meeting by providing public notice at any time before such annual meeting date. Section 3. Special Meetings. Unless otherwise required by law, special meetings of the shareholders of the Corporation for any purpose or purposes may be called at any time by the board of directors of the Corporation. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with rules and procedures adopted by the board of directors. Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is so called shall be delivered not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the vice chairman, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II with postage prepaid. When any shareholders' meeting, either annual or special, is adjourned, notice of the adjourned meeting shall not be necessary unless the board fixes a new record date for the adjourned meeting. Section 6. Fixing of Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or the shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in the case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. Section 7. Quorum. The quorum requirements for meetings of shareholders shall be as set forth in the Certificate of Incorporation. The Chairman of the meeting may adjourn the meeting from time to time whether or not a quorum is present. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 8. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed by the shareholder in the manner provided by law. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. Section 9. Voting of Shares in the Name of Two or More Persons. When ownership of stock stands in the name of two or more persons, at any meeting of the shareholders of the Corporation, any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting. If there is no such majority, the shares shall, for the purpose of voting, be divided equally among such holders present. Section 10. Voting of Shares of Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Corporation nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 11. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for director as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. -2- Unless otherwise prescribed by regulation of the board, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. Section 12. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Corporation in accordance with the provisions of Article II, Section 13 of these Bylaws. Section 13. Notice for Nominations and Proposals. (a) Nominations of candidates for election as directors at any annual meeting of shareholders may be made (i) by, or at the direction of the board of directors or (ii) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section 13, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 13. Only persons nominated in accordance with the procedures set forth in this Section 13 shall be eligible for election as directors at an annual meeting. Nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 13. To be timely, a shareholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation (i) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made, and (ii) in the case of a special meeting at which directors are to be elected, not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such shareholder and (B) the class and number of shares of the Corporation which are beneficially owned by such shareholder and also which are owned of record by such shareholder; and (iii) as to the beneficial owner, if any, on whose behalf the nomination is made, (A) the name and address of such person and (B) the class and number of shares of the Corporation which are beneficially owned by such person. At the request of the board of directors, any person nominated by, or at the direction of, the Board for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. -3- No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 13. (b) (i) At an annual meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting (A) pursuant to the Corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any shareholder of the Corporation who is a shareholder of record at the time of giving of the notice provided for in this By-law, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this By-law. (ii) For business to be properly brought before an annual meeting by a shareholder pursuant to clause (C) of paragraph (b) (i) of this By-law, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (A) a brief description of the business desired to brought before the meeting and the reasons for conducting such business at the meeting, (B) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (C) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder of record and by the beneficial owner, if any, on whose behalf the proposal is made and (D) any material interest of such shareholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business. (iii) Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-law, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this By-law. ARTICLE III - Board of Directors Section 1. General Powers. The business and affairs of the Corporation shall be under the direction of its board of directors. The board of directors may annually elect a chairman of the board and one or more vice chairmen from among its members and shall designate, when present, either the -4- chairman of the board or in his or her absence, one of the vice chairmen to preside at its meetings. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulation, the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the shareholders. Section 2. Number, Term and Election. The board of directors shall consist of not fewer than two (2) nor more than twenty-five (25) directors. Directors are to be elected by a plurality of votes cast by the shares entitled to vote in the election at a meeting of shareholders at which a quorum is present. The number of directors to be elected, subject to the foregoing limits, shall be determined from time to time by the Board of Directors. Section 3. Place of Meeting. All annual and special meetings of the board of directors shall be held on such day, at such hour, and at such place, consistent with applicable law, as the Board shall from time to time designate or as may be designated in any notice from the Secretary calling the meeting. Members of the board of directors may participate in meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person. Section 4. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this Bylaw at such time and date as the board of directors may determine. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the vice chairman, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within or outside the State of New Jersey, as the place for holding any special meeting of the board of directors called by such persons. Section 6. Notice of Special Meeting. Written notice of at least 24 hours regarding any special meeting of the board of directors or of any committee designated thereby shall be given to each director in accordance with these Bylaws, although such notice may be waived by the director. The attendance of such director at a meeting, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice of such meeting. Neither the business to be transacted at, nor the purpose of, any meeting need be specified in the notice of waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given to the extent required by New Jersey law. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by these Bylaws, the Certificate of Incorporation or the laws of New Jersey. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if, prior or subsequent to the action, a consent in writing, setting forth the action so taken, shall be signed by all of the directors. -5- Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Corporation addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. Section 11. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders. Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation as the board of directors may determine. Section 13. Presumption of Assent. A director of the Corporation who is present at a meeting of the board of directors at which action on any Corporation matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Directors Must Be Shareholders. Every director of the Corporation must be a shareholder of the Corporation and shall own in his or her own right the number of shares (if any) required by law in order to qualify as a director. Any director shall forthwith cease to be a director when he or she no longer holds such shares, which fact shall be reported to the board of directors by the secretary, whereupon the board of directors shall declare the seat of such director vacated. ARTICLE IV - Executive And Other Committees Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate one or more of the directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent provided by law, and if any, the extent that such authority shall be limited by the resolution appointing the executive committee. Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. -6- Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meeting. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum. One-third of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if, prior or subsequent to the action, a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Corporation. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these Bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. Section 10. Other Committees. The board of directors may by resolution establish any other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Corporation and may prescribe the duties, constitution, and procedures thereof. ARTICLE V - Officers Section 1. Positions. The officers of the Corporation shall be a Chief Executive Officer, a President, a Chairman of the Board, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers and assistant officers as the Board of Directors may from time to time deem advisable. Except for the Chief Executive Officer, President, Secretary and Treasurer, the Board may refrain from filling any of the said offices at any time and from time to time. The same individual may hold any two or more offices. Any officer may be removed at any time, with our without cause, and regardless of the term for which such officer was elected, but without prejudice to any contract right of such officer. -7- Section 2. Election and Term of Office. The officers of the Corporation shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Corporation to enter into an employment contract with any officer, but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 1 of this Article V. Section 3. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term. Section 4. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors, by employment contracts or otherwise. ARTICLE VI - Indemnification Section 1. Mandatory Indemnification. The Corporation shall indemnify to the full extent permitted by Section 14A:3-5 of the New Jersey Business Corporation Act every person who is or was a director or officer of: (a) the Corporation; (b) any other enterprise, if serving as such at the request of the Corporation; or (c) the legal representative of any officer or director described in clause (a) or (b) hereof. Section 2. Discretionary Indemnification. In all situations in which indemnification is not mandatory under Section 1 of this Article VI, the Corporation may to the full extent permitted by Section 14A:3-5 of the New Jersey Business Corporation Act, as amended from time to time, indemnify all persons whom it is empowered to indemnify pursuant thereto provided, however, that the Corporation's exercise of indemnification powers under this Section 2 is limited by and conditioned upon the Board of Directors' determination that to provide such indemnification would be in the best interests of the Corporation. The Board of Directors' determination whether to provide indemnification shall be conclusive in the absence of clear and convincing evidence of bad faith. ARTICLE VII - Contracts, Loans, Checks, and Deposits Section 1. Contracts. Except as otherwise prescribed by these Bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. -8- Section 3. Checks, Drafts, Etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees, or agents of the Corporation, which may include facsimile signatures, in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in any duly authorized depositories as the board of directors may select. ARTICLE VIII - Certificates for Shares and Their Transfer Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Corporation shall be in such form as shall be determined by the board of directors. Such certificates shall be signed by the chief executive officer or by any other officer of the Corporation authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Corporation itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and canceled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Corporation as the board of directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner for all purposes. Section 3. Payment for Shares. No certificate shall be issued for any shares until such share is fully paid. Section 4. Form of Payment for Shares. The consideration for the issuance of shares shall be paid in accordance with the provisions of New Jersey law. Section 5. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the shareholders entitled to examine the stock ledger, or the books of the Corporation, or to vote in person or by proxy at any meeting of shareholders. Section 6. Lost Certificates. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, -9- stolen, or destroyed certificate, or his or her legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. Section 7. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. ARTICLE IX - Fiscal Year; Annual Audit The fiscal year of the Corporation shall end on the 31st day of December of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. ARTICLE X - Dividends Subject only to the terms of the Corporation's Certificate of Incorporation and applicable law, the board of directors may, from time to time, declare and the Corporation may pay, dividends on its outstanding classes of capital stock which are eligible for dividends. ARTICLE XI - Corporate Seal The board of directors shall provide a Corporate seal which shall be two concentric circles between which shall be the name of the Corporation. The year of incorporation or an emblem may appear in the center. ARTICLE XII - Amendments These Bylaws may be amended or repealed, in whole or in part, by a majority vote of members of the Board of Directors at any regular or special meeting of the Board duly convened or as otherwise specified in the Corporation's Certificate of Incorporation. Notice need not be given of the purpose of the meeting of the Board of Directors at which the amendment or repeal is to be considered. -10- EX-13 3 EXHIBIT 13 Table of Contents Page 1 Mission Statement 2 Selected Financial Data 3 Letter to Shareholders 5 Board of Directors 6 The Sun Story 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Independent Auditors' Report 26 Consolidated Financial Statements 31 Notes to Consolidated Financial Statements 51 Corporate Directory 54 Advisory Boards 56 Financial Service Centers 58 Products and Services 1 Mission Statement . People are the source of our success. We will provide superior financial products and a dedicated working environment that creates long-term value for our customers, our employees, our shareholders and our communities. . We have a "Customer-First" attitude. We will deliver our products in anticipation of, and in response to, the needs of our customers and the communities that we serve. . Our employees are our most valued asset. We will offer a challenging and rewarding work environment that provides career advancement opportunities to attract and retain quality personnel. . Effective use of current technology will help deliver high-quality services that are important to our customers. We will focus on the implementation and efficient use of the most recent technology to provide high levels of personalized service and products that are competitive with any financial service provider in our market area. . We respect the industry we serve. We will be diligent in compliance with the letter and spirit of all federal, state and local laws and regulations. . Our shareholders provide us the capital we need to exist. We will consistently achieve above-average financial results to provide value to the our shareholders. 1 Selected Financial Data
At or for the Years Ended December 31, ------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Selected Balance Sheet Data: Assets $ 1,099,973 $ 436,795 $ 369,895 $ 217,351 $ 112,015 Cash and investments 610,339 117,388 164,251 70,809 24,134 Loans receivable (net) 427,761 295,501 183,634 134,861 83,387 Deposits 695,388 385,987 335,248 196,019 99,099 Borrowings and securities sold under agreements to repurchase 316,314 21,253 8,000 Shareholders' equity 54,632 27,415 24,671 20,571 12,306 Selected Results of Operations: Interest income $ 47,185 $ 29,270 $ 20,850 $ 12,194 $ 8,164 Net interest income 22,778 16,736 13,163 8,256 5,327 Provision for loan losses 1,665 900 808 383 2 Net interest income after provision for loan losses 21,113 15,836 12,355 7,873 5,325 Non-interest income 2,236 1,746 1,651 732 472 Non-interest expense 17,445 13,207 10,047 5,991 4,198 Net income 4,171 3,013 2,819 1,840 1,128 Per Share Data: Net income Basic $ 0.91 $ 0.71 $ 0.69 $ 0.65 $ 0.45 Diluted $ 0.82 $ 0.66 $ 0.65 $ 0.60 $ 0.43 Book Value $ 9.07 $ 6.28 $ 6.02 $ 5.33 $ 4.88
2 To Our Shareholders and Friends: The pages of this report chronicle the most dynamic year in our Company's history. It was a year in which Sun took many great strides; a year in which our mission statement continued to serve as our guide and our focus. Sun's mission has been to create enhanced value for its customers, its communities, its employees and its shareholders. Each of these four constituencies were well-served during the past year. Customers were a priority in 1997. In March, Sun National Bank converted its data systems to an in-house system licensed from Kirchman Corporation. As a result of the conversion, Sun has more flexibility in the types of products and services it offers its customers. Products such as "Sun-Dial," our automated information system, allows customers the ability to call, toll-free, 24-hours a day to inquire about the status of their accounts as well as access rate and financial service center information. In November, Sun initiated a comprehensive menu of cash management products and services to offer its customers. PC banking, lock-box and wire transfer services, among others, have become available to the Bank's customers. Community impact was a priority in 1997. During the course of the year, Sun successfully completed three separate acquisitions that resulted in the purchase of eighteen branches. Sun acquired four branches from First Union National Bank, three branches from Oritani Savings Bank, and eleven branches from The Bank of New York, in the aggregate, totaled about $257 million in deposits, $20 million in loans and $12 million in real estate and equipment. In addition, the Bank opened new branches in Cape May, Toms River and Long Beach Island. In total, Sun had thirty-eight financial service centers in nine central and southern New Jersey counties at year-end. We also established new advisory boards in Mercer and Salem Counties during the year. Along with our seven other advisory boards, they have been an excellent source of community information and customer referrals which have contributed to our dynamic growth. Employees were a priority in 1997. Sun made a significant commitment to training its employees. This was especially important in a year that included a computer system conversion, a sharp increase in the number and complexity of products and services available to our customers and a continually changing regulatory environment. The company initiated a new incentive pay system in which excellence is measured and rewards are possible at every job level. Additionally, an employee stock purchase plan was implemented allowing employees to become owners by purchasing Sun Bancorp, Inc. common stock at a discount through payroll deduction. 