Selected Financial Data
At or for the Years Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Selected Balance Sheet Data:
Assets $2,112,172 $1,929,425 $2,002,529 $1,980,861 $1,515,404
Cash and investments 800,425 739,201 848,421 948,898 739,274
Loans receivable (net) 1,217,008 1,089,605 1,031,844 901,211 690,002
Deposits 1,690,462 1,572,338 1,410,867 1,291,326 1,025,398
Borrowings and securities sold
under agreements to repurchase 205,280 160,096 407,279 528,752 337,665
Guaranteed preferred beneficial
interest in Company's
subordinated debt 59,274 57,327 57,327 57,838 58,650
Shareholders' equity 145,623 129,960 117,634 91,104 78,333
Selected Results of Operations:
Interest income $112,894 $126,825 $150,656 $114,254 $82,789
Net interest income 65,038 56,758 61,248 53,174 37,695
Provision for loan losses 4,175 7,795 2,580 1,989 2,133
Net interest income after
provision for loan losses 60,863 48,963 58,668 51,185 35,562
Non-interest income 13,178 10,516 8,183 9,751 7,400
Non-interest expense 58,965 57,695 54,447 46,955 30,447
Net income 10,378 1,328 8,780 9,714 8,784
Per Share Data:
Net earnings
Basic (1) $ 0.86 $ 0.12 $ 0.82 $0.98 $1.12
Diluted (1) $ 0.83 $ 0.12 $ 0.81 $0.91 $0.99
Book Value $13.02 $11.73 $10.91 $8.57 $9.01
Selected Ratios:
Return on average assets (1) 0.50% 0.07% 0.43% 0.58% 0.75%
Return on average equity (1) 7.63% 1.05% 8.85% 11.08% 14.29%
Ratio of equity to assets 6.55% 6.42% 5.87% 4.60% 5.17%
Cash Basis Data and Ratios (1) (2):
Cash basis earnings per share:
Basic $1.11 $0.60 $1.31 $1.41 $1.45
Diluted $1.07 $0.59 $1.28 $1.31 $1.28
Cash basis:
Return on average assets 0.63% 0.33% 0.69% 0.84% 0.97%
Return on average equity 9.65% 5.14% 14.10% 15.89% 18.49%
(1) - Beginning in 2002, new accounting standards eliminated the amortization of
goodwill, which is included in previous years' net earnings and returns. See
Note 2 of the Notes to Consolidated Financial Statements contained herein for
further discussion.
(2) - The Company's cash basis data and ratios are determined by adding back to
reported GAAP net income the non-cash amortization of intangible assets, net of
associated tax benefits. See Management's Discussion and Analysis of Financial
Condition for the reconciliation from reported results to cash basis data and
ratios.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(All dollar amounts presented in the tables,
except per share amounts, are in thousands)
Overview
Sun Bancorp, Inc. (the "Company") is a bank holding company headquartered in
Vineland, New Jersey. The Company's principal subsidiary is Sun National Bank
(the "Bank"). At December 31, 2002, the Company had total assets of $2.1
billion, total deposits of $1.7 billion and total shareholders' equity of $145.6
million. The Company's principal business is to serve as a holding company for
the Bank. As a registered bank holding company, the Company is subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "Federal Reserve").
Through the Bank, the Company provides consumer and business banking services
through five regional banking groups and 75 community banking centers located in
13 counties in Southern and Central New Jersey, in the contiguous New Castle
County market in Delaware, and in Philadelphia, Pennsylvania. Through local
management personnel with community knowledge, each regional banking group is
comprised of three functional business lines, commercial, small business and
community banking that are empowered with localized decision-making to better
serve their communities.
The Bank offers comprehensive lending, depository and financial services to its
customers and marketplace. The Bank's lending services to businesses include
commercial, commercial real estate, and small business loans. The Bank's
commercial deposit services include business checking accounts, and cash
management services such as electronic banking, sweep accounts, lock box
services, Internet banking, PC banking and controlled disbursement services. The
Bank's lending services to retail customers include home equity loans,
residential mortgage loans, and installment loans. The Bank funds these lending
activities primarily through retail deposits, repurchase agreements with
customers and advances from the Federal Home Loan Bank. The Bank's retail
deposit services include checking accounts, savings accounts, money market
deposits, certificates of deposit and individual retirement accounts. Through a
third-party arrangement, the Bank also offers mutual funds, securities
brokerage, annuities and investment advisory services. The Bank also offers
equipment leasing and SBA loans and is a designated Preferred Lender with the
New Jersey Economic Development Authority.
The Bank made significant progress in 2002 and management believes that the Bank
is positioned to become a top performing regional community bank. Difficult
economic times for the banking industry during 2002 were compounded by record
low rates and shrinking margins that tested balance sheets and portfolios. The
Bank not only weathered these challenges but also saw the success of its
repositioning strategy improve performance across the Company. The Bank's
regionalized and relationship banking approach combined with basic banking
fundamentals are reflected by the improved performance in growth of loans,
deposits and non-interest income.
The following discussion focuses on the major components of the Company's
operations and presents an overview of the significant changes in the results of
operations for the past three years and financial condition during the past two
fiscal years. This discussion should be reviewed in conjunction with the
Consolidated Financial Statements and notes thereto presented elsewhere in this
Annual Report.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 2002 was $10.4 million, or $0.83 per
share, in comparison to $1.3 million, or $0.12 per share for the year ended
December 31, 2001. As more fully described below, the 681.5% increase in net
income was attributable to an increase in net interest income of $8.3 million, a
decrease in provision for loan losses of $3.6 million, an increase in
non-interest income of $2.7 million and the elimination of goodwill amortization
during 2002 of $3.6 million. These increases to net income were partially offset
by an increase in non-interest expense of $970,000 and an increase in income tax
expense of $4.5 million compared to the results of operations for 2001.
Net income for the year ended December 31, 2001 was $1.3 million, or $0.12 per
share, in comparison to $8.8 million, or $0.81 per share for the year ended
December 31, 2000. The decrease in net income was attributable to a decrease in
net interest income of $4.5 million, an increase in provision for loan losses of
$5.2 million and an increase in non-interest expense of $3.5 million. These
decreases to net income were partially offset by an increase in non-interest
income of $2.3 million and a decrease in income tax expense of $3.5 million.
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 earned on interest-earning assets (primarily loans and
investment securities)
2
and interest paid on interest-bearing liabilities (primarily deposits and
borrowed funds). Net interest income depends on the volume and interest rate
earned on interest-earning assets and the volume and interest rate paid on
interest-bearing liabilities.
The following table sets forth a summary of average daily balances with
corresponding interest income and interest expense as well as average yield and
cost information for the periods presented.
Years Ended December 31,
------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ---------------------------- ----------------------------
Avg. Avg. Avg.
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ------- ----- ------- -------- ---- ------- -------- ----
Loans receivable (1), (2):
Commercial and industrial $991,715 $70,134 7.07% $882,464 $71,866 8.14% $824,669 $73,834 8.95%
Home equity 32,756 1,651 5.04 23,847 1,956 8.20 25,370 2,621 10.33
Second mortgage 51,751 3,874 7.49 41,847 3,392 8.11 31,054 2,553 8.22
Residential real estate 50,542 3,384 6.70 53,572 3,985 7.44 52,122 4,171 8.00
Installment 55,508 4,779 8.61 60,118 5,401 8.98 54,106 5,174 9.56
--------- ------- ---------- ------- ---------- -------
Total loans receivable 1,182,272 83,822 7.09 1,061,848 86,600 8.16 987,321 88,353 8.95
Investment securities (3) 682,433 29,346 4.30 692,927 39,423 5.69 893,268 62,661 7.01
Interest-bearing deposit with banks 10,318 88 0.85 12,013 323 2.69 5,095 417 8.18
Federal funds sold 44,891 703 1.57 39,388 1,468 3.73 8,779 595 6.78
--------- ------- ---------- ------- ---------- -------
Total interest-earning assets 1,919,914 113,959 5.94 1,806,176 127,814 7.08 1,894,463 152,026 8.02
Non-interest-earning assets:
Cash and due from banks 60,705 62,837 62,443
Bank properties and equipment 28,634 28,865 30,570
Goodwill and intangible assets 40,076 49,071 57,039
Other assets, net 28,366 17,746 (4,625)
---------- ---------- ----------
Total non-interest-earning assets 157,781 158,519 145,427
---------- ---------- ----------
Total assets $2,077,695 $1,964,695 $2,039,890
========== ========== ==========
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 584,808 10,789 1.84 $ 431,196 12,412 2.88 $ 336,773 12,321 3.66
Savings deposits 314,208 6,821 2.17 214,849 5,929 2.76 154,091 3,418 2.22
Time deposits 449,438 17,493 3.89 593,352 33,917 5.72 643,971 37,310 5.79
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits 1,348,454 35,103 2.60 1,239,397 52,258 4.22 1,134,835 53,049 4.67
---------- ------- ---------- ------- ---------- -------
Borrowed money:
Repurchase agreements with
customers 74,602 739 0.99 82,318 2,436 2.96 79,224 4,446 5.61
Repurchase agreements with FHLB - - - 129,098 6,456 5.00 334,007 21,354 6.39
FHLB advances 147,130 7,347 4.99 52,789 3,413 6.47 73,101 4,629 6.33
Federal funds purchased 682 15 2.20 534 30 5.62 5,790 441 7.62
Other borrowed money 3,242 171 5.27 1,160 36 3.10 1,160 52 4.48
---------- ------- ---------- ------- ---------- -------
Total borrowed money 225,656 8,272 3.67 265,899 12,371 4.65 493,282 30,922 6.27
Guaranteed preferred beneficial
interest in Company's
subordinated debt 55,536 4,481 8.07 57,327 5,438 9.49 57,344 5,437 9.48
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities 1,629,646 47,856 2.94 1,562,623 70,067 4.48 1,685,461 89,408 5.30
---------- ------- ---------- ------- ---------- -------
Non-interest-bearing demand deposits 287,164 265,569 245,989
Other liabilities 24,788 10,299 9,273
---------- ---------- ----------
Non-interest-bearing
liabilities 311,952 275,868 255,262
---------- ---------- ----------
Total liabilities 1,941,598 1,838,491 1,940,723
---------- ---------- ----------
Shareholders' equity 136,097 126,204 99,167
---------- ---------- ----------
Total liabilities and
shareholders' equity $2,077,695 $1,964,695 $2,039,890
========== ========== ==========
Net interest income $66,103 $57,747 $62,618
======= ======= =======
Interest rate spread (4) 3.00% 2.60% 2.72%
====== ====== ======
Net yield on interest-earning assets(5) 3.44% 3.20% 3.31%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 117.81% 115.59% 112.40%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans (see "Non-Performing and Problem
Assets").