3 Capital and shareholder value was a priority in 1997. Beginning in March, Sun raised a total of $28.8 million through the sale of trust preferred securities. Sun was one of the first community banks in the country to issue trust preferred securities on a retail and unrated basis. Trust preferred securities are an innovative way to raise capital that allows dividends to be tax-deductible. In November, Sun raised an additional $23 million through the sale of common stock in a public offering underwritten by Advest, Inc. As a result, at December 31, 1997, Sun had approximately 975 shareholders of record. Advest has since named our stock the "1998 Bank Stock of the Year." During 1997, the stock was moved from the Nasdaq SmallCap market to the Nasdaq National Market under the same symbol, "SNBC." We are pleased with the substantial increase in the market value of your investment in Sun during 1997. Our financial statements show that 1997 was another record-setting year. Total assets at December 31, 1997 were $1.1 billion, up from $436.8 million at December 31, 1996. This was an increase of $663.2 million, or 152%. Net loans grew from $295.5 million at December 31, 1996 to $427.8 million at December 31, 1997, an increase of $132.3 million, or 45%. Total deposits at December 31, 1997 were $695.4 million, an increase of $309.4 million, or 80%, from the December 31, 1996 total of $386.0 million. Total common equity grew $27.2 million, or 99%, from $27.4 million at December 31, 1996 to $54.6 million at December 31, 1997. Net interest income for the year ended December 31, 1997 was $22.8 million compared to $16.7 million for the same period in 1996, an increase of $6.0 million or 36%. Net income for the year ended December 31, 1997 amounted to $4.2 million compared to $3.0 million for the same period in 1996, an increase of $1.2 million, or 38%. As we begin 1998, we have extended our presence into Monmouth County by successfully completing the acquisition of the Eatontown branch, with deposits of $25.2 million, from First Savings Bank. A natural extension of Sun's market area, Monmouth County has been a strategic target of ours because of its significant growth opportunities. Our systems, our products and services, our people and our philosophy of an "Attitude of Excellence" have prepared us well for future growth. With mergers and consolidations of large banks occurring in our marketplace, we feel that 1998 will continue to provide Sun with numerous opportunities to take advantage of the customer disruption created by those transactions. On behalf of the Board of Directors and officers, we appreciate your continued support. Our successes could not have been possible without the untiring effort of a staff of professional bankers dedicated to achieving excellence. We thank them and we thank you. Sincerely, /s/Bernard A. Brown /s/Adolph F. Calovi /s/Philip W. Koebig, III Bernard A. Brown Adolph F. Calovi Philip W. Koebig, III Chairman President and Chief Executive Vice President Executive Officer 4 Board of Directors [Photo] [Photo] [Photo] Bernard A. Brown Adolph F. Calovi Philip W. Koebig, III Chairman of the Board President and CEO Executive Vice President [Photo] [Photo] [Photo] Sidney R. Brown Peter Galetto, Jr. Anne E. Koons 5 The Sun Story The numbers tell the story. As recently as 1992, with approximately $100 million in assets, Sun National Bank, a subsidiary of Sun Bancorp, Inc., was a successful community bank serving a defined community headquartered in Vineland, New Jersey. At the close of 1997, Sun's asset base exceeded $1 billion and its community presently extends in a circle encompassing much of central and southern New Jersey. From Cape May to Toms River, from Trenton to the suburbs of Camden County, Sun is in the process of establishing a market presence as the community bank of choice. But numbers alone do not tell the full story of Sun. In an era of industry consolidation, the idea that a customer-friendly, community-based bank could prosper and grow seemed to run counter to prevailing conventional wisdom. By pursuing a strategy of continuing growth within well defined parameters, Sun has succeeded in building a viable, contiguous network of offices. That system, now in place, is positioned to begin playing what is certain to be a major role in the financial life of the region. Implementation of the Sun growth strategy has been built upon a rigorous analysis of the opportunities within the regional marketplace. The criteria for those areas chose for expansion has included: growth potential, deposit base, competition, types of businesses, income levels and of course, location. An added dimension in Sun's continuing success is that it is perhaps the only institution of its size with a full-time Director of Corporate Development, devoted exclusively to pursuing merger and acquisition opportunities. The Sun philosophy of always seeking opportunity can be seen in its ability to capitalize upon some otherwise unnoticed effects of the larger changes in the banking industry. In addition to the obvious opportunities created by customer displacements resulting from the ongoing mega-bank mergers, Sun has been able to increasingly draw upon the availability of a wider and deeper talent pool of banking professionals, quickly and efficiently raising capability levels throughout the organization. Through timely applications of appropriate technologies, Sun has also been able to significantly level the combative playing field. Sun's new technical capacities mean the Bank now offers many of the services that were once the prerogative of only the largest financial institutions -- cash management and merchant services, to not just a few. 6 By remaining true to the fundamental principles of its mission, Sun continues to succeed. Integrating new employees, new customers and new communities into the Sun family represents an ongoing challenge that is being met in part with intensive training programs, and superior standards of service reflected in a uniform set of "Best Practices" that are being applied across the entire organization. A consistent theme of internal communications is the creation of a vital, entrepreneurial, sales culture aimed at continuous improvements in profitability and an ever-increasing share of the market. Sun's "Customer First" attitude remains the benchmark for every initiative taken. To better anticipate and satisfy the real needs of the Bank's customers, regional advisory boards have been established throughout the market to listen and learn what is really expected from Sun in each of the communities served by the Bank. The people of Sun live, work and take an active leadership role in their communities, assuring that the Bank's visible presence in the marketplace continues to increase. In 1997, Sun Bancorp, Inc. successfully raised over $50 million in new capital, and in January of this year was named by Advest, Inc. as the "top bank stock pick for 1998." Sun now has the organizational infrastructure, the seasoned expertise, the regional awareness and, most importantly, the enterprising vision to become the region's super community bank. With a dynamic, but still conservative, eye on growth and new opportunities, Sun Bancorp, Inc. looks with confidence on a future of expanded services, increased commercial business and it emergence as a truly complete banking financial services institution. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The primary activity of the Company is the oversight of the Bank. Through the Bank, the Company engages in community banking activities by accepting deposit accounts from the general public and investing such funds in a variety of loans. These community banking activities primarily include providing home equity loans, mortgage loans, a variety of commercial business and commercial real estate loans and, to a much lesser extent, installment loans. The Company also maintains an investment securities portfolio. The Company's lending and investing activities are funded by retail deposits. The largest component of the Company's net income is net interest income. Consequently, the Company's earnings are primarily dependent on its net interest income, which is determined by (i) the difference between rates of interest earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread), and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's net income is also affected by its provision for loan losses, as well as the amount of non-interest income and non-interest expenses, such as salaries and employee benefits, professional fees and services, deposit insurance premiums, occupancy and equipment costs and income taxes. Overview Beginning in 1993, the Company embarked upon a strategy to expand its operations and retail market throughout southern New Jersey through internal growth and mergers and acquisitions. The Board and management perceived opportunities to expand the Company as a result of a lack of competitive commercial banking services being provided to local businesses and the need for a locally based and managed community bank. Continued consolidation of the banking industry and a regionalization of decision authority by larger banking institutions left many businesses and individuals in the Bank's market area underserved. In mid-1994, the Company acquired the First National Bank of Tuckahoe which operated three branch offices in Cape May County, and Southern Ocean State Bank, which operated four branches in Ocean County. The two transactions, combined, resulted in the acquisition of $49 million of loans and $105 million of deposits and an increase in assets of $117 million. These banks and their operations were merged into the Bank in 1994. In 1995, as the result of further consolidation of banks and their restructuring of operations in New Jersey, the Bank acquired $52 million of deposits and four branches located in the southern New Jersey counties of Cumberland, Atlantic and Ocean from NatWest Bank and $70 million of deposits and four branches located in Cumberland and Burlington counties from New Jersey National Bank. As a result of these two branch purchase transactions, the Bank acquired $122 million of deposits; the corresponding amount of cash received to fund the deposit transfer was initially used to purchase investment securities. In addition, the Bank opened a new banking office in Pleasantville in 1995 and an office in Cape May Court House in 1996. During 1997, the Bank completed three separate transactions involving eighteen branch locations. On June 5, 1997, the Bank acquired $66.7 million in deposit liabilities, $2.3 million of loans and four branch offices located in the southern New Jersey counties of Salem and Burlington from First Union National Bank, Avondale, Pennsylvania ("First Union"). On July 24 1997, the Bank acquired approximately $34 million in deposit liabilities in three branch offices located in Camden County, New Jersey from Oritani Savings Bank, SLA, Hackensack, New Jersey ("Oritani"). On November 25, 1997, the Bank acquired $156 million in deposit liabilities and $18 million of loans and eleven branch offices located in Atlantic, Mercer, Middlesex and Somerset Counties, New Jersey from The Bank of New York ("BNY"). Simultaneous with the completion of the BNY branch purchase, a branch located in Trenton, New Jersey was consolidated into a branch acquired with the BNY transaction. During the first six months of 1997, the Bank opened three new banking offices in the communities of Cape May, Toms River and Ship Bottom, New Jersey. In recent years, the Bank also has experienced a significant level of loan growth. The Bank's loan portfolio increased from $83.4 million at December 31, 1993 to $427.8 million at December 31, 1997. Much of this loan growth is attributable to the Bank's hiring of a number of experienced loan officers previously employed by money center and multi-state regional banking organizations. In most cases, these loan officers brought with them established contacts and relationships with individuals or entities throughout the Bank's primary market area and have been able thereby to increase the Bank's customer base and the number of loan originations. The Bank also has established a number of regional advisory boards that have continued to refer loans to the Bank. 8 In addition, the Bank has made significant efforts to increase its share of seasonal lending, which has contributed to the Bank's loan growth. As noted previously, a significant portion of the Bank's total loan portfolio may be considered unseasoned and, therefore, specific payment experience for this portion of the portfolio has not yet been established. The growth and expansion of operations through mergers and acquisitions and internal growth has resulted in a significant increase in assets, loans and deposits since December 31, 1993, and a concomitant increase in net interest income, non-interest income and non-interest expenses. To support and manage the expanded operations of the Bank and to provide adequate management resources to support the further expansion and growth, the Bank recruited and hired additional experienced commercial loan officers (which itself has contributed to much of the rapid growth in the Bank's total loan portfolio), credit, compliance, loan review and internal audit personnel, operations personnel and senior level executives. In addition, the Bank has enhanced and expanded its operational and management information system and its oversight of third-party vendors. While the Bank continues to monitor its rapid growth, and the adequacy of the management and resources available to support such growth, there can be no assurance that the Bank will be successful in managing all elements relating to its rapid growth. In 1997, the Company began the process of preparing its computer systems and applications to properly recognize the year 2000. The inability of computers, software and other equipment to recognize and properly process data fields containing a two-digit year is commonly referred to as the Year 2000 Compliance issue. The compliance process has involved modifying certain software, testing hardware and software and communicating with external service providers and customers to ensure they are also taking the appropriate action to remedy any Year 2000 Compliance issues. Management expects to have substantially all of its system and application changes completed and tested by the end of 1998. Management believes that its level of preparedness is appropriate. The total cost to the Company of the Year 2000 compliance activities has not been, nor is anticipated to be, material to its financial position or results of operations. The costs and the date on which the Company plans to complete the Year 2000 Compliance modifications and testing processes are based on management's best estimates. RESULTS OF OPERATIONS Net income for the year ended December 31, 1997 was $4.2 million, or $0.82 per share, in comparison to $3.0 million, or $0.66 per share, for the year ended December 31, 1996. The increase in net income was generally attributable to a significant increase in net interest income of $6.0 million and an increase of $490,000 in non-interest income. These increases were partially offset by an increase in non-interest expenses of $4.2 million, an increase in the provision for loan losses of $765,000 and an increase in income tax expense of $411,000 in comparison to the results of operations for 1996. Net income for the year ended December 31, 1996 was $3.0 million or $0.66 per share in comparison to $2.8 million or $0.65 per share for the year ended December 31, 1995. The increase in net income was primarily due to an increase in net interest income of $3.6 million which was substantially offset by an increase in non-interest expenses of $3.2 million, an increase in the provision for loan losses of $92,000 and an increase in income tax expense of $222,000 in comparison to the results of operations for 1995. Net Interest Income. Net interest income is the most significant component of the Company's income from operations. Net interest income is the difference between interest received on interest-earning assets (primarily loans and investment securities) and interest paid on interest-bearing liabilities (primarily deposits and borrowed funds). Net interest income depends on the volume and rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing liabilities. 9 The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances. Dollar amounts are in thousands.
Years Ended December 31, -------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- -------------------------- -------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- Interest-earning assets: Loans receivable (1) $355,540 $33,130 9.32 % $235,744 $22,084 9.36 % $155,139 $15,101 9.73 % Investment securities 218,645 13,410 6.13 129,164 7,127 5.52 85,445 5,286 6.19 Federal funds sold 11,618 645 5.55 1,323 68 5.14 7,756 463 5.97 -------- ------- -------- ------- -------- -------- Total interest-earning assets 585,803 47,185 8.05 366,231 29,269 7.99 248,340 20,850 8.40 Non-interest-earning assets 49,645 40,316 24,409 -------- -------- -------- Total assets $635,448 $406,547 272,749 ======== ======== ======= Interest-bearing liabilities Interest-bearing deposit accounts $391,374 16,458 4.21 % $298,538 11,954 4.00 % $202,276 7,640 3.78 % Borrowed money 98,702 5,673 5.75 10,397 580 5.58 775 47 6.06 Interest on guaranteed preferred beneficial interest in subordinated debt 22,571 2,276 10.08 -------- ------- Total interest-bearing liabilities 512,647 24,407 4.76 308,935 12,534 4.06 203,051 7,687 3.79 Non-interest-bearing liabilities 90,440 72,486 47,004 -------- -------- -------- Total liabilities 603,087 381,421 250,055 Shareholders' equity (2) 32,361 25,126 22,694 -------- -------- -------- Total liabilities and shareholders' equity $635,448 $406,547 $272,749 ======== ======== ======== Net interest income $22,778 $16,735 13,163 ======= ======= ====== Interest rate spread (3) 3.29 % 3.93 % 4.61 % ====== ====== ====== Net yield on interest earning assets (4) 3.89 % 4.57 % 5.30 % ====== ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 114.27 % 118.55 % 122.30 % ====== ====== ======
- ------------- (1) Average balances include non-accrual loans. (2) Averages were computed using month-end balances. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 10 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).
Years ended December 31, -------------------------------------------------------------------------------------- 1997 vs. 1996 1996 vs. 1995 ------------------------------------- -------------------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to Rate / Rate / Volume Rate Volume Net Volume Rate Volume Net ------ ---- ------ --- ------ ---- ------ --- Interest income: (In thousands) Loans receivable $ 11,218 $ (107) $ (55) $ 11,056 $ 7,847 $ (575) $ (299) $ 6,973 Investment securities 4,939 794 550 6,283 2,707 (573) (293) 1,841 Federal funds sold 530 794 550 577 (382) (65) 53 (394) -------- ------ ------- -------- ------- -------- -------- -------- Total interest-earning assets $ 16,687 $ 692 $ 537 $ 17,916 $ 10,172 $ (1,213) $ (539) $ 8,420 ======== ====== ======== ======== ======== ======== ======== ======== Interest expense: Deposit accounts $ 3,718 $ 600 $ 186 $ 4,504 $ 3,658 $ 445 $ 211 $ 4,314 Borrowings 4,927 17 149 5,093 584 (4) (47) 533 Guaranteed preferred beneficial interest in subordinated debt 2,276 2,276 -------- -------- Total interest-bearing liabilities $ 8,645 $ 617 $ 2,611 $ 11,873 $ 4,242 $ 441 $ 164 $ 4,847 ======== ====== ======== ======== ======== ======== ======== ======== Net change in interest income $ 8,042 $ 75 $ (2,074) $ 6,043 $ 5,930 $ (1,654) $ (703) $ 3,573 ======== ====== ======== ======== ======== ======== ======== ========
Net interest income increased $6.0 million or 36% to $22.8 million in 1997 compared to $16.7 million in 1996. The increase is due primarily to the growth of average interest-earning assets from $366.2 million in 1996 to $585.8 million in 1997, partially offset by a decline in the interest rate spread from 3.93% in 1996 to 3.29% in 1997. The decline in the interest rate spread had a corresponding impact on the net interest margin which declined 68 basis points to 3.89% in 1997. The increase in average interest-earning assets of $219.6 million reflects an increase of $119.8 million in average loans and $89.5 million in average investment securities and $10.3 million of federal funds sold which were funded by an increase of $203.7 million of average interest-bearing liabilities and an increase of $18.0 million of average non-interest bearing liabilities. This increase in interest-bearing liabilities reflects the 1997 acquisition of branches and deposits, the growth of deposits at existing offices, the opening of three new branches and an increase in borrowings. The interest rate spread declined as of December 31, 1997, compared to December 31, 1996, due to higher costs on borrowed money as well as interest on guaranteed preferred beneficial interest in subordinated debt. The interest rate spread and net interest margin declined in 1997 compared to 1996 due to an increase in the interest cost of average interest-bearing liabilities from 4.06% in 1996 to 4.76% in 1997. The yield on average interest-earning assets increased in 1997 primarily to an increase in the yield on investment securities and federal funds sold, offset by a slight decline in the yield on loans. As general market interest rates were relatively stable during 1996 and 1997, the decline in the yield of loans in 1997 reflects the continued impact of competition for new loan originations The increase in the yield on investment securities was due primarily to the investment in U.S. government agency securities made during 1997. The increase in the interest cost of average interest-bearing liabilities is due principally to an increase in the interest cost of interest-bearing deposits from 4.00% in 1996 to 4.21% in 1997. The higher interest cost of deposits in 1997 resulted primarily from a slight increase in rates on certificates of deposit, an increase in the cost of borrowed money and the interest cost of the Company's trust preferred securities described below. The higher rates paid on certificates of deposit were consistent with those paid by competing financial institutions. The higher level of borrowed funds was primarily a 11 result of LIBOR-based repurchase agreements acquired from the Federal Home Loan Bank of New York. The proceeds from those borrowings were used to purchase U.S. Government agency securities yielding a spread over LIBOR. On March 17, 1997, Sun Capital Trust (the "Trust") issued $25 million of 9.85% Preferred Securities with a stated value and liquidation preference of $25 per share. The proceeds from the sale of the Preferred Securities of the Trust were utilized by the Trust to invest in $25 million of 9.85% Junior Subordinated Debentures (the "Debentures") of the Company due in March, 2027. On April 9, 1997, the underwriters for the Preferred Securities exercised their right to cover over-allotments. The proceeds from the sale of the Preferred Securities were utilized by the Trust to invest in $3,750,000 of the Debentures of the Company. In view of these transactions, the Company may incur increased interest expense in future periods. Net interest income increased $3.6 million or 27% to $16.7 million in 1996 compared to $13.2 million in 1995. The increase is due primarily to the growth of average interest-earning assets from $248.3 million in 1995 to $366.2 million in 1996, partially offset by a decline in the interest rate spread from 4.61% in 1995 to 3.93% in 1996. The decline in the interest rate spread had a corresponding impact on the net interest margin which declined 73 basis points to 4.57% in 1996. The 1996 increase in average interest-earning assets of $117.9 million reflects an increase of $80.6 million in average loans and $43.7 million in average investment securities which were funded by an increase of $105.9 million of average interest-bearing liabilities and an increase of $25.5 million of average non-interest bearing liabilities. This increase in interest-bearing liabilities reflects the acquisition of the branches and deposits in 1995, the growth of deposits at existing offices in 1996, the opening of two new branches in 1995 and 1996 and an increase in borrowings in 1996. The yield on average interest-earning assets declined in 1996 due to a decline in the yield of loans and investment securities. As general market interest rates were relatively stable during 1995 and 1996, the decline in the yield of loans in 1996 reflects the impact of increased competition for new loan originations The decline in the yield of investment securities was due primarily to a restructuring of the available for sale investment securities portfolio during 1996. The increase in the interest cost of average interest-bearing liabilities is due principally to an increase in the interest cost of interest-bearing deposits from 3.78% in 1995 to 4.00% in 1996. The higher interest cost of deposits in 1996 reflects primarily the increase in certificates of deposit, as a percentage of total deposits and premium interest rates offered by the Bank on certificates of deposit, during 1996. The premium rates were offered on selected maturities of certificates of deposit to generate deposit growth to fund the significant loan demand experienced by the Bank. Provision for Loan Losses. For the year ended December 31, 1997, the provision for loan losses amounted to $1.7 million, an increase of $765,000, or 85.0%, compared to $900,000 for the same period in 1996. The increase was primarily the result of the increase in the Company's loan portfolio of approximately $133.9 million at December 31, 1997 compared with December 31, 1996, primarily from commercial loans. The Company recorded a provision for loan losses of $900,000 in 1996 compared with a provision of $808,000 in 1995. The increase in the provision for loan losses in 1996 was attributable to an increase in the size of the loan portfolio due to internal loan growth. Management regularly performs an analysis to identify the inherent risk of loss in its loan portfolio. This analysis includes evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, loan commitments outstanding, delinquencies, and other factors. The Bank will continue to monitor its allowance for loan losses and make future adjustments to the allowance through the provision for loan losses as economic conditions dictate. Although the Bank maintains its allowance for loan losses at a level that it considers to be adequate to provide for the inherent risk of loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Bank's determination as to the amount of its allowance for loan losses is subject to review by the OCC, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the OCC after a review of the information available at the time of the OCC examination. 