(2) Loan fees are included in interest income and the amount is not material
for this analysis.
(3) Interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a 34% marginal federal tax rate for all periods.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
3
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) and (ii) changes in rate
(changes in rate multiplied by old average volume). The combined effect of
changes in both volume and rate has been allocated to volume or rate changes in
proportion to the absolute dollar amounts of the change in each.
Years Ended December 31,
-------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
------------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
Interest income:
Loans receivable:
Commercial and industrial $ 8,330 $(10,062) $ (1,732) $ 4,970 $ (6,938) $ (1,968)
Home equity 592 (897) (305) (150) (515) (665)
Second mortgage 756 (274) 482 876 (37) 839
Residential real estate (217) (384) (601) 114 (300) (186)
Installment (403) (219) (622) 553 (326) 227
-------- -------- -------- -------- -------- --------
Total loans receivable 9,058 (11,836) (2,778) 6,363 (8,116) (1,753)
Investment securities (589) (9,488) (10,077) (12,613) (10,625) (23,238)
Interest-bearing deposit with banks (40) (195) (235) 311 (405) (94)
Federal funds sold 182 (947) (765) 1,248 (375) 873
-------- -------- -------- -------- -------- --------
Total interest-earning assets $ 8,611 $(22,466) $(13,855) $ (4,691) $(19,521) $(24,212)
-------- -------- -------- -------- -------- --------
Interest expense:
Deposit accounts:
Demand deposits $ 301 $ (1,924) $ (1,623) $ 3,036 $ (2,945) $ 91
Savings deposits 1,043 (151) 892 1,551 960 2,511
Time deposits (7,093) (9,331) (16,424) (2,899) (494) (3,393)
-------- -------- -------- -------- -------- --------
Total deposits accounts (5,749) (11,406) (17,155) 1,688 (2,479) (791)
Borrowings:
Repurchase agreements with customers (210) (1,487) (1,697) 167 (2,177) (2,010)
Repurchase agreements with FHLB (6,456) -- (6,456) (10,994) (3,904) (14,898)
FHLB advances 3,834 100 3,934 (1,312) 96 (1,216)
Federal funds purchased (2) (13) (15) (316) (95) (411)
Other borrowed money 97 38 135 -- (16) (16)
-------- -------- -------- -------- -------- --------
Total borrowed money (2,737) (1,362) (4,099) (12,455) (6,096) (18,551)
Guaranteed preferred beneficial
interest in Company's subordinated debt (166) (791) (957) 1 -- 1
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ (8,652) $(13,559) $(22,211) $(10,766) $ (8,575) $(19,341)
-------- -------- -------- -------- -------- --------
Net change in interest income $ 17,263 $ (8,907) $ 8,356 $ 6,075 $(10,946) $ (4,871)
======== ======== ======== ======== ======== ========
The increase in net interest income (on a tax-equivalent basis) of $8.4 million
from the year ended December 30, 2002 compared to the year ended December 30,
2001 was due to a $22.2 million decrease in interest expense partially offset by
a $13.9 million decrease in interest income (on a tax-equivalent basis). Net
yield on interest-earning assets increased to 3.44% in 2002 from 3.20% in 2001.
Net interest spread increased 40 basis points in 2002 compared to 2001. In the
lower interest rate environment which characterized 2002 compared to 2001, the
Company achieved a decline in funding cost of 154 basis points which exceeded
the decline in earning asset yields of 114 basis points.
Net interest income (on a tax-equivalent basis) increased $8.4 million or 14.5%
to $66.1 million for 2002 compared to $57.7 million for 2001. This increase was
due to a combination of decreased interest rates, increased average
interest-earning assets and decreased average time deposits and total borrowed
money. The decline in interest rates contributed to a decrease of $22.5 million
of interest income on total interest-earning assets, offset by a decrease of
$13.6 million of interest expense on total interest-bearing liabilities, for a
net decrease in net interest income of $8.9 million. Of the total increase in
net interest income, $17.3 million was from the volume component. An increase in
average interest-earning assets from $1.8 billion for 2001 to $1.9 billion for
2002 increased net interest income by $8.6 million. An increase of $7.1 million
was due to the decrease in average time deposits from $593.4 million for 2001 to
$449.4 million for 2002 and a $2.7 million increase was due to the decrease in
average total borrowed money from $265.9 million for 2001 to $225.7 million for
2002. These increases were partially offset by a decrease of $1.3 million due to
an increase in average core deposit accounts from $646.0 million for 2001 to
$899.0 million for 2002.
4
Interest income (on a tax-equivalent basis) decreased $13.9 million, or 10.8% to
$114.0 million for the year ended December 31, 2002 compared to $127.8 million
for the same period in 2001. The decrease in interest income was due to the
continued decline in interest rates, which lowered the yield on average
interest-earning assets by 114 basis points. Interest income (on a
tax-equivalent basis) on investment securities decreased $10.1 million caused by
a decrease in yield of 139 basis points and a decrease in the average balance
from $692.9 million for 2001 to $682.4 million for 2002. The increase in average
balance of loans receivable from $1.06 billion for 2001 to $1.20 billion for
2002 produced an increase in interest income of $9.1 million, which was offset
by the decrease in yield of 107 basis points with a decrease in interest income
of $11.8 million. In addition, interest income on interest-bearing deposits with
banks and federal funds sold decreased an aggregate $1.0 million primarily due
to a decrease in yield of 184 and 216 basis points, respectively.
Interest expense decreased $22.2 million, or 31.7% to $47.9 million for the year
ended December 31, 2002 compared to $70.1 million for the same period in 2001.
The decrease in interest expense was due primarily to the overall decrease in
market interest rates, the change in the mix of deposits between core and time
deposits, and the mix of borrowed money. The change in interest rates decreased
overall cost of funds by 154 basis points, or $13.6 million. The change in the
mix of deposits is the result of the Company's relationship pricing strategy
that has favorably increased the deposit mix to a higher concentration of lower
costing core deposits. The decrease in the average balance of time deposits from
$593.4 million for 2001 to $449.4 million for 2002 resulted in the decrease in
the volume component of interest expense of $7.1 million. The decrease in the
average balance of time deposits was partially offset with an increase in the
average balance of core deposits from $646.0 million for 2001 to $899.0 million
for 2002, resulting in the increase in the volume component of interest expense
of $1.3 million. A $4.1 million decrease in the borrowed money component of
interest expense was the result of the change in interest rates that decreased
the overall cost of funds by 98 basis points, or $1.4 million, and the planned
lengthening of the aggregate terms of borrowed money, primarily FHLB advances,
to match the longer-term assets added during the period. During 2001, the
Company fully paid off repurchase agreements with the FHLB, resulting in a
decrease of interest expense of $6.5 million.
For 2001, net interest income (on a tax-equivalent basis) decreased $4.9
million, or 7.8% to $57.7 million for 2001 compared to $62.6 million for 2000.
This decrease was primarily due to the rate component that decreased net
interest income by $10.9 million, due to the market interest rate declines
during 2001. From the volume component, a $6.1 million increase was due
primarily to the decrease in average interest-bearing liabilities from $1.7
billion for 2000 to $1.6 billion for 2001, partially offset by the decrease in
average interest-earning assets from $1.9 billion for 2000 to $1.8 billion for
2001. Additionally, the net yield on interest-earning assets of 3.20% for 2001
decreased from 3.31% for 2000. This was due to the effect of market interest
rate decreases and the mix of interest-earning assets and interest-bearing
liabilities which reduced the interest rate spread to 260 basis points in 2001
from 272 basis points in 2000.
Provision for Loan Losses. The Company recorded a provision for loan losses of
$4.2 million for 2002, a decrease of $3.6 million compared to a provision of
$7.8 million for 2001. The larger 2001 provision was a result of loan portfolio
growth, portfolio maturation, deterioration of several loans and the impact on
the Company of the overall slowing trends of the national and regional economy.
Net charge-offs were $4.9 million for the year ended December 31, 2001 compared
to net charge-offs of $1.1 million for the year ended December 31, 2002. The
ratio of allowance for loan losses to total loans increased to 1.33% at December
31, 2002 compared to 1.21% at December 31, 2001 and 1.01% at December 31, 2000.
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, 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
levels considered 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 its primary
regulator, the Office of the Comptroller of the Currency (the "OCC"), as part of
its examination process, which may result in the establishment of an additional
allowance based upon the judgment of the OCC after a review of the information
available at the time of the OCC examination.
Non-Interest Income. Non-interest income increased $2.7 million, or 25.3% for
the year ended December 31, 2002 compared to the year ended December 31, 2001.
The increase was primarily due to a $2.1 million increase in gain on sale of
investment
5
securities. The Company reported a $2.5 million gain on sale of investment
securities during 2002 compared to a $396,000 gain on sale of investment
securities during 2001.
Non-interest income increased $2.3 million, or 28.5% for the year ended December
31, 2001 compared to the year ended December 31, 2000. The increase was
primarily due to a $1.7 million increase in service charges on deposit accounts
resulting primarily from the 9.2% increase in average balance of deposits and
increased fees. During 2001, the Company continued to focus on reducing
borrowings and increasing liquidity and capital primarily through a reduction of
its securities portfolio. The Company reported a $396,000 gain on sale of
investment securities during 2001 and reported a $311,000 loss on sale of
investment securities during 2000.