12 Non-Interest Income. Other income increased $490,000 for the twelve month period ended December 31, 1997 compared to the twelve month period ended December 31, 1996. The increase was a primarily a result of higher levels of service charges on deposit accounts resulting from a larger deposit base caused by the Bank's acquisitions and internal growth; increased fees from safe deposit box rentals in acquired branches; and partially offset by a loss on sale of fixed assets during 1997. The amount of service charges on deposit accounts increased to $1.5 million in 1997 compared to $1.1 million in 1996. Safe deposit box rental income amounted to $181,000 during 1997 compared with $85,000 during 1996. The loss on sale of fixed assets was $53,000 in 1997 compared to a gain in 1996 of $45,000. Other operating income increased $95,000, or 5.7%, from $1.7 million for the year ended December 31, 1995 to $1.8 million for the year ended December 31, 1996. The increase was primarily a result of an increase in service charges on deposit accounts and other service charges, partially offset by a reduction of gains on asset sales. Gains on sales of investment securities declined by $170,000, from $377,000 in 1995 to $207,000 in 1996. During 1995, the Company recognized $208,000 as gains on the sales of loans. During 1996, there were no sales of loans in which gains or losses were recorded. Service charges on deposit accounts increased $397,000, from $660,000 for the year ended December 31, 1995 to $1.1 million in 1996. The increase was due to a larger customer base in 1996 as a result of the branch acquisitions in 1995 and the growth of the Bank's business and higher fees on deposit accounts. Other service charges increased $88,000, from $28,000 in 1995 to $116,000 in 1996. The increase was also a result of a larger customer base. Non-Interest Expenses. Other expenses increased approximately $4.2 million, to $17.4 million for the year ended December 31, 1997 as compared to $13.2 million for the same period in 1996. The increase was a result of operating a larger organization. Of the increase, $1.8 million was in salaries and employee benefits, $327,000 in occupancy expense, $483,000 in equipment expense, $388,000 in data processing expense, $408,000 in miscellaneous expenses, $78,000 in insurance expense and $678,000 in amortization of excess of cost over fair value of assets acquired. The increase in other expenses reflects the Company's strategy to support planned expansion. Salaries and benefits increased due to additional staff positions resulting from the acquisitions as well as in lending, loan review, compliance and audit departments. The increase in data processing expense and equipment expense was the result of operating a larger institution than in the previous year. The increase in insurance expense resulted from higher premium payments to the Federal Deposit Insurance Corporation ("FDIC") in 1997. The higher amount was a result of the Bank being assessed a premium based on a capital level of "adequately capitalized" for a portion of the year. As a result of the Company's increased capital, the Bank is now considered "well-capitalized" and the FDIC premium is expected to be reduced in future periods. The increase in amortization of excess of cost over fair value of assets acquired resulted from the acquisitions completed in 1997. Other operating expenses increased $3.2 million, from $10.0 million for the year ended December 31, 1995 to $13.2 million for the year ended December 31, 1996. The increase reflects the Company's strategy to build an infrastructure to support planned expansion. Non-interest expense was directly impacted by increased salaries and employee benefits, equipment expense, data processing and amortization of intangibles, partially offset by a reduction of insurance expense. Salaries and employee benefits increased $1.8 million, from $4.7 million for the year ended December 31, 1995 to $6.5 million during 1996. The increase was a result of a higher number of officers and other employees during 1996. In addition, during 1996 the Company began a 401(k) benefits plan. As a result of the Company match, as well as administrative costs, the Company incurred approximately $91,000 in expenses during 1996. Equipment costs increased $359,000, from $459,000 for the year ended December 31, 1995 to $818,000 in 1996. Equipment costs (such as maintenance, repairs and rentals) increased as a result of the need for more equipment to operate a larger organization, as well as upgrades to the Company's telephone system and establishment of a computer network. Data processing fees increased $451,000, from $635,000 for the year ended December 31, 1995 to $1.1 million for 1996. The increase was a result of maintaining a larger deposit and loan base during 1996. The amortization of the excess cost over fair value of assets acquired increased $484,000, from $343,000 for the year ended December 31, 1995 to $827,000 in 1996. The increase was a result of a full year of amortizing the intangibles associated with the 1995 acquisitions. Insurance expenses declined $187,000, from $383,000 for the year ended December 31, 1995, to $196,000 for 1996. The reduction of insurance expense was a result of lower insurance premiums assessed by the FDIC amounting to $181,000. Income Tax Expense. Income taxes increased $371,000, from $1.4 million to $1.7 million for the years ended December 31, 1996 and December 31, 1997, respectively. Income taxes increased $222,000, or 19%, from $1.1 million for the year ended December 31, 1995 to $1.4 million for 1996. The increase was due to increased pre-tax income. 13 LIQUIDITY AND CAPITAL RESOURCES A major source of the Company's funding is its retail deposit branch network, which management believes will be sufficient to meet its long-term liquidity needs. The ability of the Company to retain and attract new deposits is dependent upon the variety and effectiveness of its customer account products, customer service and convenience, and rates paid to customers. The Company also obtains funds from the repayment and maturities of loans as well as sales and maturities of investment securities, while additional funds can be obtained from a variety of sources including loans sales, securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and other secured and unsecured borrowings. It is anticipated that FHLB advances and securities sold under agreements to repurchase will be secondary sources of funding, and management expects there to be adequate collateral for such funding requirements. The Company's primary uses of funds are the origination of loans, the funding of the Company's maturing certificates of deposit, deposit withdrawals, and the repayment of borrowings. Certificates of deposit scheduled to mature during the twelve months ending December 31, 1998 total $284.4 million. The Company may renew these certificates, attract new replacement deposits, or replace such funds with borrowed funds. As noted above, the Company has paid premium rates on certain certificates of deposit, accordingly, certain of these actions may require the continued payment of premium rates with an adverse impact on net interest income. The Company anticipates that cash and cash equivalents on hand, the cash flow from assets as well as other sources of funds will provide adequate liquidity for the Company's future operating, investing and financing needs. In addition to cash and cash equivalents of $34.1 million at December 31, 1997, the Company has substantial additional secured borrowing capacity with the FHLB and other sources. The substantial increase in liquidity resulting from the recent branch acquisitions has a negative impact on earnings resulting from lower yields on short-term assets. However, such net cash received will be invested in loans over time, which will have the effect of decreasing the Company's liquidity. Management will continue to monitor its liquidity in order to maintain it at a level which is adequate but not excessive. Net cash provided by operating activities for the year ended December 31, 1997 totaled $703,000, as compared to $3.8 million for the year ended December 31, 1996. Net cash provided by operating activities for the year ended December 31, 1996 totaled $3.8 million a decrease of $261,000 from the year ended December 31, 1995. Net cash used in investing activities for the year ended December 31, 1997 totaled $618.6 million, an increase from the year ended December 31, 1996 of $64.4 million. The increase was primarily due to an increase in the purchase of investment securities of $270.5 million, an increase in the purchase of mortgage-backed securities of $307.6 million, an increase of $113.8 million in loans, a $22.6 million increase in bank properties and equipment and an increase of $22.3 million of the excess of cost over fair value of branch assets acquired, offset by $8.7 million from maturities of investment securities, $67.1 million from sales of investment securities, $19.3 million from sales of mortgage-backed securities, and $28.8 million in proceeds from the issuance of Trust Preferred Securities. Net cash used in investing activities for the year ended December 31, 1996, totaled $64.4 million, a decrease from the year ended December 31, 1995, of $80.7 million. The decrease was primarily attributable to the 1995 branch acquisitions which resulted in an increase in investment securities of $97.6 million, offset by an increase, in 1996, in cash used for loan originations of approximately $62.0 million, and net proceeds from sale of investment securities and mortgage-backed securities of approximately $50.0 million. Net cash provided by financing activities for the year ended December 31, 1997 totaled $626.4 million. This amount was a result of a net increase in deposits of $309.4 million, of which $256.5 million was from branch acquisitions; an increase of $301.0 million from net borrowings under line of credit and repurchase agreements; proceeds from the issuance of common stock of $21.9 million, partially offset by principal repayments on borrowed funds of $6 million. 14 Net cash provided by financing activities for the year ended December 31, 1996 totaled $65.1 million. This is a result of a net increase in deposits of $50.7 million, an increase in net borrowings of $13.3 million, and a $1.1 million increase resulting from the proceeds of the exercise of stock options. The increase in deposits and net borrowings were used primarily to fund the increase in loan originations and investment securities. Net cash provided by financing activities for the year ended December 31, 1995 totaled $148.1 million. This is a result of an increase in deposits resulting from the 1995 branch acquisitions of $122.5 million, a net increase in customers deposits of $16.7 million, and an increase in net borrowings of $8 million. The increase in deposits and net borrowings were used primarily to fund the increase in loan originations and investment securities. The Company monitors its capital levels relative to its business operations and growth. It has sought to maintain the Bank's and its capital at levels consistent with, or in excess of, regulatory requirements. During 1997, the Company raised approximately $21.9 million of additional capital through a public offering of its common shares. The increase in commercial loans has had the effect of lowering the Company's risk-based capital ratios. In general, commercial loans are categorized as having a 100% risk-weighting using the calculations required by the Company's regulators. Until its recent issuance of Trust Preferred Securities and additional issuance of common shares, the rate at which commercial loans have grown has outpaced the growth rate of the Company's capital. The Company's Guaranteed Preferred Beneficial Interest in Subordinated Debt qualifies as Tier 1 or core capital of the Company, subject to a 25% capital limitation under risk-based capital guidelines developed by the Federal Reserve. The portion that exceeds the 25% capital limitation qualifies as Tier 2, or supplementary, capital of the Company. It is the Company's intent to maintain adequate risk-based capital levels. Management monitors capital levels and, when appropriate, will recommend a capital-raising effort to the Company's Board of Directors. The Company has the ability to raise capital through a private placement or a public offering, as may be appropriate. The following table sets forth the Bank's risk-based capital levels at December 31, 1997:
To Be Well Capitalized Required for Under Prompt Capital Adequacy Corrective Action Actual Purposes Provisions Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Tier 1 Risk-Based Capital $55,445,443 9.76% $ 22,723,542 4.00% $ 34,085,313 $ 6.00% Total Risk-Based Capital 59,639,244 10.50% 45,439,424 8.00% 56,799,280 10.00% Leverage 55,445,443 6.42% 34,545,447 4.00% 43,181,809 5.00%
The following table sets forth the Company's risk-based capital levels at December 31, 1997: Required for Capital Adequacy Actual Purposes Amount Ratio Amount Ratio ------ ----- ------ ----- Tier 1 Risk-Based Capital 46,516,411 8.17% $ 22,774,253 4.00% Total Risk-Based Capital 61,249,446 10.75% 45,580,983 8.00% Leverage 46,516,411 6.42% 28,982,188 4.00% 15 Asset and Liability Management The Company's exposure to interest rate risk results from the difference in maturities on interest-bearing liabilities and interest-earning assets and the volatility of interest rates. Because the Company's assets have a longer maturity than its liabilities, the Company's earnings will tend to be negatively affected during periods of rising interest rates. Conversely, this mismatch should benefit the Company during periods of declining interest rates. Management monitors the relationship between the interest rate sensitivity of the Company's assets and liabilities. In this regard, the Company emphasizes the origination of short-term commercial loans and revolving home equity loans and de-emphasizes the origination of long-term mortgage loans. Gap Analysis Banks have become increasingly concerned with the extent to which they are able to match maturities of interest-earning assets and interest-bearing liabilities. Such matching is facilitated by examining the extent to which such assets and liabilities are interest-rate sensitive and by monitoring a bank's interest rate sensitivity gap. An asset or liability is considered to be interest-rate sensitive if it will mature or reprice within a specific time period. The interest rate sensitivity gap is defined as the excess of interest-earning assets maturing or repricing within a specific time period over interest-bearing liabilities maturing or repricing within that time period. On a quarterly basis, the Bank monitors its gap, primarily its six-month and one-year maturities and works to maintain its gap within a range that does not exceed a negative 15% of total assets. The Company attempts to maintain its ratio of rate-sensitive assets to rate-sensitive liabilities between 75% to 125%. Management and the Board of Directors monitors its gap position at quarterly meetings. The Asset/Liability Committee of the Bank's Board of Directors meets to discuss the Bank's interest rate risk. The Bank uses simulation models to measure the impact of potential changes of up to 200 basis points in interest rates on the net interest income of the Company. As described below, sudden changes to interest rates should not have a material impact to the Bank's results of operations. Should the Bank experience a positive or negative mismatch in excess of the approved range, it has a number of remedial options. It has the ability to reposition its investment portfolio to include securities with more advantageous repricing and/or maturity characteristics. It can attract variable- or fixed-rate loan products as appropriate. It can also price deposit products to attract deposits with maturity characteristics that can lower its exposure to interest rate risk. At December 31, 1997, the Bank had a negative position with respect to its exposure to interest rate risk: total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing during the same time period by $43.0 million, representing a negative cumulative one-year gap ratio of 3.91%. As a result, the yield on interest-earning assets of the Bank should adjust to changes in interest rates at a slower rate than the cost of the Bank's interest-bearing liabilities. Because the Bank had negligible negative gap characteristics in its shorter maturity periods, the Bank's one-year gap mismatch would have little effect on the Bank's net interest margin during periods of rising or declining market interest rates. The following table summarizes the maturity and repricing characteristics of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 1997. All amounts are categorized by their actual maturity or repricing date with the exception of interest-bearing demand deposits and savings deposits. The Bank's historical experience with both interest-bearing demand deposits and savings deposits reflects an insignificant change in deposit levels for these core deposits. As a result, the Bank allocates approximately 35% to the 0-3 month category and 65% to the 1-5 year category. 16
Maturity/Repricing Time Periods (Dollars in Thousands) 0-3 Months 4-12 Months 1-5 Years Over 5 Years Total ---------- ----------- --------- ------------ ---------- Loans Receivable $ 149,163 $ 52,032 $ 164,327 $ 66,432 $ 431,954 Investment Securities 284,409 130,479 102,977 58,414 576,279 --------- ---------- ---------- ---------- ---------- Total interest-earning assets 433,572 182,511 267,304 124,846 1,008,233 --------- ---------- ---------- ---------- ---------- Interest-bearing demand deposits 46,012 - 73,387 - 119,399 Savings deposits 11,731 - 105,578 - 117,309 Time certificates under $100,000 43,202 178,967 21,687 - 243,856 Time certificates $100,000 or more 27,415 35,426 2,754 - 65,595 Federal Home Loan Bank advances 75,000 - - - 75,500 Federal funds purchased 5,500 - - - 5,500 Securities sold under agreements to repurchase 235,814 - - - 235,814 --------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 444,674 214,393 203,406 - 862,473 --------- ---------- ---------- ---------- ---------- Periodic Gap $ (11,102) $ (31,882) $ 63,898 $ 124,846 $ 145,760 ========= ========== ========== ========== ========== Cumulative Gap $ (11,102) $ (42,984) $ 20,914 $ 145,760 ========= ========== ========== ========== Cumulative Gap Ratio (1.01%) (3.91%) (1.90%) 13.27% ========= ========== ========== ==========
Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which requires the measurement of financial position and operating results without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. FINANCIAL CONDITION General - The Company has experienced significant growth as a result of acquisitions and internal growth. Increases were most prevalent in loans, generally commercial loans, investments, deposits and borrowed funds. The Company's assets increased by $663.2 million, or 152%, from $436.8 million at December 31, 1996 to $1.1 billion at December 31, 1997; and by $66.9 million, or 18%, from $369.9 at December 31, 1995 to $436.8 million at December 31, 1996. These increases in assets primarily reflects the Company's deployment of proceeds into the loan portfolio and investment securities portfolio from increased deposit levels resulting from its 1997 acquisitions and internal growth. Comparing balances from December 31, 1997 to December 31, 1996, the Company's cash and cash equivalents increased $12.3 million, net loans receivable increased $132.3 million, investment securities increased $480.7 million, bank properties and equipment increased $12.3 million and excess of cost over fair value of assets acquired increased $20.8 million. Total liabilities increased $607.2 million, or 148%, to $1.0 billion from December 31, 1996 to December 31, 1997. Deposits increased $309.4 million, borrowed funds increased $295.1 million from December 31, 1996 to December 31, 1997. As a result of the issuance of Trust Preferred Securities in 1997, the guaranteed preferred beneficial interest in subordinated debt amounted to $28.8 million at December 31, 1997. There were no such securities or subordinated debt at December 31, 1996. Before the effect of unrealized gains or losses on securities held for sale, shareholders' equity increased $26.1 million, or 92%, to $54.5 million at December 31, 1997, from December 31, 1996. Loans - Net loans receivable increased $132.3 million, or 45%, from December 31, 1996 to December 31, 1997, due primarily to internally-generated commercial loan growth and approximately $18 million in loans acquired with the acquisition of branches from BNY. Approximately $123.4 million of this increase was in commercial loans -- predominately commercial real estate loans. This significant increase was a result of a wider market area and the efforts from a large commercial lending staff 17 (many with long-established customer relationships) available to offer competitively priced loans. Installment loans increased $14.2 million, mostly due to a more active consumer lending department and an increase in financing of mobile homes. Residential real estate loans decreased $3.7 million as a result of scheduled principal repayments. During 1996 and 1997, the Bank used outside loan correspondents to originate residential mortgages. These loans were originated using the Bank's underwriting standards, rates and terms, and were approved according to the Bank's lending policy prior to origination. Prior to closing, the Bank normally had commitments to sell these loans with servicing released, at par and without recourse, in the secondary market. Secondary market sales were generally scheduled to close shortly after the origination of the loan. Set forth below is selected data relating to the composition of the Bank's loan portfolio by type of loan on the dates indicated. ANALYSIS OF LOAN PORTFOLIO
At December 31, ------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------- ------------------- ----------------- ------------------- ----------------- $ % $ % $ % $ % $ % - - - - - - - - - - Type of Loan: (Dollars in Thousands) - ------------ Commercial and industrial $346,475 81.00 $223,116 75.51 $118,874 64.73 $ 69,249 51.35 $ 41,642 49.94 Home equity 20,725 4.84 22,070 7.47 25,129 13.68 26,799 19.87 23,510 28.19 Residential real estate 29,454 6.89 31,777 10.75 29,287 15.95 29,633 21.97 19,151 22.97 Installment 35,301 8.25 21,133 7.51 12,409 6.76 10,787 8.00 151 0.18 Less: Loan loss allowance 4,194 0.98 2,595 0.88 2,065 1.12 1,607 1.19 1,067 1.28 -------- ------ -------- ------ -------- ------ -------- ------ --------- ------ Net loans $426,761 100.00 $295,501 100.00 $183,634 100.00 $134,861 100.00 $ 83,387 100.00 ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Type of Security: - ---------------- Residential real estate: 1-4 family $ 83,169 19.44 $ 84,036 28.44 68,904 37.52 $ 72,466 53.72 $ 49,777 59.68 Other 11,098 2.59 11,115 3.76 6,295 3.43 839 0.62 757 0.91 Commercial real estate 204,053 47.70 166,893 56.48 85,239 46.40 48,845 36.22 28,682 34.40 Commercial business loans 107,963 25.25 20,455 6.93 13,822 7.54 6,621 4.92 5,031 6.04 Consumer 22,240 5.20 15,229 5.15 11,214 6.11 6,511 4.83 151 0.18 Other 3,432 0.80 368 0.12 225 0.12 1,186 0.88 56 0.07 Less: Loan loss allowance 4,194 0.98 2,595 0.88 2,065 1.12 1,607 1.19 1,067 1.28 -------- ------ -------- ------ -------- ------ -------- ------ --------- ------ Net loans $427,761 100.00 $295,501 100.00 $183,634 100.00 $134,861 100.00 $ 83,387 100.00 ======== ====== ======== ====== ======== ====== ======== ====== ========= ======
The following table sets forth the estimated maturity of the Bank's loan portfolio at December 31, 1997. The table does not include prepayments or scheduled principal prepayments. Adjustable rate mortgage loans are shown as maturing based on contractual maturities.
Due Due after Allowance within 1 through Due after for 1 year 5 years 5 years Loan Loss Total ------ ------- ------- --------- ----- (In thousands) Commercial and industrial $ 66,050 $ 46,554 $ 233,871 $ (2,278) $ 344,197 Home equity 190 20,535 (752) 19,973 Residential real estate 1,989 743 26,722 (129) 29,325 Installment 876 2,512 31,913 (391) 34,910 Unassigned reserve (644) (644) --------- --------- $ 68,915 $ 49,999 $ 313,041 $ (4,194) $ 427,761 ========= ======== ========= ========= =========
18 The following table sets forth the dollar amount of all loans due after December 31, 1997, which have pre-determined interest rates and which have floating or adjustable interest rates. Floating or Adjustable Fixed Rates Rates Total ----------- ----- ----- (In thousands) Commercial and industrial $ 207,489 $ 138,986 $ 346,475 Home equity 1,104 19,621 20,725 Residential real estate 24,226 5,228 29,454 Installment 35,186 115 35,301 --------- --------- ---------- $ 268,005 $ 163,950 $ 431,955 ========= ========= ========== Non-Performing and Problem Assets Loan Delinquencies - The Bank's collection procedures provide that after a commercial loan is ten days past due, or a residential mortgage loan is fifteen days past due, a late charge is assessed. The borrower is contacted by mail or telephone and payment is requested. If the delinquency continues, subsequent efforts are made to contact the borrower. If the loan continues to be delinquent for ninety days or more, the Bank usually initiates foreclosure proceedings unless other repayment arrangements are made. Delinquent loans are reviewed on a case by case basis in accordance with the Bank's lending policy. Commercial loans and commercial real estate loans are placed on nonaccrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Generally, commercial loans are charged off no later than 120 days delinquent unless the loan is well secured and in the process of collection or other extenuating circumstances support collection. Residential real estate loans are typically charged off at 90 days delinquent. In all cases, loans must be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Non-Performing Assets - During 1997, the Company continued to experience a decline in the amount of loans that were on non-accrual. Total non-performing assets declined by $696,000, or 22%, from $3.2 million at December 31, 1996 to $2.5 million at December 31, 1997. The ratio of non-performing assets to net loans was .58% at December 31, 1997, compared to 1.07% at December 31, 1996. In 1996, non-performing assets decreased by $903,000, from $4.1 million at December 31, 1995 to $3.2 million at December 31, 1996. The following table sets forth information regarding loans that are delinquent ninety days or more. Management of the Bank believes that all loans accruing interest are adequately secured and in the process of collection. At the dates shown, the Bank had no restructured loans within the definition of SFAS No. 15. 19 Non-Performing Assets
At December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Commercial and industrial $ 116 $ 354 $ 1,721 $ 1,178 $ 1,074 Home equity 466 337 295 341 204 Residential real estate 253 586 607 342 265 Installment 62 - 35 40 - ------- ------- ------- -------- ------- Total $ 897 $ 1,277 $ 2,658 $ 1,901 $ 1,543 ======= ======= ======= ======== ======= Accruing loans that are contractually past due 90 days or more: Commercial and industrial $ 642 $ 404 $ 135 $ 525 Home equity 168 62 279 30 Residential real estate 355 572 64 20 $ 2 Installment 168 105 67 7 - ------- ------- ------- -------- ------- Total $ 1,313 $ 1,143 $ 545 $ 582 $ 2 ======= ======= ======= ======== ======= Total non-accrual and 90-day past due loans $ 2,210 $ 2,420 $ 3,203 $ 2,483 1,545 Real estate owned 270 756 876 1,033 359 ------- ------- ------- -------- ------- Total non-performing assets $ 2,480 $ 3,176 $ 4,079 $ 3,506 $ 1,904 ======= ======= ======= ========= ======= Total non-accrual and 90-day past due loans to net loans 0.52% 0.82% 1.74% 1.84% 1.85% Total non-accrual and 90-day past due loans to total assets 0.20% 0.55% 0.87% 1.14% 1.38% Total non-performing assets to net loans 0.58% 1.07% 2.22% 2.61% 2.28% Total non-performing assets to total assets 0.23% 0.73% 1.10% 1.62% 1.70% Total allowance for loan losses to total non-performing loans 189.77% 107.23% 64.47% 64.72% 69.06%
Interest income that would have been recorded on loans on non-accrual status, under the original terms of such loans, would have totaled $115,144 for the year ended December 31, 1997. Foreclosed Real Estate - Real estate acquired by the Bank as a result of foreclosure is classified as Real Estate Owned until such time as it is sold. When Real Estate Owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair value less estimated disposal costs. Any subsequent write-down of Real Estate Owned is charged to operations. At December 31, 1997, the Bank had a net amount of $270,000 classified as Real Estate Owned. Allowances for Losses on Loans and Real Estate Owned - It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans. A provision for loan losses is charged to operations based on management's evaluation of the estimated losses that may be incurred in the Bank's loan portfolio. Management also periodically performs valuations of Real Estate Owned and establishes allowances to reduce book values of the properties to their net realizable values when necessary. 20 The following table sets forth information with respect to the Bank's allowance for losses on loans at the dates indicated:
At December 31, ------------------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in thousands) Allowance for losses on loans, beginning of period $ 2,595 $ 2,065 $ 1,607 Charge-offs: Commercial 307 286 Mortgage 37 9 73 Installment 65 85 67 ------------- -------- -------- Total charge-offs 102 401 426 ------------- -------- -------- Recoveries Commercial 22 6 33 Mortgage 4 28 Installment 14 21 15 ------------- -------- -------- Total recoveries 36 31 76 ------------- -------- -------- Net charge-offs 66 370 350 Provision for loan losses 1,665 900 808 ------------- -------- -------- Allowance for losses on loans, end of period $ 4,194 $ 2,595 $ 2,065 ============= ======== ======== Net loans charged off as a percent of average loans outstanding 0.02% 0.16% 0.23%
The following table sets forth the allocation of the Bank's allowance for loan losses by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses that may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, -------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Percent of Percent of Percent of Loans to Loans to Loans to Total Total Total Amount Loans Amount Loans Amount Loans (Dollars in thousands) Balance at end of period applicable to: Commercial and industrial $ 2,278 80.21 % $ 1,301 74.98 % $ 1,094 64.02 % Residential real estate 129 6.82 139 10.65 403 15.96 Home equity 752 4.80 490 7.40 319 13.34 Installment 391 8.17 167 6.97 54 6.68 Unallocated 644 - 498 - 195 - -------- ---------- -------- ---------- -------- -------- Total allowance $ 4,194 100.00 % $ 2,595 100.00 % $ 2,065 100.00 % ======== ====== ======== ====== ======== ======
Investment Securities - Most of the Company's investment portfolio is held at the Bank's wholly-owned subsidiary, Med-Vine, Inc. ("Med-Vine"). Total investment securities increased $480.7 million, or 502.9%, from $95.6 million at December 31, 1996 to $576.3 million at December 31, 1997. During 1997, the growth in the investment portfolio was the result of a number of factors. The Bank used repurchase agreements from the FHLB, which totaled approximately $210.8 million at December 31, 1997, to match fund or partially match fund short-term investment securities for an incremental profit in a structured transaction. The purpose of the structured transactions is to increase net interest income and partially offset the increase in interest expense resulting from the issuance of Trust Preferred Securities. The Company also received approximately $200 million in cash from the branch acquisitions completed during 1997 and approximately $42.1 million in net proceeds from the sales of common stock and Trust Preferred Securities. The internal growth of the Bank's deposit base also contributed a source of funds for deployment into the investment portfolio. 21 The investment policy of the Bank is established by senior management and approved by the Board of Directors. Med-Vine's investment policy is identical to that of the Bank. It is based on asset and liability management goals and is designed to provide a portfolio of high quality investments that optimizes interest income and provides acceptable limits of safety and liquidity. The Bank has classified its entire portfolio of investment securities as available for sale. As a result, the investment securities are carried at their estimated fair value which is based on quoted market prices. The following table sets forth the carrying value of the Bank's investment securities portfolio at the dates indicated:
At December 31, --------------------------------------------------------------------------------------------------------- 1997 1996 1995 -------------------------------- ---------------------------------- ------------------------------- Net Unrealized Estimated Net Estimated Net Estimated Amortized Gains Fair Amortized Unrealized Fair Amortized Unrealized Fair Cost (Losses) Value Cost Losses Value Cost Gains Value ---- -------- ----- ---- ------ ----- ---- ----- ----- Available for sale (Dollars in thousands) U.S. Treasury securities $ 53,113 $ (106) $ 53,007 $ 51,955 $ (921) $ 51,034 $ 41,674 $ 230 $ 41,904 Government agency and mortgage-backed securities 449,771 390 450,161 63 - 63 41,734 264 41,998 State and political subdivision securities 41,738 ( 16) 41,722 20,168 (329) 19,839 16,667 75 16,742 Other securities 31,424 ( 36) 31,388 24,877 (232) 24,645 46,304 61 46,365 --------- ------ -------- -------- ------- -------- -------- ------- -------- Total securities available for sale $ 576,046 $ 232 $576,278 $ 97,063 $ 1,482 $ 95,581 $146,379 $ 630 $147,009 ========= ====== ======== ======== ======= ======== ======== ======= ========
The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Bank's investment portfolio at December 31, 1997. All securities are classified as being available for sale, therefore the carrying value is the estimated fair value.