Non-Interest Expenses. Non-interest expenses increased approximately $970,000,
or 1.7% to $59.0 million for the year ended December 31, 2002 as compared to
$58.0 million for the same period for 2001. Salaries and employee benefits
increased $4.0 million, reflecting the effect of the increased staffing in 2001
and early 2002. This was partially offset by the reduction of amortization of
goodwill of $3.6 million due to the Company adopting Statement of Financial
Accounting Standards ("SFAS") No. 147 in the fourth quarter of 2002. The
adoption of SFAS No. 147 results in the Company ceasing amortization on
approximately $19.7 million of goodwill.
Non-interest expenses increased approximately $3.5 million, or 6.5% to $58.0
million for the year ended December 31, 2001 as compared to $54.4 million for
the same period for 2000. This increase is primarily due to an increase in other
expenses of $1.9 million, salaries and employee benefits of $1.2 million, and
occupancy expense of $646,000. Included in other expenses is $1.0 million in
consulting fees relating to 2001 management initiatives for technology, risk
management, branch optimization and the Company's Process & Profit Improvement
program. Salaries and benefits increased due to additional key positions hired
during the year reflecting the Company's focus on building a business banking
team to meet the needs of the small business market, expansion of the Commercial
and Retail Banking Divisions, additional support within Credit Administration
and other various operational and administrative support staff. The increase in
occupancy expense is a result of a bank wide branch maintenance program
initiated in 2001.
Income Tax Expense. Income taxes increased $4.5 million, from $156,000 for year
ended December 31, 2001 to $4.7 million for the year ended December 31, 2002.
The increase was due to a larger 2002 pretax income. In addition, the Company's
effective tax rate increased due the proportion of tax-free municipal income to
income before taxes. Due to a decrease in pretax income in 2001, income taxes
decreased $3.5 million, from $3.6 million to $156,000 for the years ended
December 31, 2000 and December 31, 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
A major source of the Company's funding is its retail deposit branch network,
which management believes will be sufficient to meet the Company's long-term
liquidity needs. The ability of the Company to retain and attract new deposits
is dependent upon the variety and effectiveness of its customer account
products, customer service and convenience, and rates paid to customers. The
Company also obtains funds from the repayment and maturities of loans as well as
sales and maturities of investment securities, while additional funds can be
obtained from a variety of sources including federal funds purchased, securities
sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances,
loan sales or participations 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
12 months ending December 31, 2003 total $286.5 million. The Company has
implemented a core deposit relationship strategy that places less reliance on
certificates of deposits as a funding source. The Company will continue to price
certificates of deposit for retention, however, based on market conditions and
other liquidity considerations, it may avail itself of the secondary borrowings
discussed above.
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 $65.6 million at December 31, 2002, the Company
has additional secured borrowing capacity with the FHLB and other sources.
Management will continue to monitor the Company's liquidity and maintain it at a
level that is adequate but not excessive.
6
Net cash provided by operating activities for the year ended December 31, 2002
totaled $23.2 million, compared to $23.3 million for the year ended December 31,
2001 and $16.3 million for the year ended December 31, 2000.
During 2002, the primary source of funds for the increase in lending activities
of $132.7 million was an increase in deposits of $118.1 million and an increase
in net borrowings of $45.2 million. Net cash used in investing activities for
the year ended December 31, 2002 totaled $202.1 million, compared to net cash
provided by investing activities for the year ended December 31, 2001 of $71.0
million. The change was primarily due to an increase in the purchase of
investment securities of $113.0 million, a decrease in the maturities,
prepayments and calls of securities of $131.7 million and a net increase in
loans of $67.1 million. These were partially offset by an increase in the
proceeds from the sale of securities of $58.2 million. Net cash provided by
financing activities for the year ended December 31, 2002 totaled $165.4
million, compared to net cash used by financing activities of $84.9 million for
the year ended December 31, 2001. The change was primarily a result of an
increase of $292.4 million of net repayments under lines of credit and
repurchase agreements, partially offset by a reduced net increase in deposits of
$57.7 million.
Net cash provided by investing activities for the year ended December 31, 2001
totaled $71.0 million, an increase of $79.9 million compared to net cash used
for the year ended December 31, 2000 of $8.9 million. This continued to reflect
the Company's overall balance sheet and liquidity management process. The
increase was primarily due to an increase in the maturities, prepayments and
calls of investment securities of $519.7 million, an increase in the sale of
investment securities of $40.4 million and a reduced net increase in loans of
$69.1 million. These increases in cash provided were partially offset by a
$552.9 million increase in the purchase of investment securities.
Net cash used by financing activities for the year ended December 31, 2001
totaled $84.9 million, compared to net cash provided by financing activities of
$7.2 million for the year ended December 31, 2000. The increase was primarily
the result of an increase of $120.0 million of net repayments under lines of
credit and repurchase agreements and a decrease in deposits resulting from a
branch sale in the fourth quarter 2001 of $14.3 million. These were partially
offset by an increase in deposits of $56.3 million. The increase in deposits
reflects the Company's successful implementation of a customer relationship
strategy for both loans and deposits.
Management has developed a capital plan for the Company and the Bank that should
allow the Company and the Bank to grow capital internally at levels sufficient
for achieving its growth projections and operating and financial risks. It is
the Company's intention to maintain "well-capitalized" risk-based capital
levels. The Company has also considered a plan for contingency capital needs,
and when appropriate, the Company's Board of Directors may consider various
capital raising alternatives. The following table sets forth the risk-based
capital levels at December 31, 2002 for the Company and the Bank.
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
At December 31, 2002 Actual Purposes Provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc $176,688 12.15% $116,224 8.00% N/A
Sun National Bank $165,322 11.39% $116,021 8.00% $145,026 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc $147,459 10.14% $ 58,112 4.00% N/A
Sun National Bank $148,639 10.24% $ 58,010 4.00% $ 87,016 6.00%
Leverage Ratio:
Sun Bancorp, Inc $147,459 6.84% $ 86,291 4.00% N/A
Sun National Bank $148,639 6.97% $ 85,244 4.00% $106,556 5.00%
As part of its capital plan, the Company maintains trust preferred securities of
$46.7 million at December 31, 2002 that qualify as Tier 1 or core capital of the
Company, subject to a 25% capital limitation under risk-based capital guidelines
developed by the Federal Reserve. The portion that exceeds the 25% capital
limitation amounting to $12.6 million at December 31, 2002 qualifies as Tier 2,
or supplementary capital of the Company.
7
Asset and Liability Management
The Company's exposure to interest rate risk results from the difference in
maturities and repricing characteristics of the interest-earning assets and
interest-bearing liabilities and the volatility of interest rates. If the
Company's assets have shorter maturity or repricing terms than its liabilities,
the Company is asset sensitive and its earnings will tend to be negatively
affected during periods of declining interest rates. Conversely, this mismatch
would benefit the Company during periods of increasing interest rates.
Management monitors the relationship between the interest rate sensitivity of
the Company's assets and liabilities. During 2002, while the Company was asset
sensitive for the majority of the year and interest rates were declining, the
interest rate component negatively affected net interest income by $8.9 million.
This decrease in net interest income was exceeded by the increase in the volume
component positively affecting net interest income by $17.2 million, resulting
in a net increase of net interest income of $8.3 million.
Gap Analysis
Banks are concerned with the extent to which they are able to match maturities
or repricing characteristics 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
monthly basis, the Company and Bank monitor their gap, primarily their six-month
and one-year maturities.
The Asset/Liability Committee of the Board of Directors discuss, among other
things, interest rate risk of the Company and the Bank. Management uses
simulation models to measure the impact of potential changes of up to 300 basis
points in interest rates on net interest income. Sudden changes to interest
rates should not have a material impact to 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. The Bank 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. The Bank can also price deposit products to attract
deposits with maturity characteristics that can lower its exposure to interest
rate risk.
During most of 2002, the Company was asset sensitive. At December 31, 2002, the
Company had a negative position with respect to its exposure to interest rate
risk maturing or repricing within one year. Total interest-bearing liabilities
maturing or repricing within one year exceeded interest-earning assets maturing
or repricing during the same time period by $33.4 million, representing a
negative cumulative one-year gap ratio of 1.58%. As a result, the cost of
interest-bearing liabilities of the Company should adjust to changes in interest
rates at a faster rate than yield on interest-earning assets of the Company.
8
The following table the maturity and repricing characteristics of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 2002.
All amounts are categorized by their actual maturity or repricing date with the
exception of interest-bearing demand deposits and savings deposits. As a result
of prior experience during periods of rate volatility and management's estimate
of future rate sensitivities, the Company allocates the interest-bearing demand
deposits and savings deposits into categories noted below, based on the
estimated duration of those deposits.
Maturity/Repricing Time Periods
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
---------- ----------- --------- ------------ -----
Loans receivable $386,191 $187,385 $608,907 $ 50,933 $1,233,416
FHLB interest-bearing deposit 2,435 - - - 2,435
Investment securities 142,194 126,667 355,978 101,733 726,572
Federal funds sold 138 - - - 138
-------- -------- -------- -------- ----------
Total interest-earning assets 530,958 314,052 964,885 152,666 1,962,561
-------- -------- -------- -------- ----------
Interest-bearing demand deposits 234,220 91,014 273,407 28,753 627,394
Savings deposits 28,133 77,480 203,666 19,229 328,508
Time certificates 111,217 176,337 123,248 1,325 412,127
Federal Home Loan Bank advances 4,349 33,322 96,825 7,764 142,260
Other borrowed funds 1,160 - - - 1,160
Securities sold under agreements to
repurchase 61,860 - - - 61,860
Guaranteed preferred beneficial interest in
Company's subordinated debt - 59,274 - - 59,274
-------- -------- -------- -------- ----------
Total interest-bearing liabilities 440,939 437,427 697,146 57,071 1,632,583
-------- -------- -------- -------- ----------
Periodic Gap $ 90,019 $ (123,375) $267,739 $ 95,595 $ 329,978
======== ========== ======== ======== =========
Cumulative Gap $ 90,019 $ (33,356) $234,383 $329,978
======== ========== ======== ========
Cumulative Gap Ratio 4.26% (1.58%) 11.10% 15.63%
======== ========== ======== ========
9
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 accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results without considering the
change in the relative purchasing power of money over time and due to inflation.