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total ------------------ ------------------ ----------------- ------------------- ----------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) U.S. Government Obligations $ 5,092 5.27 % $47,915 5.49 % $ 53,007 5.47 % Government agency and mortgage-backed securities 1,198 5.33 29,408 6.17 $ 64,091 6.95 % $ 355,464 6.80 % 450,161 6.78 Municipal obligations - - - - 2,676 4.78 39,046 5.43 41,722 5.38 Other securities 3,077 5.02 3,196 5.86 5 6.00 25,110 6.45 31,388 6.25 ------- ---- ------- ---- -------- ---- --------- ---- -------- ---- Total $ 9,367 5.19 % $80,519 5.76 % $ 66,772 6.87 % $ 419,620 6.65 % $ 95,581 6.53 % ======= ==== ======= ==== ======== ==== ========= ==== ======== ====
Deposits - Consumer and commercial deposits are attracted principally from within the Bank's primary market area through the offering of a broad selection of deposit instruments including checking, regular savings, money market, certificates of deposit and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Bank regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Bank's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. The Bank does not obtain funds through brokers, nor does it solicit funds outside the State of New Jersey. Deposits at December 31, 1997, totaled $695.4 million, an increase of $309.4 million, or 80%, over the December 31, 1996 balance of $386.0 million. Demand deposits, including NOW accounts and money market accounts, increased $135.0 million, or 101%, at December 31, 1997, to $268.7 million, compared with December 31, 1996. Savings deposits increased $54.4 million to $117.9 million at December 31, 1997, from $63.5 million at December 31, 1996. 22 Certificates of deposit under $100,000 increased $91.6 million from December 31, 1996, to $243.3 million at December 31, 1997. Certificates of deposit of $100,000 or more increased $28.4 million to $65.6 million at December 31, 1997. The increase in all categories of deposits during 1997 was due in large part to the acquisition of deposits in connection with the branch office purchases, as well as promotional rates offered on certain certificates of deposit during the year in response to rates offered by other financial institutions in the Bank's market areas. The following table sets forth average deposits by various types of demand and time deposits:
For the Years Ended December 31, ----------------------------------------------------------------------- 1997 Avg. Yield 1996 Avg. Yield 1995 Avg. Yield ---- ---------- ---- ---------- ---- ---------- (Dollars in thousands) Non-interest bearing demand $ 85,985 $ 65,556 $ 45,562 Interest bearing demand deposits 78,383 1.95 % 62,270 1.78 % 48,609 2.19 % Savings deposits 72,927 2.13 65,393 2.23 57,470 2.28 Time deposits 240,064 5.57 170,875 5.49 96,256 5.48 --------- ---- --------- ---- --------- ---- Total $ 477,359 3.45 % $ 364,094 3.28 % $ 247,897 3.09 % ========= ==== ========= ==== ========= ====
The following table indicates the amount of certificates of deposit of $100,000 or more by remaining maturity at December 31, 1997. Dollar amounts are shown in thousands. Remaining maturity: Three months or less $ 27,415 Over three through six months 14,138 Over six through twelve months 21,288 Over twelve months 2,754 --------- $ 65,595 ========= Borrowings - Borrowed funds increased $295.1 million at December 31, 1997, to $316.3 million, from $ 21.3 million at December 31, 1996. The increase was a result of an increase of $65.0 million in advances from the FHLB, an increase of $5.5 million in federal funds purchased, an increase of $210.8 million in securities sold under agreements to repurchase with the FHLB and an increase of $19.8 million in securities sold under agreements to repurchase with customers. This was partially offset by a loan repayment of $6.0 million. For the years ended December 31, 1997 and 1996 the maximum month-end amount of advances borrowed from the FHLB was $75.0 million and $10.0 million, respectively. The Company sold U.S. Treasury securities to customers under agreements to repurchase them, at par, on the next business day. For the years ended December 31, 1997 and 1996 the maximum month-end amount of securities sold under agreements to repurchase with customers was $29.8 million and $5.3 million, respectively. The Company purchased federal funds from correspondent banks, on an overnight basis. For the years ended December 31, 1997 and 1996, the maximum month-end amount of federal funds purchased from correspondents was $10.0. During 1997, the Company engaged in structured transactions designed to offset the interest expense incurred in connection with the issuance of the Trust Preferred Securities (See -- Investment Securities). For the year ended December 31, 1997, the maximum month-end amount of securities sold under agreements to repurchase with the FHLB was $210.8 million. 23 At December 30, 1996, the Company obtained a $6 million revolving line of credit from a correspondent bank with a term of 36 months. The floating rate of interest was the prime rate plus fifty basis points. For the years ended December 31, 1997 and 1996 the maximum month-end amount outstanding from the line of credit was $6.0 million. December 31, ---------------------------- 1997 1996 ---- ---- (Dollars in thousands) FHLB advances outstanding at end of period $ 75,000 $ 10,000 Interest rate 6.93% 7.38% Approximate average amount outstanding $ 7,726 $ 5,265 Approximate weighted average rate 5.67% 5.44% FHLB repurchase agreements outstanding at end of period $ 210,751 Interest rate 6.01% Approximate average amount outstanding $ 75,101 Approximate weighted average rate 5.71% Deposits are the primary source of funds for the Bank's lending activities, investment activities and general business purposes. Should the need arise, the Bank has the ability to access lines of credit from various sources including the Federal Reserve Bank, the FHLB and various other correspondent banks. In addition, on an overnight basis, the Bank has the ability to offer securities sold under agreements to repurchase. Guaranteed Preferred Beneficial Interest in Subordinated Debt On March 17, 1997, the Company's subsidiary, Sun Capital Trust (the "Trust") issued $25 million of 9.85% Preferred Securities with a stated liquidation preference of $25 per share. The proceeds from the sale of the Preferred Securities were utilized by the Trust to invest in $25 million of 9.85% Junior Subordinated Debentures (the "Debentures") of the Company, due in March, 2027. On April 9, 1997, the underwriters for the Preferred Securities exercised their right to purchase an additional $3.75 million of the Preferred Securities on the same terms as the original issuance to cover over-allotments. The proceeds from the sale of the Preferred Securities were utilized by the Trust to invest in $3.75 million of the Debentures of the Company. The Preferred Securities represent preferred undivided beneficial interests in the Trust's assets which consists solely of the Debentures. The distributions payable on each Preferred Security is fixed at a rate per annum of 9.85% of the stated liquidation amount per Preferred Security, is cumulative and is payable quarterly. The Company has fully, irrevocably and unconditionally guaranteed the Trust's obligations under the Preferred Securities (including the payment of distributions and certain other payments relating to the Preferred Securities). The Debentures mature on March 31, 2027. The Preferred Securities are subject to mandatory redemption (I) in whole, but not in part, at the maturity upon repayment of the Debentures, (ii) in whole, but not in part, contemporaneously with the optional redemption at any time by the Company of the Debentures upon the occurrence of certain events and (iii) in whole or in part at any time on or after March 31, 2002, contemporaneously with the optional redemption by the Company of the Debentures in whole or in part. 24 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Sun Bancorp, Inc. We have audited the accompanying consolidated statements of financial condition of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sun Bancorp, Inc. and subsidiaries as of December 31, 1997, and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/Deloitte & Touche, LLP - ------------------------- DELOITTE & TOUCHE, LLP Philadelphia, Pennsylvania February 1, 1998 25 SUN BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1997 AND 1996
1997 1996 ---- ---- ASSETS Cash and due from banks $ 34,060,747 $ 17,006,758 Federal funds sold - 4,800,000 --------------- -------------- Cash and cash equivalents 34,060,747 21,806,758 Investment securities available for sale (amortized cost - $576,045,766; 1997 and $97,063,398; 1996) 576,278,353 95,581,384 Loans receivable (net of allowance for loan losses - $4,193,801; 1997 and $2,595,312; 1996) 427,761,049 295,500,668 Bank properties and equipment, net 24,479,854 12,222,507 Real estate owned, net 270,114 755,628 Accrued interest receivable 6,752,163 2,850,399 Excess of cost over fair value of assets acquired 26,174,146 5,365,218 Deferred taxes 1,314,043 1,070,535 Other assets 2,882,356 1,641,959 --------------- -------------- TOTAL $ 1,099,972,825 $ 436,795,056 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits $ 695,387,536 $ 385,986,905 Advances from the Federal Home Loan Bank 75,000,000 10,000,000 Loan payable - 6,000,000 Federal funds purchased 5,500,000 - Securities sold under agreements to repurchase 235,813,503 5,253,048 Other liabilities 4,889,487 2,140,527 --------------- -------------- Total liabilities 1,016,590,526 409,380,480 --------------- -------------- Guaranteed preferred beneficial interest in subordinated debt 28,750,000 - COMMITMENTS AND CONTINGENT LIABILITIES (Note 16) SHAREHOLDERS' EQUITY Preferred stock, none issued - - Common stock, $1 par value, 10,000,000 shares authorized, issued and outstanding: 4,013,791 in 1997 and 1,848,929 in 1996 4,013,791 1,848,929 Surplus 38,850,245 18,124,359 Retained earnings 11,614,755 8,419,417 Net unrealized gain (loss) on securities available for sale, net of income taxes 153,508 (978,129) --------------- -------------- Total shareholders' equity 54,632,299 27,414,576 --------------- -------------- TOTAL $ 1,099,972,825 $ 436,795,056 =============== ==============
- ----------------------------------------------- See notes to consolidated financial statements 26 SUN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- INTEREST INCOME: Interest and fees on loans $ 33,129,946 $22,073,767 $15,100,885 Interest on investment securities 13,409,947 7,127,393 5,285,877 Interest on federal funds sold 645,602 68,366 463,001 ------------ ----------- ----------- Total interest income 47,185,496 29,269,526 20,849,763 ------------ ----------- ----------- INTEREST EXPENSE: Interest on deposits 16,458,025 11,953,591 7,639,933 Interest on short-term funds borrowed 5,673,562 580,412 47,158 Interest on guaranteed preferred beneficial interest in subordinated debt 2,275,795 - - ------------ ----------- ----------- Total interest expense 24,407,382 12,534,003 7,687,091 ------------ ----------- ----------- Net interest income 22,778,114 16,735,523 13,162,672 PROVISION FOR LOAN LOSSES 1,665,000 900,000 807,660 ------------ ----------- ----------- Net interest income after provision for loan losses 21,113,114 15,835,523 12,355,012 ------------ ----------- ----------- OTHER INCOME: Service charges on deposit accounts 1,549,021 1,057,139 659,811 Other service charges 49,057 115,999 28,068 (Loss) Gain on sale of fixed assets (53,136) 45,207 46,487 Gain on sale of loans 990 207,984 Gain on sale of investment securities 207,037 206,538 377,126 Other 483,202 320,890 331,513 ------------ ----------- ----------- Total other income 2,236,171 1,745,773 1,650,989 ------------ ----------- ----------- OTHER EXPENSES: Salaries and employee benefits 8,349,048 6,525,903 4,689,269 Occupancy expense 1,735,137 1,407,875 1,269,514 Equipment expense 1,300,234 817,696 459,460 Provision for losses on real estate owned 14,963 78,000 Professional fees and services 328,349 352,970 249,760 Data processing expense 1,474,247 1,085,874 634,753 Amortization of excess of cost over fair value of assets acquired 1,504,713 826,701 342,562 Postage and supplies 483,496 420,120 335,055 Insurance 273,732 196,110 382,554 Other 1,981,017 1,573,404 1,606,404 ------------ ----------- ----------- Total other expenses 17,444,936 13,206,653 10,047,331 ------------ ----------- ----------- INCOME BEFORE INCOME TAXES 5,904,349 4,374,643 3,958,670 INCOME TAXES 1,733,000 1,362,000 1,140,000 ------------ ----------- ----------- NET INCOME $ 4,171,349 $ 3,012,643 $ 2,818,670 ============ =========== =========== Basic earnings per share $ 0.91 $ 0.71 $ 0.69 ============ =========== =========== Diluted earnings per share $ 0.82 $ 0.66 $ 0.65 ============ =========== =========== Weighted average shares 4,607,534 4,247,540 4,064,196 ============ =========== ===========
- ------------------------------------------------------ See notes to consolidated financial statements 27 SUN BANCORP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net Unrealized Gain (Loss) on Securities Retained Available for Common Stock Surplus Earnings Sale Total ------------ ------- -------- ---- ----- BALANCE, JANUARY 1, 1995 $ 1,556,434 $ 16,426,648 $ 2,588,104 $ $ 20,571,186 Exercise of stock options 74,741 530,627 605,368 Sale of common stock 20,000 240,000 260,000 Unrealized gain on securities available for sale, net of income taxes $ 415,572 415,572 Net income - - 2,818,670 - 2,818,670 ------------ ------------ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1995 1,651,175 17,197,275 5,406,774 415,572 24,670,796 Stock dividend 87,892 (87,892) Cash paid for fractional interest resulting from stock dividend (2,146) (2,146) Exercise of stock options 109,862 1,017,122 1,126,984 Net unrealized loss on securities available for sale, net of income taxes (1,393,701) (1,393,701) Net income - - 3,012,643 - 3,012,643 ------------ ------------ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1996 1,848,929 18,124,359 8,419,417 (978,129) 27,414,576 Exercise of stock options 3,531 34,237 37,768 Sale of common stock 1,094,428 20,787,283 21,881,711 Stock dividend 1,066,903 (92,511) (974,392) - Cash paid for fractional interest resulting from stock dividends (3,123) (1,619) (4,742) Net unrealized gain on securities available for sale, net of income taxes 1,131,637 1,131,637 Net income - - 4,171,349 - 4,171,349 ------------ ------------ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1997 $ 4,013,791 $ 38,850,245 $ 11,614,755 $ 153,508 $ 54,632,299 ============ ============ ============= ============= =============
28 SUN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
For the Years Ended December 31, --------------------------------------------- 1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 4,171,349 $ 3,012,643 $ 2,818,670 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,665,000 900,000 807,660 Provision for losses on real estate owned 14,963 78,000 Depreciation and amortization 529,734 484,059 325,913 Amortization of excess cost over fair value of assets acquired 1,504,713 826,701 342,562 Gain on sale of loans (990) (207,984) Gain on sale of investment securities available for sale (207,037) (206,538) (246,129) Gain on sale of mortgage-backed securities available for sale (130,997) (Loss) Gain on sale of bank properties and equipment 53,136 (29,298) (46,487) Deferred income taxes (826,472) (147,401) (27,398) Change in assets and liabilities which (used) provided cash: Accrued interest and other assets (5,142,161) (1,175,180) (838,246) Accounts payable and accrued expenses 2,748,960 164,483 1,215,343 ------------- ------------- ------------- Net cash provided by operating activities 702,741 3,829,469 4,090,907 ------------- ------------- ------------- INVESTING ACTIVITIES: Purchases of investment securities held to maturity (30,094,922) Purchases of investment securities available for sale (270,543,543) (27,823,745) Purchases of mortgage-backed securities held to maturity (45,544,706) Purchases of mortgage-backed securities available for sale (307,630,314) (4,074,088) Increase in investment securities resulting from branch acquisitions (97,600,000) Proceeds from maturities of investment securities held to maturity 65,280,038 Proceeds from maturities of investment securities available for sale 8,716,550 99,213,685 10,344,666 Proceeds from maturities of mortgage-backed securities held to maturity 19,908,185 Proceeds from maturities of mortgage-backed securities available for sale 4,354,398 125,716 Proceeds from sale of investment securities available for sale 67,133,964 93,679,375 16,880,505 Proceeds from sale of mortgage-backed securities available for sale 19,346,213 50,782,881 7,359,934 Proceeds from sale of loans 220,000 1,870,608 Net increase in loans (113,795,707) (112,767,037) (50,605,944) Increase in loans resulting from branch acquisitions (20,348,684) (636,714) Purchase of bank properties and equipment (1,241,818) (1,359,295) (825,912) Increase in bank properties and equipment resulting from branch (11,786,574) (5,430,744) acquisitions Proceeds from sale of bank properties and equipment 35,576 42,606 250,824 Proceeds from issuance of guaranteed preferred beneficial interest in subordinated debt 28,750,000 Excess of cost over fair value of branch assets acquired (22,313,641) (4,450,145) Decrease in real estate owned, net 470,551 120,674 78,578 ------------- ------------- ------------- Net cash used in investing activities (618,633,029) (64,382,072) (145,113,582) ------------- ------------- -------------
29 FINANCING ACTIVITIES:
Net increase in deposits 52,877,747 50,739,109 16,685,101 Increase in deposits resulting from branch acquisitions 256,522,884 122,543,875 Net borrowings under line of credit and repurchase agreements 301,060,455 21,253,048 12,500,000 Principal payments on borrowed funds (6,000,000) (8,000,000) (4,500,000) Proceeds from exercise of stock options 37,768 1,126,984 605,368 Payments for fractional interests resulting from stock dividend (4,742) (2,146) Proceeds from issuance of common stock 21,881,711 -- 260,000 ------------- ------------- ------------- Net cash provided by financing activities 626,375,823 65,116,995 148,094,344 ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 12,253,989 4,564,392 7,071,669 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,806,758 17,242,366 10,170,697 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,060,747 $ 21,806,758 $ 17,242,336 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 23,323,935 $ 12,743,696 $ 6,100,954 Income taxes paid 1,450,000 $ 1,577,757 $ 944,516 SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS: Transfer of loans to real estate owned $ 389,867 $ 424,644 $ 196,181
- ---------------------------------------------------------------------------- See notes to consolidated financial statements 30 SUN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. NATURE OF OPERATIONS Sun Bancorp, Inc. (the "Company") is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Sun Capital Trust (the "Trust"), Sun National Bank (the "Bank") and the Bank's wholly owned subsidiary, Med-Vine, Inc. All significant inter-company balances and transactions have been eliminated. The Company and the Bank have their administrative offices in Vineland, New Jersey. At December 31, 1997, the Bank had thirty-eight financial service centers located throughout central and southern New Jersey. The Company's principal business is to serve as a holding company for the Bank. The Company's outstanding common stock is traded on the Nasdaq National Market under the symbol "SNBC." The Company is subject to reporting requirements of the Securities and Exchange Commission. The Trust is a Delaware business trust which holds the Debentures issued by the Company. The Bank is in the business of attracting customer deposits through its financial service centers and investing these funds, together with borrowed funds and cash from operations, in loans, primarily commercial real estate and non-real estate loans, as well as mortgage-backed and investment securities. The Bank's primary regulatory agency is the Office of the Comptroller of the Currency ("OCC"). Med-Vine, Inc. is a Delaware holding company which holds the majority of the Bank's investment portfolio. The principal business of Med-Vine, Inc. is investing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The significant estimates include: allowance for loan losses, real estate owned and excess of cost over fair value of net assets acquired. Actual results could differ from those estimates. Investment Securities - The Company accounts for debt and equity securities as follows: Held to Maturity - Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security. Available for Sale - Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes to market interest or prepayment rates, needs for liquidity, and changes in the availability of and the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Fair value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and are reported net of tax as a separate component of shareholders' equity until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statement of income and determined using the adjusted cost of the specific security sold. Loans Purchased - The discounts and premiums resulting from the purchase of loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Interest Income on Loans - Interest on commercial, real estate and installment loans is credited to operations based upon the principal amount outstanding. Interest accruals are generally discontinued when a loan becomes 90 days past due or when principal or interest is considered doubtful of collection. When interest accruals are discontinued, interest credited to income in the current year is reversed, and interest accrued in the prior year is charged to the allowance for loan losses. 31 Allowance for Loan Losses - The allowance for loan losses is determined by management based upon past experience, evaluation of estimated loss and impairment in the loan portfolio, current economic conditions and other pertinent factors. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral. Any reserves required based on this evaluation are included in the allowance for loan losses. Allowances for loan losses are based on estimated net realizable value unless it is probable that loans will be foreclosed, in which case allowances for loan losses are based on the fair value of the underlying collateral. Management's periodic evaluation is based upon evaluation of the portfolio, past loss experience, current economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Bank Properties and Equipment - Bank properties and equipment are stated at cost, less allowances for depreciation. The provision for depreciation is computed by the straight-line method based on the estimated useful lives of the assets. Deferred Loan Fees - Loan fees net of certain direct loan origination costs are deferred and the balance is recognized into income as a yield adjustment over the life of the loan using the interest method. Real Estate Owned - Real estate owned is comprised of property acquired through foreclosure and is carried at the lower of the related loan balance or fair value of the acquired property based on an annual appraisal less estimated cost to dispose. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Losses subsequent to foreclosure are charged against operations. Excess of Cost Over Fair Value of Net Assets Acquired - The excess of cost over fair value of net assets acquired is net of accumulated amortization of $3,542,579 and $2,037,866 at December 31, 1997 and 1996, respectively, and is amortized by the straight-line method over 15 years for bank acquisitions and over 7 years for branch acquisitions. Long-Lived Assets - Management evaluates the carrying amount of long-lived assets and intangibles for impairment based on the fair value of the asset. At December 31, 1997 and 1996, the Company had not recognized an impairment loss based on this evaluation. Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include amounts due from banks and federal funds sold. Income Taxes - Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share - In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share , which is effective for periods ending after December 15, 1997. This statement establishes standards for computing and presenting earnings per share (EPS) and supersedes APB Opinion No. 15, Earnings Per Share. The Company adopted SFAS No. 128 effective December 31, 1997 and all EPS for periods presented have been retroactively restated in accordance with the Statement. The adoption of this statement did not have a material effect on the Company's reported earnings per share Stock dividend - On May 20, 1997 and September 17, 1996, the Company's Board of Directors declared special 5% stock dividends which were paid on June 25, 1997 and October 30, 1996, respectively, to stockholders of record on June 2, 1997 and October 15, 1996, respectively. Accordingly, earnings per share for the years ended December 31, 1996 and 1995 have been restated to reflect the increased number of shares outstanding. 32 Stock split - On February 17, 1998, the Company's Board of Directors declared a three-for-two stock split effected in the form of a 50% stock dividend payable on March 18, 1998 to shareholders of record on March 4, 1998. On August 28, 1997 the Company's Board of Directors declared a three-for-two stock split effected in the form of a 50% stock dividend which was paid on September 25, 1997 to shareholders of record on September 11, 1997. Accordingly, earnings per share for the years ended December 31, 1997, 1996 and 1995 have been restated to reflect the increased number of shares outstanding. Accounting for Stock Options - The Company accounts for stock-based compensation using the intrinsic value method which recognizes as expense the difference between the market value of the stock and the exercise price at grant date. The Company has not recognized any compensation expense under this method. In the year ended December 31, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation which permits the use of the intrinsic value method of accounting for stock-based compensation but also requires the Company to disclose the pro forma effects of accounting for stock-based compensation using the fair value method as described in SFAS No. 123. Accounting Principles Issued But Not Adopted - In June, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires disclosure, as a component of comprehensive income, amounts from transactions and other events which are currently excluded from the statement of income and are recorded directly to shareholders' equity. Also in June, 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information was issued. This statement requires an entity to disclose financial information in a manner consistent with internally used information and requires more detailed disclosures of operating and reporting segments than are currently in practice. These statements are effective for fiscal years beginning after December 15, 1997 and early adoption is permitted. Management of the Company does not believe the Statements will have a material impact on the Company's results of operations or financial position when adopted. The Company will adopt both standards effective January 1, 1998. Reclassifications - Certain reclassifications have been made in the 1996 and 1995 consolidated financial statements to conform to those classifications used in 1997. 3. ACQUISITIONS On November 20, 1997, the Bank purchased eleven branches from The Bank of New York. The Bank acquired approximately $156,049,000 of deposit liabilities plus $240,000 of accrued interest, $9,485,000 of real estate and equipment, $18,035,000 of loans plus related accrued interest and $2,277,000 in cash. The Bank paid a premium of approximately $15,501,000, which will be amortized primarily over seven years. On July 24, 1997, the Bank purchased three branches from Oritani Savings Bank. The Bank acquired approximately $33,922,000 of deposit liabilities plus $144,000 of accrued interest, $547,000 of real estate and equipment and $180,000 in cash. The Bank paid a premium of $2,151,000, which is being amortized over seven years. On June 5, 1997, the Bank purchased four branches from First Union National Bank. The Bank acquired approximately $66,552,000 of deposit liabilities plus $222,000 of accrued interest, $1,755,000 of real estate and equipment, $2,313,000 of loans plus related accrued interest and $1,203,000 in cash. The Bank paid a premium of approximately $4,661,000, which is being amortized over seven years. On November 24, 1995, the Bank purchased four branches from New Jersey National Bank. The Bank acquired approximately $70,227,000 of deposit liabilities plus $492,000 of accrued interest, $3,675,000 of real estate and equipment, $48,000 of loans plus related accrued interest and $1,009,000 in cash. The Bank paid a premium of approximately $2,368,000, which is being amortized over seven years. On July 14, 1995, the Bank purchased four branches from NatWest Bank. The Bank acquired approximately $52,317,000 of deposit liabilities plus $479,000 of accrued interest, $1,755,000 of real estate and equipment, $588,000 of loans plus related accrued interest and $610,000 in cash. The Bank paid a premium of approximately $2,082,000, which is being amortized over seven years. 33 4. INVESTMENT SECURITIES The amortized costs of investment securities and the approximate fair values at December 31, 1997 and 1996 were as follows:
December 31, 1997 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Available for Sale: Cost Gains Losses Value Debt Securities U. S. Treasury Obligations $ 53,112,961 $ 22,245 $ (128,487) $ 53,006,719 State and Municipal Obligations 41,738,042 115,920 (131,695) 41,722,267 Other bonds 6,313,495 -- (35,849) 6,277,646 Mortgage-backed securities 449,770,918 629,512 (239,059) 450,161,371 ------------ ------------ ------------ ------------ Total debt securities 550,935,416 767,677 (535,090) 551,168,003 ------------ ------------ ------------ ------------ Equity Securities Federal Reserve Bank stock 1,367,100 1,367,100 Federal Home Loan Bank stock 23,660,000 23,660,000 Atlantic Central Bankers Bank stock 83,250 -- -- 83,250 ------------ ------------ ------------ ------------ Total equity securities 25,110,350 -- -- 25,110,350 ------------ ------------ ------------ ------------ Total $576,045,766 $ 767,677 $ (535,090) $576,278,353 ============ ============ ============ ============
December 31, 1996 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Available for Sale: Cost Gains Losses Value Debt Securities U. S. Treasury Obligations $51,954,682 $ 12,086 $ (932,957) $51,033,811 State and Municipal Obligations 20,168,222 28,006 (356,822) 19,839,406 Other bonds 10,075,483 7,635 (239,962) 19,843,156 Mortgage-backed securities 63,061 -- -- 63,061 ----------- ----------- ----------- ----------- Total debt securities 92,261,448 47,727 (1,529,741) 90,779,434 ----------- ----------- ----------- ----------- Equity Securities Federal Reserve Bank stock 617,800 617,800 Federal Home Loan Bank stock 4,100,900 4,100,900 Atlantic Central Bankers Bank stock 83,250 83,250 ----------- ----------- ----------- ----------- Total equity securities 4,801,950 -- -- 4,801,950 ----------- ----------- ----------- ----------- Total $97,063,398 $ 47,727 $(1,529,741) $95,581,384 =========== =========== =========== ===========
During 1997, the Company sold $86,480,177 of securities available for sale resulting in a gross gain of $225,959. During 1996, the Company sold $144,529,374 of securities available for sale resulting in a gross gain of $206,538. During 1995, the Company sold $24,240,439 of securities available for sale resulting in a gross gain of $377,126. At December 31, 1997 and 1996 the Bank was required to maintain an average reserve balance with the Federal Reserve Bank of $100,000 and $3,579,000 respectively. 34 The maturity schedule of the investment in debt securities available for sale at December 31, 1997 is as follows: Amortized Estimated Cost Market Value Due in one year or less $ 9,370,575 $ 9,366,919 Due after one year through five years 80,691,171 80,518,151 Due after five years through ten years 66,650,723 66,762,117 Due after ten years 110,229,882 110,207,604 266,942,351 266,854,791 Mortgage-backed securities 283,993,065 284,313,212 ------------ ------------ $550,935,416 $551,168,003 ============ ============ At December 31, 1997, $4,000,000 of U.S. Treasury Notes were pledged to secure public deposits. 5. LOANS The components of loans as of December 31, 1997 and 1996 were as follows: December 31, -------------------------------- 1997 1996 Commercial and industrial $ 346,475,157 $ 223,116,474 Real estate-residential mortgages 50,178,260 53,846,436 Installment 35,301,433 21,133,070 ------------- ------------- Total gross loans 431,954,850 298,095,980 Allowance for loan losses (4,193,801) (2,595,312) ------------- ------------- Net loans $ 427,761,049 $ 295,500,668 ============= ============= Nonaccrual loans $ 896,902 $ 1,277,208 ============= ============= There were no irrevocable commitments to lend additional funds on nonaccrual loans at December 31, 1997. The reduction in interest income resulting from nonaccrual loans was $115,144, $151,614 and $276,955 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest income recognized on these loans for the years ended December 31, 1997, 1996 and 1995 was $40,334, $15,414 and $24,989, respectively. Certain officers, directors and their associates (related parties) have loans and conduct other transactions with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for other nonrelated party transactions. The aggregate dollar amount of these loans to related parties as of December 31, 1997 and 1996, along with an analysis of the activity for the years ended December 31, 1997 and 1996, is summarized as follows: For the Years Ended December 31, ---------------------------- 1997 1996 Balance, beginning of year $ 11,437,134 $ 8,621,460 Additions 10,954,834 7,306,997 Repayments (2,954,727) (4,491,323) ------------ ------------ Balance, end of year $ 19,437,241 $ 11,437,134 ============ ============ 35 Under approved lending decisions, the Company has commitments to lend additional funds totaling approximately $84,302,101 and $58,635,413 at December 31, 1997 and 1996, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on an individual basis. The type and amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Most of the Bank's business activity is with customers located within its local market area. Generally, loans granted are secured by commercial real estate, residential real estate and other assets. The ultimate repayment of loans is dependent, to a certain degree, on the local economy and real estate market. 6. ALLOWANCE FOR LOAN LOSSES An analysis of the change in the allowance for loan losses is as follows: For the Years Ended December 31, ------------------------------------------- 1997 1996 1995 Balance, beginning of period $ 2,595,312 $ 2,064,640 $ 1,607,375 Charge-offs (102,408) (400,387) (426,289) Recoveries 35,897 31,059 75,894 ----------- ----------- ----------- Net charge-offs (66,511) (369,328) (350,395) Provision for loan losses 1,665,000 900,000 807,660 ----------- ----------- ----------- Balance, end of period $ 4,193,801 $ 2,595,312 $ 2,064,640 =========== =========== =========== The provision for loan losses charged to expense is based upon past loan and loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans. A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. 36 Impairment losses are included in the provision for loan losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include consumer loans and residential real estate loans, and are not included in the data that follows:
December 31, 1997 December 31, 1996 ----------------- ----------------- Impaired loans with related reserve for loan losses calculated under SFAS No. 114 $ -- $ -- Impaired loans with no related reserve for loan losses calculated under SFAS No. 114 $1,157,838 $ 584,114 ---------- ---------- Total impaired loans $1,157,838 $ 584,114 ========== ==========
Year Ended Year Ended December 31, 1997 December 31, 1996 ----------------- ----------------- Average impaired loans $1,244,522 $ 596,519 ========== ========== Interest income recognized on impaired loans $ 106,715 $ 18,284 ========== ========== Cash basis interest income recognized on impaired loans $ 82,544 $ 15,414 ========== ==========
Interest payments on impaired loans are typically applied to principa l unless the ability to collect the principal amount is fully assured, in which case interest is recognized on the cash basis. Commercial loans and commercial real estate loans are placed on nonaccrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Generally, commercial loans are charged off no later than 120 days delinquent unless the loan is well secured and in the process of collection, or other extenuating circumstances support collection. Residential real estate loans are typically placed on nonaccrual at the time the loan is 90 days delinquent. Other consumer loans are typically charged off at 90 days delinquent. In all cases, loans must be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. 7. BANK PROPERTIES AND EQUIPMENT Bank properties and equipment at December 31, 1997 and 1996 consist of the following major classifications: December 31, ----------------------------- 1997 1996 Land $ 5,923,238 $ 3,084,395 Buildings 13,520,232 6,982,449 Leasehold improvements and equipment 7,485,262 3,991,723 ------------ ------------ 26,928,732 14,058,567 Accumulated depreciation and amortization (2,448,878) (1,836,060) ------------ ------------ Total $ 24,479,854 $ 12,222,507 ============ ============ 37 8. REAL ESTATE OWNED Real estate owned consisted of the following: December 31, ----------------------- 1997 1996 Commercial properties $ 128,031 $ 435,765 Residential properties 142,083 360,863 --------- --------- 270,114 796,628 Allowance -- (41,000) --------- --------- Total $ 270,114 $ 755,628 ========= ========= During 1997 and 1995, approximately $15,000 and $78,000, respectively, was charged against operations to adjust real estate owned for declines in value. There was no charge in 1996. 9. DEPOSITS Deposits consist of the following major classifications: December 31, ---------------------------- 1997 1996 Demand Deposits $268,655,067 $133,624,391 Savings Deposits 117,879,048 63,506,894 Time Certificates under $100,000 243,257,829 151,615,202 Time Certificates $100,000 or more 65,595,592 37,240,418 ------------ ------------ Total $695,387,536 $385,986,905 ============ ============ Of the total demand deposits, approximately $149,499,000 and $76,500,000 are non-interest bearing at December 31, 1997 and 1996, respectively. A summary of certificates by year of maturity is as follows: Year Ended December 31, 1998 $284,412,949 1999 14,495,629 2000 5,800,887 Thereafter 4,143,956 ------------ Total $308,853,421 ============ A summary of interest expense on deposits is as follows: Year Ended December 31, ---------------------------------------- 1997 1996 1995 Savings Deposits $ 1,555,491 $ 1,455,043 $ 1,394,849 Time Certificates 13,370,984 9,382,920 5,274,045 Interest-Bearing Demand Deposits 1,531,550 1,115,628 971,039 ----------- ----------- ----------- Total $16,458,025 $11,953,591 $ 7,639,933 =========== =========== =========== 38 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK Federal Home Loan Bank ("FHLB") advances at December 31, 1997 and 1996 were $75,000,000 and $10,000,000, respectively. Advances are collateralized under a blanket collateral lien agreement. At December 31, 1997 and 1996, $17,000,000 and $10,000,000, respectively were borrowed under overnight lines of credit at interest rates of 7.125% and 7.35%, respectively. At December 31, 1997, $58,000,000 was borrowed under a one-month advance maturing in January, 1998 at a rate of interest of 6.875%. Interest expense on advances was $438,268, $286,316 and $6,733 for the years ended December 31, 1997, 1996 and 1995, respectively. 11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE In 1997, the Company entered into repurchase agreements with the FHLB. At December 31, 1997, the amount outstanding was $210,751,000, maturing in January, 1998 and bearing an average interest rate of 6.01%. Interest expense on FHLB repurchase agreements was $4,285,478 for the year ended December 31, 1997. There were no such repurchase agreements during 1996 or 1995. Collateral for the repurchase agreements were U.S. Government Agency Collateralized Mortgage Obligations. The market value of the collateral at December 31, 1997 was approximately $220,118,000. During 1997 and 1996, the Company entered into overnight repurchase agreements with customers. At December 31, 1997 and 1996, the amounts outstanding were $25,062,502 and $5,253,048, respectively. At December 31, 1997, the amounts were borrowed at interest rates ranging from 4.75% to 6.275%. At December 31, 1996, the amounts were borrowed at interest rates ranging from 4.75% to 5.11%. Collateral for customer repurchase agreements were U.S. Treasury Notes. The market value of the collateral was equal to the amounts outstanding. 12. OTHER BORROWED FUNDS At December 31, 1997, the Company purchased federal funds in the amount of $5,500,000 from correspondent banks on an unsecured overnight line of credit at an interest rate of 6.00%. There were no such purchases at December 31, 1996. On December 30, 1996, the Company obtained a $6,000,000 revolving line of credit from a correspondant bank with a term of 36 months. The floating rate of interest was the prime rate plus fifty basis points. At December 31, 1996, there was $6,000,000 outstanding at an interest rate of 8.75%. At December 31, 1997 there was no balance outstanding. 13. STOCK OPTION PLAN On April 18, 1995, the Company adopted a Stock Option Plan (the "1995 Plan"). Options granted under the 1995 Plan may be either qualified incentive stock options or nonqualified options as determined by the Executive Compensation Committee. Options granted under the 1995 Plan are at the estimated fair value at the date of grant. There were 744,187 shares of stock reserved for issuance under the 1995 Plan. On May 31, 1985, the Company adopted a Stock Option Plan (the "1985 Plan"). During 1995, options were no longer eligible to be granted under the 1985 Plan. Options granted under the 1985 Plan were either qualified incentive stock options or nonqualified options as determined by the Executive Compensation Committee. Options granted under the 1985 Plan were at the estimated fair value at the date of grant. At December 31, 1997, there were 309,730 shares of stock remaining for issuance under the 1985 Plan. 39 Under the 1995 Plan, the nonqualified options expire ten years and ten days after the date of grant, unless terminated earlier under the option terms. The incentive options expire ten years after the date of grant, unless terminated earlier under the option terms. Under the 1985 Plan, all options expire in the year 2001. The vesting provision of the 1995 Plan allows for 50% of options to vest one year after the date of grant, and 50% two years after the date of grant, subject to employment and other conditions. All shares granted under the 1985 Plan are fully vested. Options granted under the 1995 and 1985 Plans, adjusted for the 5% stock dividends granted in 1996 and 1997 and the three-for-two stock splits granted in 1997 and 1998, are as follows:
Incentive Nonqualified Options granted and outstanding: December 31, 1997 at prices ranging from $3.04 to $16.67 per share 444,680 609,193 ======= ======= December 31, 1996 at prices ranging from $3.04 to $7.77 per share 351,647 454,900 ======= ======= December 31, 1995 at prices ranging from $3.04 to $6.53 per share 439,785 371,118 ======= =======
Activity in the stock option plans for the period beginning January 1, 1995 and ending December 31, 1997 was as follows:
Weighted Average Exercise Exercise Number Price Price of Shares Per Share Per Share --------- --------- --------- Outstanding at January 1, 1995 692,585 $ 3.58 1995: Granted 310,080 $5.24 - $ 5.77 $ 5.50 Exercised (185,405) $3.04 - $ 4.22 $ 3.26 Expired (6,357) $3.04 - $ 6.53 $ 5.85 --------- Outstanding at December 31, 1995 810,903 $ 4.29 1996: Granted 269,148 $7.06 - $ 7.77 $ 7.06 Exercised (272,403) $3.04 - $ 3.84 $ 3.73 Expired (1,101) $ 6.53 $ 6.53 --------- Outstanding at December 31, 1996 806,546 $ 5.39 1997: Granted 257,997 $8.89 - $16.67 $ 10.00 Exercised (8,205) $5.24 - $ 6.53 $ 4.60 Expired (2,466) $ 7.06 $ 7.06 --------- Outstanding at December 31, 1997 1,053,873 $3.04 - $16.67 $ 6.56 ========= ========
The following table summarizes stock options outstanding at December 31, 1997.