The impact of inflation is reflected in the increased cost of the Company's
operations. Nearly all the assets and liabilities of the Company are monetary.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
FINANCIAL CONDITION
The Company's assets increased by $182.7 million, or 9.5% from $1.93 billion at
December 31, 2001 to $2.11 billion at December 31, 2002. In 2002, the Company
continued to reposition and control the growth of the balance sheet while
enhancing its overall liquidity, interest rate risk profile and capital
position, and continuing the growth of its core businesses through an increase
in loans and deposits. The Company increased net loans receivable by $127.4
million, investment securities by $75.6 million, deposits by $118.1 million, and
advances from the FHLB by $68.3 million, while decreasing federal funds sold by
$11.4 million and repurchase agreements by $23.1 million. Total capital
increased by $15.7 million, or 12.1% from $130.0 million at December 31, 2001 to
$145.6 million at December 31, 2002.
Loans. Net loans receivable increased $127.4 million, or 11.7%, from December
31, 2001 to December 31, 2002, due primarily to internally generated growth in
commercial loans, small business loans and home equity loans, offset by a
decrease in mortgage loans and installment loans. Commercial and small business
loans increased $132.7 million, or 14.6% and home equity loans increased $20.7
million. The increase in commercial and small business loans was a result of a
total team effort from three major business lines across five regional community
banking groups. These groups emphasize quick-response and local decision-making
resulting in continued competitive pricing and servicing of all commercial
loans. As interest rates continued to decline during 2002, the Bank's mostly
fixed rate products, mortgages and installment loans, have decreased by $23.0
million, partially offset by floating or adjustable rate home equity products
which increased $20.7 million.
The Company uses third-party loan correspondents to originate residential
mortgages that are subsequently sold into the secondary market. These loans are
originated using the investor's underwriting standards, rates and terms, and are
approved according to the investor's lending policy prior to origination. Prior
to closing, the Company generally has commitments to sell these loans with
servicing released, at par and without recourse, in the secondary market.
Secondary market sales are generally scheduled to close shortly after
origination. Set forth below is selected data relating to the composition of the
Company's loan portfolio by type of loan and type of security on the dates
indicated.
ANALYSIS OF LOAN PORTFOLIO
At December 31,
--------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------- ------------------- ----------------- --------- ----- -------------------
Amount % Amount % Amount % Amount % Amount %
---------- ------ ---------- ----- -------- ----- -------- ------ -------- ------
Type of Loan:
Commercial and
industrial $1,043,885 85.77 $ 911,145 83.62 $ 869,088 84.23 $750,707 83.32 $548,646 79.52
Home equity 44,603 3.67 23,854 2.19 24,613 2.38 26,619 2.96 31,068 4.50
Second mortgage 47,458 3.90 49,047 4.50 35,056 3.40 27,448 3.05 21,803 3.16
Residential real estate 43,375 3.56 55,282 5.07 54,140 5.25 52,986 5.88 48,119 6.97
Installment 54,095 4.45 63,609 5.84 59,433 5.76 51,633 5.73 47,359 6.86
Less: Loan loss
allowance (16,408) (1.35) (13,332) (1.22) (10,486) (1.02) (8,472) (0.94) (6,993) (1.01)
---------- ------ ---------- ----- ---------- ------ -------- ------ -------- ------
Net loans $1,217,008 100.00 $1,089,605 100.00 $1,031,844 100.00 $900,921 100.00 $690,002 100.00
========== ====== ========== ====== ========== ====== ======== ====== ======== ======
Type of Security:
Residential real estate:
1-4 family $ 166,495 13.67 $ 146,157 13.41 $ 143,973 13.96 $118,837 13.19 $123,263 17.87
Other 88,465 7.27 108,437 9.95 83,615 8.10 8,954 0.99 9,726 1.41
Commercial real estate 721,658 59.30 599,027 54.98 576,365 55.86 199,437 22.14 242,700 35.17
Commercial business loans 210,374 17.29 199,103 18.27 183,130 17.75 528,513 58.66 269,406 39.06
Consumer 36,333 2.99 36,640 3.36 40,879 3.96 38,817 4.31 40,362 5.85
Other 10,091 0.83 13,573 1.25 14,368 1.39 14,835 1.65 11,538 1.67
Less: Loan loss
allowance (16,408) (1.35) (13,332) (1.22) (10,648) (1.02) (8,472) (0.94) (6,993) (1.01)
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Net loans $1,217,008 100.00 $1,089,605 100.00 $1,031,844 100.00 $900,921 100.00 $690,002 100.00
========== ====== ========== ====== ========== ====== ======== ====== ======== ======
10
The following table sets forth the estimated maturity of the Company's loan
portfolio at December 31, 2002. The table does not include prepayments or
scheduled principal payments. 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
----------- ---------- ----------- --------- ----------
Commercial and industrial $210,781 $452,716 $380,388 $(14,806) $1,029,079
Home equity 79 1,044 43,480 (263) 44,340
Second mortgage 1,272 18,514 27,672 (277) 47,181
Residential real estate 5,534 1,100 36,741 (265) 43,110
Installment 10,098 13,000 30,997 (797) 53,298
-------- -------- -------- -------- ----------
$227,764 $486,374 $519,278 $(16,408) $1,217,008
======== ======== ======== ======== ==========
The following table sets forth the dollar amount of all loans due after December
31, 2003 which have pre-determined interest rates and which have floating or
adjustable interest rates.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----------- ----------
Commercial and industrial $404,564 $428,540 $ 833,104
Home equity - 44,524 44,524
Second mortgage 46,186 - 46,186
Residential real estate 30,243 7,598 37,841
Installment 39,512 4,485 43,997
-------- -------- ----------
$520,505 $485,147 $1,005,652
======== ======== ==========
Non-Performing and Problem Assets
Loan Delinquencies. The Company's collection procedures provide for a late
charge assessment after a commercial loan is 10 days past due, or a residential
mortgage loan is 15 days past due. The Company contacts the borrower by mail or
telephone and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the borrower. If the loan continues to be delinquent
for 90 days or more, the Company usually initiates foreclosure proceedings
unless other repayment arrangements are made. Delinquent loans are reviewed on a
case-by-case basis in accordance with the lending policy.
Interest accruals are generally discontinued when a loan becomes 90 days past
due or when collection of principal or interest is considered doubtful. When
interest accruals are discontinued, interest credited to income in the current
year is reversed, and interest accrued in the prior year is charged to the
allowance for loan losses. Generally, commercial loans are charged off no later
than 120 days delinquent unless the loan is well secured and in the process of
collection or other extenuating circumstances support collection. Residential
real estate loans are typically charged off at 90 days delinquent. In all cases,
loans must be placed on non-accrual or charged off at an earlier date if
collection of principal or interest is considered doubtful.
Problem Loans. During 2002, the Company classified two credits aggregating $13.5
million as restructured loans within the definition of SFAS No. 15. These loans
have had a temporary modification of terms to provide near-term cash flow relief
to the borrowers. At December 31, 2002, these loans, as restructured, were
current, fully performing and well collateralized. These loans were not
classified as non-accrual and were not considered non-performing.
At December 31, 2002, there were two commercial loan relationships aggregating
$7.0 million for which payments are current, but where the borrowers were
experiencing financial difficulties, that were not classified as non-accrual and
were not considered non-performing. At December 31, 2002, these loans were
current and well collateralized.
Non-Performing Assets. Total non-performing assets increased $2.4 million from
$11.0 million at December 31, 2001 to $13.4 million at December 31, 2002. The
ratio of non-performing assets to net loans increased to 1.10% at December 31,
2002 compared to 1.02% at December 31, 2001. The following table sets forth
information regarding loans that are delinquent 90 days or more. Management of
the Company believes that all loans accruing interest are adequately secured and
in the process of collection.
11
Non-Performing Assets
At December 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Loans accounted for on a non-accrual basis:
Commercial and industrial $ 8,879 $ 8,007 $ 2,933 $ 2,085 $ 979
Home equity 14 201 65 8 241
Second mortgage 100 130 38 5 81
Residential real estate 593 735 430 250 182
Installment 377 50 240 232 125
------- ------- ------- ------- -------
Total $ 9,963 $ 9,123 $ 3,706 $ 2,580 $ 1,608
======= ======= ======= ======= =======
Accruing loans that are contractually past due 90 days or more:
Commercial and industrial $ 1,837 $ 425 $ 114 $ 880 $ 202
Home equity 30 42 36 339 252
Second mortgage 122 190 153 54 134
Residential real estate 401 295 540 303 230
Installment 115 146 332 226 68
------- ------- ------- ------- -------
Total $ 2,505 $ 1,098 $ 1,175 $ 1,802 $ 886
======= ======= ======= ======= =======
Total non-accrual and 90-day past due loans $12,468 $10,221 $ 4,881 $ 4,382 $ 2,494
Real estate owned 904 898 1,179 535 292
------- ------- ------- ------- -------
Total non-performing assets $13,372 $11,119 $ 6,060 $ 4,917 $ 2,786
======= ======= ======= ======= =======
Total non-accrual and 90-day past due loans to net loans 1.02% 0.94% 0.47% 0.49% 0.36%
Total non-accrual and 90-day past due loans to total assets 0.59% 0.53% 0.24% 0.22% 0.16%
Total non-performing assets to net loans 1.10% 1.02% 0.59% 0.55% 0.40%
Total non-performing assets to total assets 0.63% 0.58% 0.30% 0.25% 0.18%
Total allowance for loan losses to total non-performing loans 131.60% 130.44% 214.83% 193.34% 280.39%
Interest income that would have been recorded on loans on non-accrual status,
under the original terms of such loans, would have totaled $984,000 for the year
ended December 31, 2002.