Number of Options Weighted Average Remaining Weighted Average Exercise Range of Exercise Price Outstanding Contractual Life Price - ------------------------------------------------------------------------------------------------------------------- $ 3.04 - $ 3.34 177,945 4 $ 3.79 $ 5.24 - $ 6.53 351,265 6 $ 5.33 $ 7.06 - $ 8.89 295,016 8 $ 7.27 $ 10.00 - $ 11.00 224,997 9 $ 10.04 $ 16.67 - $ 16.67 4,650 10 $ 16.67 ------------------------------------------------------------------------------------ 1,053,873 7 $ 6.56
40 The Company accounts for stock-based compensation using the intrinsic value method. Had compensation cost for the Company's two stock option plans been determined based on the fair value method of accounting described in SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
For the Years Ended December 31, --------------------------------------------- 1997 1996 1995 ---- ---- ---- Net income: As reported $ 4,171,349 $ 3,012,643 $ 2,818,670 Pro forma $ 3,736,190 $ 2,461,089 $ 2,370,020 Earnings per share on net income: Basic As reported $ 0.91 $ 0.71 $ 0.69 Pro forma $ 0.81 $ 0.58 $ 0.58 Diluted As reported $ 0.82 $ 0.66 $ 0.65 Pro forma $ 0.74 $ 0.54 $ 0.54 Weighted average fair value of options granted during the year $ 1.69 $ 3.42 $ 2.39
Significant assumptions used to calculate the above fair value of the awards are as follows: 1997 1996 1995 ---- ---- ---- Risk free rate of return 6.16 % 6.44 % 5.65 % Expected option life 60 months 60 months 60 months Expected volatility 24 % 14 % 15 % Expected dividends 0 0 0 14. EMPLOYEE AND DIRECTOR STOCK PURCHASE PLANS On July 15, 1997 the Company adopted an Employee Stock Purchase Plan ("ESPP") and a Directors Stock Purchase Plan ("DSPP") (collectively, the "Purchase Plans") wherein 218,812 shares were reserved for issuance pursuant to the plan. Under the terms of the Purchase Plans, the Company grants participants an option to purchase shares of Company common stock with an exercise price equal to 95% of market prices. Under the ESPP, employees are permitted, through payroll deduction, to purchase up to $25,000 of fair market value of common stock per year. Under the DSPP, directors are permitted to remit funds, on a regular basis, to purchase up to $25,000 of fair market value of common stock per year. Participants incur no brokerage commissions or service charges for purchases made under the Purchase Plans. For the year ended December 31, 1997, there were 1,191 shares and 3,896 shares granted and issued through the ESPP and DSPP, respectively. 15. BENEFITS During 1996, the Company established a 401(k) Savings Plan (the 401(k) Plan) for all qualified employees. Substantially all employees are eligible to participate in the 401(k) Plan following completion of one year of service and attaining age 21. Vesting in the Company's contribution accrues over four years at 25% each year. Pursuant to the 401(k) Plan, employees could contribute up to 15% of their compensation to a maximum of $9,500 in 1997 and 1996. The Company contributes Company common stock, at market value, at 50% of the employee contribution, up to 6% of compensation. The Company's contribution to the 401(k) Plan was $90,619 and $85,722 for the years ended December 31, 1997 and 1996, respectively. The Company paid $9,705 and $4,861 during 1997 and 1996, repectively, to administer the 401(k) Plan. 41 16. COMMITMENTS AND CONTINGENT LIABILITIES The Company, from time to time, may be a defendant in legal proceedings related to the conduct of its business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial statements. In the normal course of business, the Bank has various commitments and contingent liabilities, such as customers' letters of credit (including standby letters of credit of $12,335,011 and $9,663,853 at December 31, 1997 and 1996, respectively), which are not reflected in the accompanying financial statements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the judgment of management, the financial position of the Company will not be affected materially by the final outcome of any contingent liabilities and commitments. Office space and branch facilities are leased from a company affiliated with the chairman under separate agreements with the Company. The leases, which expire in the year 2012, provide for a combined annual rental of $344,592 with annual increases based on increases in the Consumer Price Index. In February 1985, the Bank entered into an agreement with a partnership comprised of directors of the Bank and shareholders of the Company to lease an office building for an initial term of ten years with three renewal options of five years each, requiring annual rentals of $96,000 in addition to real estate taxes during the extension periods. The Bank has exercised its first five-year renewal option. The Bank subleases a portion of the office building. Future minimum payments under noncancelable operating leases with initial terms of one year or more consisted of the following at December 31, 1997: 1998 $ 867,339 1999 797,011 2000 690,504 2001 672,104 2002 647,695 Thereafter 5,471,888 ----------- $ 9,146,541 =========== Rental expense included in occupancy expense for all operating leases was $609,161, $516,526 and $510,285 for the years ended December 31, 1997, 1996 and 1995, respectively. 42 17. INCOME TAXES The income tax provision consists of the following: December 31, ------------------------------------------ 1997 1996 1995 Current $ 2,559,473 $ 1,504,874 $ 1,167,398 Deferred (826,473) (142,874) (27,398) ----------- ----------- ----------- Total $ 1,733,000 $ 1,362,000 $ 1,140,000 =========== =========== =========== Items that gave rise to significant portions of the deferred tax accounts at December 31, 1997 and 1996 are as follows:
December 31, ---------------------------- 1997 1996 Deferred tax asset: Allowance for loan losses $ 1,219,106 $ 590,257 Deferred loan fees 83,541 63,900 Other real estate - 73,344 Goodwill amortization 373,016 72,150 Unrealized loss on investment securities - 503,885 Other 225,042 51,274 ----------- ----------- Total deferred tax asset 1,900,705 1,354,810 Deferred tax liability: Property (450,126) (284,275) Unrealized gain on investment securities (79,080) Other real estate (57,456) ----------- ----------- Total deferred tax liability (586,662) (284,275) ----------- ----------- Net deferred tax asset $ 1,314,043 $ 1,070,535 =========== ===========
The provision for federal income taxes for the years ended December 31, 1997, 1996 and 1995, differs from that completed at the statutory rate as follows: Years Ended December 31, ------------------------------------------ 1997 1996 1995 Tax computed at the statutory rate $ 2,007,479 $ 1,487,379 $ 1,345,948 Increase in charge resulting from: Goodwill amortization 57,321 57,327 57,160 Tax exempt interest (net) (258,994) (340,896) (157,940) Other, net (72,806) 158,190 ----------- ----------- ----------- $ 1,733,000 $ 1,362,000 $ 1,140,000 =========== =========== =========== 43 18. EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to shareholders (net income), by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding increased by the number of common shares that are assumed to have been purchased with the proceeds from the exercise of the options (treasury stock method). These purchases were assumed to have been made at the average market price of the common stock, which is based on the average price received on common shares sold. Retroactive recognition has been given to market values, common stock outstanding and potential common shares for periods prior to the date of the Company's stock dividends and stock splits, as well as for the adoption of SFAS No. 128.
For the Years Ended December 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- Net income $4,171,349 $3,012,643 $2,818,670 Average dilutive stock options outstanding 1,053,873 806,548 810,906 Average exercise price per share $ 6.56 $ 5.39 $ 4.28 Average market price - diluted basis $ 11.87 $ 8.89 $ 6.85 Average common shares outstanding 4,607,533 4,247,540 4,064,196 Increase in shares due to exercise of options - diluted basis 471,736 317,549 304,281 ---------- ---------- ---------- Adjusted shares outstanding - diluted 5,079,269 4,565,089 4,368,477 Net income per share - basic $ 0.91 $ 0.71 $ 0.69 Net income per share - diluted $ 0.82 $ 0.66 $ 0.65
19. REGULATORY MATTERS The ability of the Bank to pay dividends to the Company is controlled by certain regulatory restrictions. Permission from the OCC is required if the total of dividends declared in a calendar year exceeds the total of the Bank's net profits, as defined by the OCC, for that year, combined with its retained net profits of the two preceding years. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory --and possibly additional discretionary -- actions by regulators, that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes, as of December 31, 1997 that the Bank meets all applicable capital adequacy requirements. 44 During 1997 regulatory capital was increased through the issuance of Trust Preferred Securities and common stock. As a result, at December 31, 1997, the Company's Tier 1 Capital and Total Risk-Based Capital increased by $40.1 million and $50.1 million, respectively. As of December 31, 1997, the most recent notification from the OCC (dated May 5, 1997) categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum Tier 1 Capital, Total Risk-Based Capital and Leverage Ratios as set forth in the table.
To Be Well-Capitalized Required for Under Prompt Capital Adequacy Corrective Action Actual Purposes Procedures ------ -------- ---------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ------ At December 31, 1997 Tier 1 Risk-Based Capital $ 55,445,443 9.76% $22,723,542 4.00% $34,085,313 6.00% Total Risk-Based Capital 59,639,244 10.50% 45,439,424 8.00% 56,799,280 10.00% Leverage 55,445,443 6.42% 34,545,447 4.00% 43,181,809 5.00% At December 31, 1996 Tier 1 Risk-Based Capital $ 28,907,862 9.34% $12,380,480 4.00% 18,570,720 6.00% Total Risk-Based Capital 31,503,174 10.18% 24,760,960 8.00% 30,951,200 10.00% Leverage 28,907,862 6.81% 16,974,791 4.00% 21,218,489 5.00%
The Company's tier 1 risk-based capital, total risk-based capital and leverage capital are 8.17%, 10.75% and 5.38%, respectively, at December 31, 1997 and 7.44%, 8.28% and 5.43%, respectively, at December 31, 1996. 45 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
December 31, 1997 December 31, 1996 ------------------------------------------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Assets: Cash and cash equivalents $ 34,060,747 $ 34,060,747 $ 21,806,758 $ 21,806,758 Investment securities 576,278,353 576,278,353 95,581,384 95,581,384 Loans receivable, net 427,761,049 424,641,330 295,500,668 293,777,592 Liabilities: Demand deposits 268,655,067 268,655,067 133,624,391 133,624,391 Savings deposits 117,879,048 117,879,048 63,506,894 63,506,894 Certificates of deposit 308,853,421 308,605,531 188,855,620 191,448,487 Advances from the Federal Home Loan Bank 75,000,000 75,000,000 10,000,000 10,000,000 Loan payable - - 6,000,000 6,000,000 Federal funds purchased 5,500,000 5,500,000 Securities sold under agreements to repurchase 213,813,503 213,813,503 5,253,048 5,253,048
Cash and cash equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. Investment securities - For investment securities, fair values are based on quoted market prices. Loans receivable - The fair value was estimated by discounting approximate cash flows of the portfolio to achieve a current market yield. Demand deposits, savings deposits and certificates of deposit - The fair value of demand deposits and savings deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. Advances from the Federal Home Loan Bank, federal funds purchased, securities sold under agreements to repurchase and loan payable The fair value is estimated to be the amount payable at the reporting date. Commitments to extend credit and letters of credit - The majority of the Bank's commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. No adjustment was made to the entry-value interest rates for changes in credit performing commercial loans and real estate loans for which there are no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the entry-value interest rates along with the general reserves applicable to the performing commercial and real estate loan portfolios for which there are no known credit concerns result in a fair valuation of such loans on an entry-value basis. 46 The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997 and 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since December 31, 1997 and 1996, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. 21. INTEREST RATE RISK The Company's exposure to interest rate risk results from the difference in maturities on interest-bearing liabilities and interest-earning assets and the volatility of interest rates. Because the Company's assets have a shorter maturity than its liabilities, the Company's earnings will tend to be negatively affected during periods of declining interest rates. Conversely, this mismatch should benefit the Company during periods of rising interest rates. Management monitors the relationship between the interest rate sensitivity of the Company's assets and liabilities. 22. GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT On March 17, 1997, the Trust, a statutory business trust created under Delaware law that is a subsidiary of the Company, issued $25 million, 9.85% Preferred Securities ("Preferred Securities") with a stated value and liquidation preference of $25 per share. This Trust's obligations under the Preferred Securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the Preferred Securities of the Trust were utilized by the Trust to invest in $25 million of 9.85% Junior Subordinated Debentures (the "Debentures") of the Company. The Debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Interest on the Preferred Securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the Debentures prior to the maturity date of March 31, 2027, on or after March 31, 2002, at 100% of the stated liquidation amount, plus accrued and unpaid distributions, if any, to the redemption date. Under the occurrence of certain events, the Company may redeem in whole, but not in part, the Debentures prior to March 31, 2002. Proceeds from any redemption of the Debentures would cause a mandatory redemption of the Preferred Securities having an aggregate liquidation amount equal to the principal amount of the Debentures redeemed. On April 9, 1997, the underwriters for the Preferred Securities exercised their right to purchase an additional $3,750,000 of the Preferred Securities on the same terms as the original issuance to cover over-allotments. The proceeds from the sale of the Preferred Securities were utilized by the Trust to invest in $3,750,000 of Debentures of the Company. The Trust is a wholly-owned subsidiary of the Company, has no independent operations and issued securities that contained a full and unconditional guarantee of its parent, the Company. 23. ACQUISITIONS (UNAUDITED) On February 26, 1998, the Bank purchased one branch from First Savings Bank, Woodbridge, N.J. The Bank acquired approximately $25,228,000 of deposit liabilities, $118,000 in equipment, $34,000 in loans and $119,000 in cash. The Bank paid a premium of $1,085,000, which will be amortized over seven years. 47 24. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Statements of Financial Condition December 31, ---------------------------------- 1997 1996 Assets Cash $ 269,709 $ 27,187 Investments in subsidiaries 81,619,589 33,294,851 Prepaid expense 1,466,298 95,417 Accrued interest and other assets 28,889 - ------------- ------------ Total $ 83,384,485 $ 33,417,455 ============= ============ Liabilities and Shareholders' Equity Loan payable $ 6,000,000 Other liabilities $ 2,186 2,879 ------------- ------------ Total liabilities 2,186 6,002,879 Guaranteed preferred beneficial interest in subordinated debt 28,750,000 Shareholders' Equity 54,632,299 27,414,576 ------------- ------------ Total $ 83,384,485 $ 33,417,455 ============= ============
Condensed Statements of Income
Years ended December 31, ------------------------------------------ 1997 1996 1995 Net interest expense $(2,387,201) $ (1,888) Other income 48,750 15,909 12,278 Expenses (133,238) (16,271) (27,025) ----------- ----------- ----------- Loss before equity in undistributed income of subsidiaries and income tax expense (2,471,689) (2,250) (14,747) Equity in undistributed income of subsidiaries 6,643,038 3,014,893 2,833,417 Income tax expense -- -- -- ----------- ----------- ----------- Net income $ 4,171,349 $ 3,012,643 $ 2,818,670 =========== =========== ===========
48 Condensed Statements of Cash Flows
Years ended December 31, ----------------------------------------- 1997 1996 1995 Operating activities: Net income $ 4,171,349 $ 3,012,643 $ 2,818,670 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 9,756 8,360 Undistributed income of subsidiaries (6,643,038) (3,014,893) (2,833,417) Gain on sale of investment securities available for sale (48,750) Tax benefit from exercise of non-qualified stock options (net) (110,000) Changes in assets and liabilities which (used) provided cash: Accrued interest and other assets (1,399,770) (57,241) 9,665 ----------- ------------ ------------ Accounts payable and accrued expenses (693) 2,879 - ----------- ------------ ------------ Net cash (used in) provided by operating activities (3,920,902) (156,856) 3,278 ----------- ------------ ------------ Investing activities: Purchases of investment securities available for sale (1,200,000) Proceeds from sale of investment securities available for sale 1,248,750 Dividend from subsidiary 1,565,937 Advances to subsidiary (42,116,000) (7,100,000) (1,700,000) ----------- ------------ ------------ Net cash used in investing activities (40,501,313) (7,100,000) (1,700,000) ----------- ------------ ------------ Financing activities: Net borrowings under line of credit agreement 6,000,000 Repayments of short-term borrowings (6,000,000) Exercise of stock options 37,768 1,126,984 605,358 Proceeds from issuance of guaranteed preferred beneficial interest in subordinated debt 28,750,000 Proceeds from issuance of commons stock 21,881,711 Payment for fractional interest resulting from stock split (1,619) Payments for fractional interests resulting from stock dividend (3,123) (2,146) - ----------- ------------ ------------ Net cash provided by financing activities 44,664,737 7,124,838 865,358 ----------- ------------ ------------ Increase (decrease) in cash 242,522 (132,018) (831,364) Cash, beginning of year 27,187 159,205 990,569 ----------- ------------ ------------ Cash, end of year $ 269,709 $ 27,187 $ 159,205 =========== ============ ============
49 25. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents summarized quarterly data for each of the last two years restated for stock dividends and stock splits paid (dollars are in thousands):
Three Months Ended ----------------------------------------------------------------------------------------------------- December 31, September 30 June 30, March 31, December 31, September 30, June 30, March 31 1997 1997 1997 1997 1996 1996 1996 1996 ---- ---- ---- ---- ---- ---- ---- ---- Interest income $ 16,288 $ 12,751 $ 9,893 $ 8,252 $ 7,982 $ 7,917 $ 6,917 $ 6,454 Interest expense 8,898 6,817 4,969 3,723 3,507 3,429 3,001 2,597 -------- --------- -------- --------- -------- ------- ------- -------- Net interest income 7,390 5,934 4,924 4,529 4,475 4,488 3,916 3,857 Provision for loan losses 420 420 405 420 225 225 225 225 Other operating income 864 597 369 408 449 453 356 502 Other expenses 5,687 4,427 3,760 3,573 3,492 3,608 2,991 3,129 -------- --------- -------- --------- -------- ------- ------- -------- Income before income taxes 2,147 1,684 1,128 944 1,207 1,108 1,056 1,005 Income taxes 654 489 325 265 361 333 332 336 -------- --------- -------- --------- -------- ------- ------- -------- Net income $ 1,493 $ 1,195 $ 803 $ 679 $ 846 $ 775 $ 724 $ 669 ======== ========= ======== ========= ======== ======= ======= ======== Basic earnings per share $ 0.26 $ 0.27 $ 0.19 $ 0.15 $ 0.19 $ 0.18 $ 0.17 $ 0.17 ======== ========= ======== ========= ======== ======= ======= ======== Diluted earnings per share $ 0.26 $ 0.24 $ 0.17 $ 0.15 $ 0.17 $ 0.17 $ 0.17 $ 0.16 ======== ========= ======== ========= ======== ======= ======= ========
Basic and diluted earnings per share is computed independently for each of the quarters presented. Consequently, the sum of the quarters may not equal the earnings per share. The Company's common stock began public trading on August 29,1996.