Foreclosed Real Estate. Real estate acquired by the Company as a result of
foreclosure and bank properties and equipment that the Company is holding for
sale is classified as real estate owned until such time as it is sold. When real
estate is acquired or transferred, 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, 2002, the Company had a net amount of $904,000 classified as
real estate owned, including $309,000 of bank properties and equipment that were
no longer used in the Company's operations. At December 31, 2001, the Company
had a net amount of $898,000 classified as real estate owned, including $609,000
of bank properties and equipment that were no longer used in the Company's
operations. During 2001, the Company recorded a write down of a bank property
that was classified as real estate owned in the amount of $300,000.
Allowances for Losses on Loans and Real Estate Owned. The Company's allowance
for losses on loans increased to $16.4 million or 1.33% of loans at December 31,
2002. Due to loan portfolio growth, portfolio maturation, the deterioration of
several loans and the impact on the Company of the national and local economies
during 2001, the Company's allowance for losses on loans increased to $13.3
million or 1.21% of loans at December 31, 2001 compared to $10.5 million or
1.01% of loans at December 31, 2000. Provision for loan losses was $4.2 million
in 2002, $7.8 million in 2001 and $2.6 million in 2000. Net charge-offs were
$1.1 million in 2002, $4.9 million in 2001 and $566,000 in 2000.
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 have been incurred in the Company's loan portfolio. Management also
periodically performs valuations of real estate owned and establishes allowances
to reduce book values of the properties to their net realizable values when
necessary.
12
The following table sets forth information with respect to the Company's
allowance for losses on loans at the dates indicated:
At December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Allowance for losses on loans, beginning of year $13,332 $10,486 $ 8,472 $ 6,993 $ 4,124
Charge-offs:
Commercial 1,219 4,748 209 15 26
Mortgage 20 4 8 210 203
Installment 371 665 384 311 68
------- ------- ------- ------- -------
Total charge-offs 1,610 5,417 601 536 297
------- ------- ------- ------- -------
Recoveries:
Commercial 457 423 - - 18
Mortgage - - 25 10 -
Installment 54 45 10 16 15
------- ------- ------- ------- -------
Total recoveries 511 468 35 26 33
------- ------- ------- ------- -------
Net charge-offs 1,099 4,949 566 510 264
Allowance acquired with branch purchase 1,000
Provision for loan losses 4,175 7,795 2,580 1,989 2,133
------- ------- ------- ------- -------
Allowance for losses on loans, end of year $16,408 $13,332 $10,486 $ 8,472 $ 6,993
======= ======= ======= ======= =======
Net loans charged off as a percent of average loans outstanding 0.09% 0.47% 0.06% 0.06% 0.05%
======= ======= ======= ======= =======
The following table sets forth the allocation of the Company's allowance for
loan losses by loan category and the percent of loans in each category to total
loans receivable at the dates indicated. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses that may occur within the loan category since the total loan loss
allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ---------------- ------------------ -------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance at end of year
applicable to:
Commercial and industrial $14,806 84.63% $11,457 82.62% $ 8,676 83.38% $6,994 82.55% $5,981 78.72%
Residential real estate 265 3.52 577 5.01 391 5.19 327 5.83 164 6.90
Home equity 263 3.62 268 2.16 343 2.36 254 2.93 382 4.46
Installment 1,074 8.23 1,030 10.21 1,076 9.07 897 8.69 466 9.92
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Total allowance $16,408 100.00% $13,332 100.00% $10,486 100.00% $8,472 100.00% $6,993 100.00%
======= ====== ======= ====== ======= ====== ====== ====== ====== ======
Investment Securities. A portion of the Company's investment portfolio is held
at the Bank's wholly owned subsidiary, Med-Vine, Inc. ("Med-Vine"). Total
investment securities, excluding restricted equity securities, increased $75.6
million or 11.7% from $647.6 million at December 31, 2001 to $723.2 million at
December 31, 2002.
The Company's investment policy is established by senior management and approved
by the Board of Directors. Med-Vine's investment policy is identical to that of
the Company. It is based on asset and liability management goals and is designed
to provide a portfolio of high quality investments that optimizes interest
income within acceptable limits of safety and liquidity. The Company has
classified its entire portfolio of debt investment securities as available for
sale. As a result, these securities are carried at their estimated fair value
based on quoted market prices.
13
The following table sets forth the carrying value of the Company's portfolio of
investment securities available for sale.
At December 31,
----------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Net Net Net
Unrealized Estimated Unrealized Estimated Unrealized Estimated
Amortized Gains Fair Amortized Gains Fair Amortized Gains Fair
Cost (Losses) Value Cost (Losses) Value Cost (Losses) Value
-------- -------- -------- -------- -------- -------- -------- -------- --------
U.S. Treasury obligations $ 54,400 $1,144 $ 55,544 $ 51,809 $ 580 $ 52,389 $ 69,406 $ 53 $ 69,459
Government agency and
mortgage-backed 567,200 6,111 573,311 551,584 (481) 551,103 645,090 (15,738) 629,352
securities
Municipal obligations 70,672 996 71,668 43,692 (881) 42,811 49,267 (467) 48,800
Other securities 22,690 (12) 22,678 1,255 - 1,255 948 - 948
-------- ------ -------- -------- -------- -------- -------- -------- --------
Total $714,962 $8,239 $723,201 $648,340 $ (782) $647,558 $764,711 $(16,152) $748,559
======== ====== ======== ======== ======== ======== ======== ======== ========
During 2002, the Company invested $19.7 million in a Pooled Floating Rate
Capital Security, which were classified as other securities.
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Company's portfolio of
investment securities available for sale at December 31, 2002. All debt
securities are classified as available for sale; therefore, the carrying value
is the estimated fair value. Yields on tax-exempt obligations have been
calculated on a tax-equivalent basis.
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total
---------------- ----------------- ----------------- -------------------- -----------------
Wtd. Wtd. Wtd. Wtd. Wtd.
Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg. Carrying Avg.
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
U.S. Treasury obligations $ 27,506 3.09% $ 22,406 2.90% $ 5,632 5.11% - - $ 55,544 3.20%
Government agency and
mortgage-backed securities 186,006 2.82 349,748 4.00 32,663 4.83 $ 4,894 6.64% 573,311 3.69
Municipal obligations 15,818 1.95 14,646 4.01 25,328 3.97 15,877 5.07 71,668 3.78
Other securities 2,604 0.96 20,074 2.11 - - - - 22,678 1.97
-------- -------- ------- ------- --------
Total $231,934 2.77% $406,873 3.65% $63,623 4.51% $20,771 5.44% $723,201 3.62%
======== ======== ======= ======= ========
Deposits. Consumer and commercial deposits are attracted principally from within
the Company's primary market area through offering a wide compliment of deposit
products that include checking, savings, money market, certificates of deposits
and individual retirement accounts. The deposit strategy stresses the importance
of building a relationship with each and every customer. To help facilitate
these relationships, the Bank continued during 2002 its relationship pricing
strategy that has helped to dramatically increase core deposit growth. 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
relationship strategy has enabled the Bank to continue to favorably increase the
deposit mix with a higher concentration of core deposits. Management regularly
meets to evaluate internal cost of funds, to analyze the competition, to review
the Company's cash flow requirements for lending and liquidity and executes any
appropriate pricing changes when necessary. The Company does not obtain funds
through brokers, nor does it solicit funds outside the states of New Jersey,
Delaware or Pennsylvania.
Deposits at December 31, 2002 totaled $1.69 billion, an increase of $118.1
million, or 7.5% over the December 31, 2001 balance of $1.57 billion. Demand
deposits, including NOW accounts and money market accounts, increased $145.9
million, or 18.1%, at December 31, 2002, to $949.8 million, compared with
December 31, 2001. Savings deposits increased $53.4 million, or 19.4% to $328.5
million at December 31, 2002, from $275.1 million at December 31, 2001. Total
certificates of deposit decreased $81.1 million, or 16.4% from December 31,
2001, to $412.1 million at December 31, 2002. The increase in core deposits
during 2002 was due to internal growth from the Company's relationship strategy,
which during the year included promotional rates on selected money market
accounts, as represented in the following table.
14
For the Years Ended December 31,
-------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
---------- ------ ---------- ------ ---------- ------
Core deposits $1,278,355 75.6 % $1,079,079 68.6 % $781,920 55.4 %
Time deposits 412,127 24.4 % 493,259 31.4 % 628,972 44.6 %
---------- ------ ---------- ------ ---------- ------
Total deposits $1,690,462 100.00 % $1,572,338 100.00 % $1,410,867 100.00 %
========== ====== ========== ====== ========== ======
The following table sets forth average deposits by various types of demand and
time deposits:
For the Years Ended December 31,
------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Amount Avg. Cost Amount Avg. Cost Amount Avg. Cost
------ --------- ------ --------- ------ ---------
Non-interest-bearing demand deposits $287,164 $265,510 $245,989
Interest-bearing demand deposits 584,808 1.84% 431,196 2.88% 336,772 3.66%
Savings deposits 314,208 2.17 214,849 2.76 154,091 2.22
Time deposits 449,438 3.89 593,351 5.72 643,972
------- ------- -- --------
5.79
Total $1,635,618 2.60% $1,504,906 3.47% $1,380,824 3.84%
========== ========== ==========
The following table indicates the amount of certificates of deposit of $100,000
or more by remaining maturity at December 31, 2002.
Three months or less $43,565
Over three through six months 21,361
Over six through twelve months 18,733
Over twelve months 21,846
--------
Total $105,505
========
Borrowings. Borrowed funds increased $45.2 million in 2002, to $205.3 million at
December 31, 2002, from $160.1 million at December 31, 2001. The increase was a
result of a net increase of $68.3 million in advances from the FHLB offset by a
decrease of $23.1 million in securities sold under agreements to repurchase with
customers. The additional advances from the FHLB were used to match fund loans
originated during 2002.
For the years ended December 31, 2002 and 2001, the maximum month-end amount of
advances borrowed from the FHLB was $193.4 million and $30.0 million,
respectively. The Company sells U.S. Treasury securities to customers under
agreements to repurchase them, at par, on the next business day. For the years
ended December 31, 2002 and 2001, the maximum month-end amount of securities
sold under agreements to repurchase with customers was $86.2 million and $93.5
million, respectively. The Company also purchased overnight federal funds from
correspondent banks. For the years ended December 31, 2002 and 2001, the maximum
month-end amount of federal funds purchased from correspondent banks was $20.0
million and $0, respectively. During 2001, the Company paid off in full its FHLB
repurchase agreements.
15
The following table sets forth certain information regarding FHLB advances,
interest rates, approximate average amounts outstanding and their approximate
weighted average rates at the dates indicated.
December 31,
------------------------------------
2002 2001 2000
---- ---- ----
FHLB convertible rate advances outstanding at end of year $45,000 $ 45,000 $ 45,000
Interest rate 6.76% 6.76% 6.76%
Approximate average amount outstanding $45,000 $ 45,000 $ 41,138
Approximate weighted average rate 6.76% 6.76% 6.85%
FHLB term amortizing advances outstanding at end of year $89,060 $ 29,008 $ 4,133
Interest rate 4.33% 4.19% 5.68%
Approximate average amount outstanding $92,191 $ 7,285 $ 4,192
Approximate weighted average rate 4.31% 4.88% 5.68%
FHLB term non-amortizing advances outstanding at end of year $ 8,200 - -
Interest rate 4.85% - -
Approximate average amount outstanding $ 4,695 - -
Approximate weighted average rate 4.92% - -
FHLB repurchase agreements outstanding at end of year - - $255,145
Interest rate - - 6.45%
Approximate average amount outstanding - $129,097 $332,981
Approximate weighted average rate - 5.00% 6.43%
FHLB overnight line of credit advances outstanding at end of year - - -
Interest rate - - -
Approximate average amount outstanding $5,244 $ 504 $ 27,759
Approximate weighted average rate 1.88% 2.29% 6.67%
The following table sets forth certain information regarding securities sold
under agreements to repurchase with customers, interest rates, approximate
average amounts outstanding and their approximate weighted average rates at the
dates indicated.
December 31,
------------------------------------
2002 2001 2000
---- ---- ----
Securities sold under agreements to repurchase with customers
outstanding at end of year $61,860 $84,928 $101,841
Interest rate 0.61% 0.59% 5.68%
Approximate average amount outstanding $74,602 $82,318 $79,310
Approximate weighted average rate 0.99% 2.96% 5.55%
Deposits are the primary source of funds for the Company's lending activities,
investment activities and general business purposes. Should the need arise, the
Company has the ability to access lines of credit from various sources including
the Federal Reserve Bank, the FHLB and various other correspondent banks. In
addition, on an overnight basis, the Company has the ability to sell securities
under agreements to repurchase.
Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
Guaranteed preferred beneficial interest in Company's subordinated debt consists
of the following:
December 31, 2001
-------------------
2002 2001
------- -------
Sun Trust I - $28,040
Sun Trust II $29,274 29,287
Sun Trust III 20,000 -
Sun Trust IV 10,000 -
------- -------
$59,274 $57,327
======= =======
16
In 1997, the Company's subsidiary, Sun Capital Trust ("Sun Trust I") issued
$28.75 million of 9.85% Preferred Securities ("Sun Trust I Preferred
Securities") with a stated value and liquidation preference of $25 per share.
The proceeds from the sale of Sun Trust I Preferred Securities were utilized by
Sun Trust I to invest in $28.75 million of 9.85% Junior Subordinated Debentures
(the "Sun Trust I Debentures") of the Company, due March 2027.
In 1998, the Company's subsidiary, Sun Capital Trust II ("Sun Trust II") issued
$29.9 million of 8.875% Preferred Securities ("Sun Trust II Preferred
Securities") with a stated value and liquidation preference of $10 per share.
The proceeds from the sale of Sun Trust II Preferred Securities were utilized by
Sun Trust II to invest in $29.9 million of 8.875% Junior Subordinated Debentures
(the "Sun Trust II Debentures") of the Company, due December 2028.
During 2002, the Company notified the holders of the outstanding $28.0 million
of 9.85% Sun Trust I Preferred Securities of its intention to call these
securities contemporaneously with the redemption of the Sun Trust I 9.85% Junior
Subordinated Debentures on April 1, 2002. As a result, the Company wrote down
the unamortized debt issuance costs of the called securities in the amount of
$777,000, net of income tax, through a charge to equity. The Company funded this
call with short-term borrowings of $25.0 million and a $3.0 million dividend
from Sun. On April 10, 2002, the Company issued $20.0 million Pooled Floating
Rate Capital Securities ("Sun Trust III Capital Securities"). The interest rate
resets every six months to LIBOR plus 3.70%, with an initial rate of 6.02%, and
will not exceed 11.00% through five years from its issuance. The proceeds were
used to pay down $20.0 million of short-term borrowings.
On July 11, 2002, the Company issued $10.0 million Pooled Floating Rate Capital
Securities ("Sun Trust IV Capital Securities"). The interest rate resets every
three months to LIBOR plus 3.65%, with an initial rate of 5.51%, and will not
exceed 11.95% through five years from its issuance. The proceeds were used to
pay down $5.0 million of short-term borrowings and for general corporate
purposes.
During 2002, the Company repurchased 1,300 shares of Sun Trust II preferred
securities for approximately $13,000. During 2000, the Company repurchased
22,800 shares of Sun Trust II preferred securities for approximately $228,000.
For more information regarding guaranteed preferred beneficial interest in
Company's subordinated debt, refer to Note 25 of the Notes to Consolidated
Financial Statements contained herein.
Disclosures about Contractual Obligations and Commercial Commitments
The Company's contractual cash obligations (see Notes 11 and 19) at December 31,
2002 were as follows:
Payments Due by Period
--------------------------------------------------------------------------
Less than One to Four to After
Contractual Cash Obligations Total One Year Three Years Five Years Five Years
- ---------------------------- -------- -------- ----------- ---------- ----------
Long-Term Debt $159,894 $43,891 $46,003 $62,978 $7,022
Operating Leases 31,369 3,528 6,627 5,894 15,320
-------- ------- ------- ------- -------
Total Contractual Cash Obligations $191,263 $47,419 $52,630 $68,872 $22,342
======== ======= ======= ======= =======
The Company's contractual commitments (see Note 19) at December 31, 2002 were as
follows:
Amount of Commitment Expiration Per Period
----------------------------------------------------------
Unfunded Less than One to Three Four to After
Commitments Commitments One Year Years Five Years Five Years
- ----------- ----------- -------- ----- ---------- ----------
Lines of Credit $196,775 $130,900 $15,798 - $50,077
Commercial Letters of Credit 42,757 18,303 24,454 - -
Construction Funding 75,956 56,237 19,719 - -
Other Commitments 2,245 20 410 $19 1,796
-------- -------- ------- --- -------
Total Commitments $317,733 $205,460 $60,381 $19 $51,873
======== ======== ======= === =======
17
Reconciliation From Reported Results to Cash Basis Data and Ratios
The Company prepares its consolidated financial statements using U.S. generally
accepted accounting principles ("GAAP") in this Annual Report. That
presentation, which is referred to as "reported basis" provides the reader with
an understanding of the Company's results that can be consistently tracked from
year to year and enables a comparison of the Company's performance with other
companies' GAAP financial statements.
In addition to analyzing the Company's results on a reported basis, management
looks at results on a "cash basis" to measure overall Company results against
targeted goals. The definition of cash basis starts with the reported GAAP
results and then excludes the amortization of intangible assets, net of
applicable income taxes. The amortization of intangible assets is viewed by
management as transactions that are not part of the Company's normal daily
business operations and therefore are not indicative of trends.
The following summary table provides a reconciliation of the Company's reported
and cash basis results:
For the Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cash Basis Data and Ratios:
Reported Net income $10,378 $1,328 $8,780 $9,714 $8,784
Less: Trust Preferred issuance costs write-off 777 - - - -
------- ------ ------- ------- -------
Net income available to common shareholders 9,601 1,328 8,780 9,714 8,784
Amortization of intangible assets, net of tax benefits 2,760 5,161 5,200 4,225 2,580
------- ------ ------- ------- -------
Cash basis earnings $12,361 $6,489 $13,980 $13,939 $11,364
======= ====== ======= ======= =======
Reported basic earnings per share $0.86 $0.12 $0.82 $0.98 $1.12
Amortization of intangible assets, net of tax benefits 0.25 0.48 0.49 0.43 0.33
------- ------ ------- ------- -------
Cash basis earnings per share $1.11 $0.60 $1.31 $1.41 $1.45
======= ====== ======= ======= =======
Reported diluted earnings per share $0.83 $0.12 $0.81 $0.91 $0.99
Amortization of intangible assets, net of tax benefits 0.24 0.47 0.47 0.40 0.29
------- ------ ------- ------- -------
Cash basis diluted earnings per share $1.07 $0.59 $1.28 $1.31 $1.28
======= ====== ======= ======= =======
Reported return on average assets 0.50% 0.07% 0.43% 0.58% 0.75%
Amortization of intangible assets, net of tax benefits 0.13 0.26 0.26 0.26 0.22
------- ------ ------- ------- -------
Cash basis return on average assets 0.63% 0.33% 0.69% 0.84% 0.97%
======= ====== ======= ======= =======
Reported return on average equity 7.63% 1.05% 8.85% 11.08% 14.29%
Amortization of intangible assets, net of tax benefits 2.02 4.09 5.25 4.81 4.20
------- ------ ------- ------- -------
Cash basis return on average equity 9.65% 5.14% 14.10% 15.89% 18.49%
======= ====== ======= ======= =======
Critical Accounting Policies
In management's opinion, the most critical accounting policies impacting the
Company's consolidated financial statements are the following:
Allowance for loan losses. Management carefully monitors the credit quality of
the loan portfolio and makes estimates about the amount of credit losses that
have been incurred at each financial statement date. Management evaluates the
fair value of collateral supporting the impaired loans using independent
appraisals and other measures of fair value. This process involves subjective
judgments and assumptions and is subject to change based on factors that may be
outside the control of the Company.