Prices of common stock: High $ 22.66 $ 14.67 $ 10.45 $ 9.84 $ 9.42 $ 9.07 N/A N/A Low 14.33 9.89 9.10 8.67 8.47 8.47 N/A N/A
50 CORPORATE DIRECTORY SUN BANCORP, INC. SUN NATIONAL BANK DIRECTORS DIRECTORS Bernard A. Brown Bernard A. Brown Adolph F. Calovi Adolph F. Calovi Sidney R. Brown Linwood C. Gerber Philip W. Koebig, III Douglas J. Heun, CPA Peter Galetto, Jr. Philip W. Koebig, III Anne E. Koons Vito J. Marseglia. Joel B. Martin, CPA Anthony Russo, III Edward H. Salmon, PhD William H. Thompson, DDS Kevin K. Walsh, PhD OFFICERS Executive Management Bernard A. Brown Bernard A. Brown Chairman of the Board Chairman of the Board Adolph F. Calovi Philip W. Koebig, III President and CEO President and CEO Philip W. Koebig, III James S. Killough Executive Vice President Executive Vice President Sidney R. Brown Robert F. Mack Vice Chairman, Secretary and Treasurer Executive Vice President and Cashier Robert F. Mack Harry G. Miller Controller Executive Vice President Carol A. Pringle Bart A. Speziali Assistant Secretary Executive Vice President Catherine Romeo Edward F. Madden Auditor Senior Vice President 51 Officers Dorothy Antrim Vice President Darlene Beamsderfer Assistant Vice President Patricia M. Bianca Assistant Cashier Erika O. Bonsanto Assistant Cashier Roxanne C. Booker Assistant Cashier William J. Bugdon Assistant Vice President Devon C. Callan Assistant Vice President Douglas Conover Vice President Catherine M. Crosby Assistant Vice President Ernest Current Administrative Services Officer Darla A. D'Antonio Assistant Cashier Robert E. Davis, Jr. Regional Vice President Roland J. Dey Vice President Fern K. Dirkes Assistant Vice President Sharon A. Draine Assistant Vice President Darlene V. Driscoll Assistant Cashier Vicki L. Duffield Assistant Vice President Ronald J. Durborow Vice President and Regional Manager Arlene H. Elrod Assistant Vice President Bruce E. Engle Vice President James G. Erickson Regional Vice President Duncan H. Farquhar Vice President Sandra Ferrarie Vice President Elizabeth Hackney Assistant Vice President John A. Hall Vice President Marjorie H. Hall Vice President Mark A. Hall Vice President John Hancq Vice President Marjorie H. Hart Director, Human Resources Barbara L. Hawryliw Audit Officer Daniel F. Hires Regional Vice President Susan Hoffman Assistant Vice President Candace L. Johnson Assistant Vice President Hugh E. Keefe Vice President D. Gail Knight Assistant Vice President Allison K. Kruse Marketing Officer Adriana B. Lindner Assistant Vice President Michael W. Lloyd Vice President and Regional Manager Anthony Lombardo Assistant Controller Kevin M. Loughlin Assistant Vice President 52 William J. MacDonald Vice President Bernard J. Maloney Assistant Cashier Anthony O. Marinaccio Vice President William B. McDowell Assistant Vice President Mariluz McVey Vice President, and Regional Manager Holly L. Milita Assistant Vice President Priscilla A. Miller Assistant Vice President Yvette M. Miller Assistant Vice President William T. Moyer Controller Nancy H. Muldowney Vice President and Regional Manager Patricia A. Munson Assistant Vice President Louis F. Nell Vice President Bette L. Nuss Vice President and Regional Manager Henry J. Obergfell Regional Vice President Salvatore Panzino Assistant Vice President Margarida R. Pereira Assistant Cashier Mary Alice Petzinger Assistant Cashier Donna M. Plunkett Assistant Vice President Robert E. Pollard Assistant Controller Roy S. Probst Vice President David A. Repici Vice President Gary J. Riordan Assistant Vice President James D. Robson Vice President Catherine R. Romeo Vice President/Auditor Steven A. Ryan Vice President Jan M. Sanger Assistant Vice President Harry B. Sauers Vice President/Loan Review Officer Ronald A. Seagraves Director of Corporate Development Richard J. Simone Vice President John Skoglund Vice President Kimberlee J. Studzinski Assistant Vice President Richard P. Tocci Vice President Lisa Varesio Assistant Cashier Cynthia L. Volk Assistant Cashier Edward W. Wahl Regional Vice President John G. Watkins Vice President Ann O. Wigglesworth Vice President Charlotte Wigglesworth Assistant Cashier David A. White Assistant Vice President Beverly A. Wright Assistant Cashier 53 ADVISORY BOARD MEMBER DIRECTORY ATLANTIC COUNTY - -------------------------------------------------------------------- Robert J. Bray Orthodontist Paula R. Hetzel, Esq. Attorney Thomas J. Kuhar Ole Hansen & Sons, Inc. Richard S. Mairone, Esq. Perskie Nehmad & Perillo, PA James J. McCullough S.J. Transportation Authority Robert Nichols Admiral Nissan, Inc. Frank Rich, Jr. Rich Fire Protection Frank J. Siracusa Frank J. Siracusa & Son Richard Traa Traa Corp. Mike Turner Turner Electrical Inc. Donald B. Vass BURLINGTON COUNTY - ----------------------------------------------------------------------- Ronald L. Allen Allen's Oil & Propane, Inc. Arthur Brooks Fort & Hargrove Thomas Budd T.H. Budd & Sons, Inc. Leonard V. Fox, Jr. Janney Montgomery Scott, Inc. Philip E. Haines, Esq. Attorney Eric Johnson Johnson's Corner Farm Robert Meyer Bob Meyer Communities, Inc. Thomas A. Paparone Paparone Housing Co., Inc. Frederick Pond Pond & Spitz Building Corp. Mike Quick Quick-Wright Electrical Joseph P. Schooley Schooley Electric, Inc. BURLINGTON COUNTY - ----------------------------------------------------------------------- Marcel Schulmann, MD Physician Stephen Spitz Pond & Spitz Building Corp. James C. Wagner Wagner Sharer Murtaugh & CAMDEN COUNTY - ----------------------------------------------------------------------- Fred S. Berlinsky Markeim-Chalmers, Inc. Richard B. Charny, Esq. Weiner & Charny, P.A. Reynold P. Cicalese, CPA Alloy Silverstein Shapiro Adams Leon D. Dembo, Esq. Dembo & Saldutti Michael P. Edmondson Wheat First Union William Green Wilmar Industries, Inc. Jerome C. Pontillo, Esq. The Fentell Corp. Jo Surpin Mediq Consulting Group Bud Tresch Redy-Mixt Konkrete HAMMONTON - ------------------------------------------------------------------------ Arthur R. Brown, Jr. Secretary of Agriculture State of New Jersey Joseph Continisio, Jr. Joseph Continisio Builders, Inc. Carmen T. Grasso C.T. Grasso, Inc. Russell Lucca Lucca's Freezer & Cold Ralph Morano, Sr. J. Morano & Sons, Inc. Anthony M. Mortellite, Sr. Mortellite Enterprises 54 CAPE MAY COUNTY - ----------------------------------------------------------------------- Curtis Bashaw The Virginia Hotel Joseph M. Brennan, CPA Tracey Heun Brennan & Co. Bill Brown William J. Brown Agency Michael J. Caruso, DO Atlantic Eye Center Albert Donzanti Aldon Homes & Development Joseph S. Franco Ocean Front Hotels Bill Kindle Kindle Auto Plaza Vincent L. LaManna, Jr., Esq Attorney Vince Orlando Engineering Design Assoc, PA Jeff Reichle Lund's Fisheries Malcolm Robertson Driftwood Camping Resort, Inc. Robert I. Salasin, MD Cape Associates in Surgery, PA Charles Sansone Robert Smeltzer Smeltzer & Sons Feed & Lewis J. Tozour Coldwell Banker Township Realty Ernie Utsch Utsch's Marina MERCER COUNTY - ----------------------------------------------------------------------- Michael D. Briehler Harold R. Levenson, CPA Oring, Levenson, Burness, P.A. Paul N. Watter Szaferman, Lakind, Blumstein, Watter & Blader, P.C. OCEAN COUNTY - ------------------------------------------------------------------------ Stephen M. Cors Superior Mortgage Company Steven Eisenberg Terrace Tavern John Ferringo Tucker and Owl Tree Restuarants Anthony T. Godfrey S.T. Associates M. Dean Haines Ocean County Clerk T. Brian Holloway Mystic Shores, Inc. Robert Lange Kenneth B. Maxwell Kenneth B. Maxwell, Inc. Joseph T. Mezzina Mezzina Real Estate George F. Murphy, Esq. Dasti, Murhpy & Wellerson John M. Parsons Retired James N. Rutter Former Ocean Co. Sheriff John Szymanski Tupper Lake Homes SALEM COUNTY - ------------------------------------------------------------------------ Herb Devonshire Budd Division, Liberty Plastics, Inc. Michael S. Warner, CPA Warner & company VINELAND - ------------------------------------------------------------------------ Ralph A. Acevedo Educator Catherine J. Arpino Newcomb Foundation Dominick P. Baruffi, II Jersey Panel Corp./ Baruffi Associates Fred J. Bernardini, Sr. Bernal Mechanical Contractors Ginger L. Chase Sir Speedy Printing Mark I. Fisher B&B Poultry Harry E. Hearing, CPA Romano, Hearing & Testa, CPA David G. Manders Manders-Merighi Associates Ronald G. Rossi Joseph Pontiac-Isuzu Rocco J. Tedesco, Esq. Kavesh, Pancari, Tedesco & Pancari Gerard Velazquez, III Community Builders Scott J. Zucca L.J. Zucca, Inc. 55 Administrative Offices 226 Landis Avenue Vineland, NJ 08360 (609) 691-7700 Subsidiaries Med-Vine, Inc. 1105 North Market Street Wilmington, DE 19801 Sun Capital Trust 226 Landis Avenue Vineland, NJ 08360 Financial Service Center Locations Atlantic County Atlantic City 2028 Atlantic Avenue Atlantic City, NJ 08401 345-8272 Brigantine 3900 Atlantic Avenue Brigantine, NJ 08203 266-2100 Hammonton 12th Street and First Avenue Hammonton, NJ 08037 567-5880 Egg Harbor Township 3100 Hingston Avenue Egg Harbor, NJ 08234 272-8200 Linwood 599 New Road Linwood, NJ 08221 924-9191 Northfield Mainland Plaza 501 Tilton Road Northfield, NJ 08225 645-3200 Somers Point 521 New Road Somers Point, NJ 08244 653-8200 Weymouth 903 Blvd., Route 50 Mays Landing, NJ 08330 625-9152 Burlington County Florence 220 West Front Street Florence, NJ 08518 499-4960 Maple Shade 380 S. Lenola Road Maple Shade, NJ 08052 222-0200 Medford 99 Hartford Road Medford, NJ 08055 654-7600 Riverside 15-17 Scott Street Riverside, NJ 080575 461-0461 Camden County Clementon 1468 Blackwood-Clementon Road Clementon, NJ 08021 784-4242 Lindenwold 430 Gibbsboro Road Lindenwold, NJ 08021 346-3800 Merchantville 47 South Centre Street Merchantville, NJ 08109 622-3800 56 Cape May County Cape May 941 Columbia Avenue Cape May, NJ 08204 898-2120 Cape May Court House 1011 B Route 9 South CMCH, NJ 08210 465-7197 Greenfield 71 Route 50 Greenfield, NJ 08230 390-3418 Marmora 108 Roosevelt Blvd. Marmora, NJ 08223 390-3529 Tuckahoe 2201 Route 50 Tuckahoe, NJ 08250 628-2662 Cumberland County Millville 1026 North High Street Millville, NJ 08332 293-0800 Vineland 401 Landis Avenue Vineland, NJ 08360 205-0700 Vineland - East Landis 1180 E. Landis Avenue Vineland, NJ 08360 205-0900 Mercer County Trenton 226 South Broad Street Trenton, NJ 08608 392-3300 Chambersburg 695 Chambers Street Trenton, NJ 08611 396-1900 Ewing 1660 North Olden Ave. Trenton, NJ 08638 530-9653 Hamilton Square 411 Route 33 Trenton, NJ 08619 890-7447 Middlesex County Forrestal Village 2 Village Boulevard Princeton, NJ 08540 987-8809 Monmouth County Eatontown 158 Wycoff Road Eatontown, NJ 07724 (732) 542-4800 Ocean County Barnegat 311 South Main Street Barnegat, NJ 08005 698-4300 Long Beach Island 1211 Long Beach Blvd. Ship Bottom, NJ 08008 361-8011 Manahawkin Route 72 East Manahawkin, NJ 08050 597-1800 Mystic Island 800 Radio Road Little Egg Harbor, NJ 08087 296-1773 Toms River 601 Route 37 West Toms River, NJ 08753 (732) 240-2922 Tuckerton 540 Route 9 Tuckerton, NJ 08087 296-1700 Salem County Carney's Point 270 Georgetown Road Carney's Point, NJ 08069 299-5770 Salem 175 West Broadway Salem, NJ 08079 935-6560 Woodstown 8 North Main Street Woodstown, NJ 08098 769-2466 Somerset County Rocky Hill 1185 Route 206 Montgomery Twp, NJ 08540 497-0500 Additional Information For financial information, including the annual report, quarterly reports and reports to the Securities and Exchange Commission on Form 10-K, contact Sun Bancorp, Inc. Shareholder Relations, 226 Landis Avenue, Vineland, NJ 08360. 57 Products and Services
Deposit Products Commercial Consumer Commercial Checking Super Interest Checking Small Business Checking Regular Checking Sun Preferred Business Checking NJ Consumer Checking Business Money Market Money Market Non-Profit Checking Sun Gold Relationship Account Super Interest Sun Ray Relationship Account Sole Proprietorship Checking Young Savers Master Accounting Sunshine Savings Attorney Trust Sun Premium Savings Business Savings Certificates of Deposit Certificates of Deposit Jumbo Certificates of Deposit Simplified Employee Pension (SEP) Sun Rise Certificates of Deposit Microlink Electronic Banking Sun Power Certificates of Deposit Cash Control Investment Account Individual Retirement Account Lock Box Sun Growth IRA Controlled Disbursement Holiday Clubs Account Reconciliation Account Analysis Loan Products Commercial Consumer Commercial Term Loans Home Equity Loans Lines of Credit Residential Mortgages Commercial Real Estate Loans Personal Loans Equipment Loans Automobile Loans Small Business Administration Loans Small Business Loans Cash to Spare Services ATM Access Sun National Bank Check Card Automatic Transfers Bank by Mail Coin and Currency Services Repurchase Agreements Federal Tax Depository Services Merchant Credit Card Services Safe Deposit Boxes Telephone Transfers Wire Transfer Services Night Depository SunDial 24-Hour Telephone Banking
58 EX-21 4 EXHIBIT 21 EXHIBIT 21 EXHIBIT 21 Subsidiaries of the Company Subsidiaries Percentage Owned Jurisdiction of Incorporation - ------------ ---------------- ----------------------------- Sun National Bank 100% United States Med-Vine, Inc. (1) 100% Delaware Sun Capital Trust 100% Delaware (1) Med-Vine, Inc. is a wholly owned subsidiary of Sun National Bank EX-23 5 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-32681 of Sun Bancorp, Inc. on Form S-8 of our report dated February 1, 1998, appearing in this Annual Report on Form 10-K of Sun Bancorp, Inc. for the year ended December 31, 1997 /s/ Deloitte & Touche LLP - -------------------------- DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 31, 1998 EX-27 6 ARTICLE 9 FDS FOR FORM 10-K405
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL REPORT ON FORM 10-K405 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1000 YEAR DEC-31-1997 DEC-31-1997 34,061 0 0 0 576,278 576,278 576,278 431,955 4,194 1,099,973 695,388 316,314 4,889 0 28,750 0 4,014 50,619 1,099,973 33,130 13,410 645 47,185 16,458 24,407 22,778 1,665 207 17,445 5,904 5,904 0 0 4,171 0.91 0.82 3.89 897 1,313 0 0 2,595 102 36 4,194 4,194 0 644
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