18
Accounting for income taxes. Deferred tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Management exercises
significant judgment in the evaluation of the amount and timing of the
recognition of the resulting tax liabilities and the judgments and estimates
required for the evaluation are periodically updated based upon changes in
business factors and the tax laws.
Accounting for goodwill impairment. Goodwill must be tested annually for
impairment and any resulting impairment must be charged to net income in the
year of the impairment test. The test used to determine the existence of
impairment requires estimates in the resulting calculation of impairment. Any
resulting impairment based upon estimates used by management could have a
significant impact on the Company's financial results.
Forward-Looking Statements
The Company may from time to time make written or oral "forward-looking
statements" including statements contained in this annual report and in other
communications by the Company which are made in good faith pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, such as statements of the Company's plans,
objectives, expectations, estimates and intentions, involve risks and
uncertainties and are subject to various important factors, some of which are
beyond the Company's control, including interest rate fluctuations, changes in
financial services' laws and regulations and competition, and which could cause
the Company's actual results to differ materially from the forward-looking
statements. The Company does not undertake, and specifically disclaims any
obligation, 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.
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sun Bancorp, Inc.
Vineland, New Jersey
We have audited the accompanying consolidated statements of financial condition
of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2002
and 2001, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sun Bancorp, Inc. and subsidiaries
as of December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform to Statement of
Financial Accounting Standards No. 147.
/s/DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 3, 2003 (March 19, 2003 as to Note 27)
20
SUN BANCORP, INC. AND SUBSIDIARIES
- ----------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
(Dollars in thousands, except share amounts) 2002 2001
---- ----
ASSETS
Cash and due from banks $ 65,476 $ 67,557
Federal funds sold 138 11,525
----------- -----------
Cash and cash equivalents 65,614 79,082
Investment securities available for sale (amortized cost -
$714,962; 2002 and $648,340; 2001) 723,201 647,558
Loans receivable (net of allowance for loan losses -
$16,408; 2002 and $13,332; 2001) 1,217,008 1,089,605
Restricted equity investments 11,610 12,561
Bank properties and equipment, net 29,468 28,180
Real estate owned, net 904 898
Accrued interest receivable 11,012 11,089
Goodwill 19,672 --
Intangible assets, net 19,783 43,637
Deferred taxes, net 6,867 8,154
Other assets 7,033 8,661
----------- -----------
TOTAL $ 2,112,172 $ 1,929,425
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 1,690,462 $ 1,572,338
Advances from the Federal Home Loan Bank (FHLB) 142,260 74,008
Loan payable 1,160 1,160
Securities sold under agreements to repurchase 61,860 84,928
Other liabilities 11,533 9,704
----------- -----------
Total liabilities 1,907,275 1,742,138
----------- -----------
Guaranteed preferred beneficial interest in Company's subordinated debt 59,274 57,327
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 5 and 19)
SHAREHOLDERS' EQUITY
Preferred stock, none issued
Common stock, $1 par value, 25,000,000 shares authorized, issued and
outstanding: 11,271,135 in 2002 and 10,553,942 in 2001 11,271 10,554
Surplus 114,930 108,058
Retained earnings 15,030 11,864
Accumulated other comprehensive income (loss) 5,438 (516)
Treasury stock at cost, 86,250 shares in 2002 (1,046) -
----------- -----------
Total shareholders' equity 145,623 129,960
----------- -----------
TOTAL $ 2,112,172 $ 1,929,425
=========== ===========
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
21
SUN BANCORP, INC. AND SUBSIDIARIES
- ----------------------------------
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, except share amounts)
2002 2001 2000
---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 83,822 $ 86,600 $ 88,353
Interest on taxable investment securities 25,693 35,523 55,672
Interest on non-taxable investment securities 2,085 1,946 2,704
Dividends on restricted equity investments 591 1,288 3,332
Interest on federal funds sold 703 1,468 595
---------- ---------- ----------
Total interest income 112,894 126,825 150,656
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 35,104 52,258 53,049
Interest on funds borrowed 8,271 12,371 30,922
Interest on guaranteed preferred beneficial interest
in Company's subordinated debt 4,481 5,438 5,437
---------- ---------- ----------
Total interest expense 47,856 70,067 89,408
---------- ---------- ----------
Net interest income 65,038 56,758 61,248
PROVISION FOR LOAN LOSSES 4,175 7,795 2,580
---------- ---------- ----------
Net interest income after provision for loan losses 60,863 48,963 58,668
---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 6,940 6,923 5,175
Other service charges 441 389 392
(Loss) gain on sale of bank properties and equipment (4) 33 9
Gain on sale of loans held for sale - - 24
Gain (loss) on sale of investment securities 2,517 396 (311)
Other 3,284 2,775 2,894
---------- ---------- ----------
Total other income 13,178 10,516 8,183
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 28,208 24,229 23,049
Occupancy expense 7,893 7,306 6,660
Equipment expense 5,041 5,009 5,016
Data processing expense 3,428 3,147 3,223
Amortization of intangible assets 4,182 7,820 7,879
Other 10,213 10,484 8,620
---------- ---------- ----------
Total other expenses 58,965 57,995 54,447
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 15,076 1,484 12,404
INCOME TAXES 4,698 156 3,624
---------- ---------- ----------
NET INCOME $ 10,378 $ 1,328 $ 8,780
========== ========== ==========
Basic earnings per share $ 0.86 $ 0.12 $ 0.82
========== ========== ==========
Diluted earnings per share $ 0.83 $ 0.12 $ 0.81
========== ========== ==========
Weighted average shares - basic 11,167,988 10,882,849 10,703,028
========== ========== ==========
Weighted average shares - diluted 11,596,874 11,074,328 10,904,684
========== ========== ==========
- --------------------------------------------------------------------
See notes to consolidated financial statements
22
SUN BANCORP, INC AND SUBSIDIARIES
- ---------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
------- -------- ------- ------------- ------- --------
BALANCE, JANUARY 1, 2000 $10,080 $105,798 $13,170 $(27,516) $(10,428) $ 91,104
Comprehensive income:
Net income - - 8,780 - - -
Net change in unrealized loss on securities
available for sale, net of taxes of $8,683 - - - 16,855 - -
--------
Comprehensive income - - - - - 25,635
--------
Exercise of stock options - - 270 - 628 898
Issuance of common stock 7 43 (1,176) - 1,140 14
Stock dividends - - (5,188) - 5,188 -
Cash paid for fractional interest
resulting from stock dividends - - (17) - - (17)
------- -------- ------- ------ -------- --------
BALANCE, DECEMBER 31, 2000 10,087 105,841 15,839 (10,661) (3,472) 117,634
Comprehensive income:
Net income - - 1,328 - - -
Net change in unrealized loss on securities
available for sale, net of taxes of $5,224 - - - 10,145 - -
--------
Comprehensive income - - - - - 11,473
--------
Exercise of stock options 234 207 (96) - 325 670
Issuance of common stock 7 70 (40) - 150 187
Stock dividends 226 1,940 (5,163) - 2,997 -
Cash paid for fractional interest
resulting from stock dividend - - (4) - - (4)
------- -------- ------- ------ -------- --------
BALANCE, DECEMBER 31, 2001 10,554 108,058 11,864 (516) 0 129,960
Comprehensive income:
Net income - - 10,378 - - -
Net change in unrealized loss on securities
available for sale, net of taxes of $3,067 - - - 5,954 - -
-------
Comprehensive income - - - - - 16,332
-------
Exercise of stock options 160 708 - - - 868
Issuance of common stock 24 268 - - - 292
Stock dividends 533 6,673 (7,206) - - -
Cash paid for fractional interest
resulting from stock dividend - - (6) - - (6)
Trust preferred issuance costs write-off - (777) - - - (777)
Treasury stock purchased - - - - (1,046) (1,046)
------- -------- ------- ------ -------- --------
BALANCE, DECEMBER 31, 2002 $11,271 $114,930 $15,030 $5,438 $ (1,046) $145,623
======= ======== ======= ====== ======== ========
- ---------------------------------------------------
See notes to consolidated financial statements
23
SUN BANCORP, INC. AND SUBSIDIARIES
- ----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands) Years Ended December 31,
------------------------------------
2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 10,378 $ 1,328 $ 8,780
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 4,175 7,795 2,580
Provision for losses on real estate owned 117 73 56
Depreciation and amortization 2,387 2,463 2,284
Net amortization (accretion) of investment securities 3,518 (2,098) (243)
Amortization of intangible assets 4,182 7,820 7,879
Gain on sale of loans - - (24)
Proceeds from sale of loans held for sale - - 925
(Gain) loss on sale of investment securities available for sale (2,517) (396) 311
Loss (gain) on sale of bank properties and equipment 4 (33) (9)
Write down of book value of bank properties and equipment - - 369
Write down of book value of excess of cost over fair value of assets acquired - 100 -
Deferred income taxes (1,780) (2,743) (1,550)
Change in assets and liabilities which provided (used) cash:
Accrued interest receivable 77 5,525 (1,637)
Other assets 851 2,912 (6,574)
Other liabilities 1,829 582 3,181
--------- --------- ---------
Net cash provided by operating activities 23,221 23,328 16,328
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (771,157) (658,167) (105,286)
Redemption of restricted equity securities 951 17,684 14,551
Proceeds from maturities, prepayments or calls of investment
securities available for sale 528,918 660,659 140,911
Proceeds from sale of investment securities available for sale 174,616 116,372 75,963
Net increase in loans (132,689) (65,583) (134,633)
Increase in loans resulting from branch acquisitions (364) -
Purchase of bank properties and equipment (3,689) (1,810) (1,596)
Increase in bank properties and equipment resulting from branch acquisitions - (63) -
Decrease in bank properties and equipment resulting from branch sale - 354 -
Proceeds from sale of bank properties and equipment 10 33 754
Reduction of excess of cost over fair value of branch assets acquired
resulting from branch sale - 1,282 -
Proceeds from sale of real estate owned 988 599 448
--------- --------- ---------
Net cash (used in) provided by investing activities (202,052) 70,996 (8,888)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 118,124 175,815 119,541
Decrease in deposits resulting from branch sale (14,344)
Net borrowings (repayments) under line of credit and repurchase agreements 45,184 (247,183) (127,173)
Proceeds from exercise of stock options 784 670 898
Proceeds from other borrowings 25,000 - -
Repayment of other borrowings (25,000) - -
Proceeds from issuance of guaranteed preferred beneficial interest in Company's
subordinated debt 30,000 - -
Redemption of guaranteed preferred beneficial interest in Company's subordinated debt (28,040) - -
Payments for fractional interests resulting from stock dividend (6) (4) (17)
Repurchase of guaranteed preferred beneficial interest in Company's subordinated debt (13) - (511)
Proceeds from issuance of common stock 376 187 14
Treasury stock purchased (1,046) - -
--------- --------- ---------
Net cash provided by (used in) financing activities 165,363 (84,859) (7,248)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,468) 9,465 192
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 79,082 69,617 69,425
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 65,614 $ 79,082 $ 69,617
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 48,862 $ 72,434 $ 87,615
Income taxes paid $ 2,770 $ 4,139 $ 5,609
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans and bank properties and equipment to real estate owned $ 1,111 $ 391 $ 1,148
Trust preferred issuance costs write-off $ 777 - -
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
24
SUN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(All dollar amounts presented in the tables, except per share amounts, are in
thousands)
1. NATURE OF OPERATIONS
Sun Bancorp, Inc. (the "Company") is registered as a 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 ("SunTrust I") (liquidated in April 2002), Sun
Capital Trust II ("SunTrust II"), Sun Capital Trust III ("SunTrust III"), Sun
Capital Trust IV ("SunTrust IV"), Sun National Bank (the "Bank") and the Bank's
wholly owned subsidiaries, Med-Vine, Inc., Sun Financial Services, L.L.C. and
2020 Properties, L.L.C. All significant intercompany balances and transactions
have been eliminated. (See also Note 3.)
The Company and the Bank have their administrative offices in Vineland, New
Jersey. At December 31, 2002, the Company had 75 financial service centers
located throughout central and southern New Jersey, New Castle County, Delaware
and in Philadelphia, Pennsylvania. The Company's principal business is to serve
as a holding company for 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. Sun
Trust II, Sun Trust III and Sun Trust IV are Delaware business trusts which hold
Junior Subordinated Debentures issued by the Company. The Bank is in the
business of attracting customer deposits through their Community Banking Centers
and investing these funds, together with borrowed funds and cash from
operations, in loans, primarily commercial real estate, small business 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 (the "OCC"). Med-Vine, Inc. is a Delaware holding company that holds a
portion of the Bank's investment portfolio. The principal business of Med-Vine,
Inc. is investing. The principal business of Sun Financial Services, L.L.C. is
to provide annuities and insurance products in the Bank's Community Banking
Centers through a contract with a third-party licensed insurance agent. The
principal business of 2020 Properties, L.L.C. is to acquire certain loans,
judgments, real estate and other assets in satisfaction of debts previously
contracted by the Bank.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. The significant estimates include the allowance for loan losses,
goodwill, core deposit and other intangible assets, and deferred tax asset
valuation allowance. Actual results could differ from those estimates.
Investment Securities - The Company accounts for debt securities as follows:
Held to Maturity - Debt securities that management has the positive intent
and ability to hold until maturity are classified as held to maturity and
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the interest method over the estimated remaining term of the underlying
security. The Company had no investment securities classified as held to
maturity at December 31, 2002 or 2001.
Available for Sale - Debt securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes to
market interest or prepayment rates, needs for liquidity, and changes in the
availability of and the yield of alternative investments, are classified as
available for sale. These assets are carried at fair value. Fair value is
determined using published quotes as of the close of business. Unrealized gains
and losses are excluded from earnings and are reported net of tax as other
comprehensive income or loss until realized. Realized gains and losses on the
sale of investment securities are reported in the consolidated statement of
income and determined using the adjusted cost of the specific security sold.
Loans Purchased - The discounts and premiums resulting from the purchase of
loans are amortized to income using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Loans Held for Sale - Included in loans receivable is approximately $3,010,000
and $1,621,000 of loans held for sale at December 31, 2002 and 2001,
respectively. These loans were carried at the lower of cost or fair value, on an
aggregate basis.
25
Deferred Loan Fees - Loan fees net of certain direct loan origination costs are
deferred and the balance is amortized to income as a yield adjustment over the
life of the loan using the interest method.
Interest Income on Loans - Interest on commercial, small business, real estate
and installment loans is credited to operations based upon the principal amount
outstanding. Interest accruals are generally discontinued when a loan becomes 90
days past due or when principal or interest is considered doubtful of
collection. When interest accruals are discontinued, interest credited to income
in the current year is reversed and interest accrued in the prior year is
charged to the allowance for loan losses.
Allowance for Loan Losses - The allowance for loan losses is determined by
management based upon past experience, evaluation of estimated loss and
impairment in the loan portfolio, current economic conditions and other
pertinent factors. The allowance for loan losses is maintained at a level that
management considers adequate to provide for estimated losses and impairment
based upon an evaluation of known and inherent risk in the loan portfolio. Loan
impairment is evaluated based on the fair value of collateral or estimated net
realizable value. 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.
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology
and Documentation Issues. SAB No. 102 expresses the SEC staff's views on the
development, documentation and application of a systematic methodology for
determining the allowance for loan losses in accordance with accounting
principles generally accepted in the United States of America. In addition, in
July 2001, the federal banking agencies issued guidance on this topic through
the Federal Financial Institutions Examination Council interagency guidance,
Policy Statement on Allowance for Loan and Lease Losses Methodologies and
Documentation for Banks and Savings Institutions. In management's opinion, the
Bank's methodology and documentation of the allowance for loan losses meets the
guidance issued.
Restricted Equity Securities - Equity securities of bankers' banks are
classified as restricted equity securities because ownership is restricted and
there is not an established market for their resale. These securities are
carried at cost and are periodically evaluated for impairment.
Bank Properties and Equipment - Bank properties and equipment are stated at
cost, less allowances for depreciation. The provision for depreciation is
computed by the straight-line method based on the estimated useful lives of the
assets. For leasehold improvements, depreciation is computed by the
straight-line method based on the estimated useful lives of the assets or the
term of the lease including renewals, whichever is shorter.
Real Estate Owned - Real estate owned is comprised of property acquired through
foreclosure and bank property and equipment that is not in use. It is carried at
the lower of the related loan balance or fair value of the property based on an
appraisal less estimated cost to dispose. Losses arising from foreclosure
transactions are charged against the allowance for loan losses. Gains or losses
subsequent to foreclosure are included in operations.
Goodwill and Other Intangible Assets - In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. However, SFAS No. 142 did not change the accounting prescribed for
certain acquisitions by banking and thrift institutions, resulting in continued
amortization of the excess of cost over fair value of net assets acquired under
SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which allows financial institutions meeting certain
criteria to reclassify their unidentifiable intangible asset balances to
goodwill and retroactively cease amortization beginning as of January 1, 2002.
The Company adopted SFAS No. 147 on October 1, 2002, and as required by the
standard, the Company restated earnings for the quarterly periods ended March
31, 2002, June 30, 2002 and September 30, 2002 (see Note 28).
Goodwill is the excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired in a business
combination. It is not amortized but is tested for impairment annually, or more
frequently if events or
26
changes in circumstances indicate that the asset might be impaired. Impairment
is the condition that exists when the carrying amount of goodwill exceeds its
implied fair value. The Company uses a third-party appraisal to assist
management in identifying impairment. The Company believes that its goodwill was
not impaired during 2002 and 2001.
Other intangible assets consist of core deposit intangibles and Excess of Cost
over Fair Value of Assets Acquired ("SFAS No. 72 Intangibles"), net of
accumulated amortization. Core deposit intangibles are amortized by the
straight-line method over 10 or 15 years. SFAS No. 72 Intangibles are amortized
by the straight-line method over 15 years.
A reconciliation of previously reported net income and earnings per share to the
amounts adjusted for the exclusion of goodwill amortization, net of tax,
follows. The per share amounts have been restated to retroactively give effect
to stock dividends.
Years Ended December 31,
---------------------------
2001 2000
---- ----
Net income:
Reported net income $1,328 $ 8,780
Add: goodwill amortization, net of tax 5,161 5,200
------ -------
Adjusted net income $6,489 $13,980
====== =======
Basic earnings per share:
Reported basic earnings per share $0.12 $0.82
Add: goodwill amortization, net of tax 0.47 0.49
----- -----
Adjusted basic net income per share $0.59 $1.31
===== =====
Diluted earnings per share:
Reported diluted earnings per share $0.12 $0.81
Add: goodwill amortization, net of tax 0.47 0.48
----- -----
Adjusted diluted net income per share $0.59 $1.29
===== =====
Long-Lived Assets - Management evaluates the carrying amount of long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Measurement of an
impaired loss for long-lived assets and intangibles would be based on the fair
value of the asset. For the years ended December 31, 2001 and 2000, the Company
recognized a $100,000 and a $369,000 impairment loss, respectively, based on
this evaluation. For the year ended December 31, 2002, the Company did not
recognize an impairment loss based on this evaluation.
Income Taxes - Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date. A deferred tax liability is recognized for temporary differences
that will result in taxable amounts in future years. A deferred tax asset is
recognized for temporary differences that will result in deductible amounts in
future years and for carryforwards. A valuation allowance is recognized if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Treasury Stock - Stock held in treasury by the Company is accounted for using
the cost method which treats stock held in treasury as a reduction to total
shareholders' equity.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from banks and federal funds sold.
Earnings Per Share - Basic earnings per share is computed by dividing income
available to common shareholders (in 2002, net income less trust preferred
issuance costs write-off), ("Income Available") by the weighted average number
of shares of common stock outstanding during the year. Diluted earnings per
share is calculated by dividing Income Available by the weighted average number
of shares of common stock and common stock equivalents outstanding decreased by
the number of common shares that are assumed to have been repurchased with the
proceeds from the exercise of the options (treasury stock method) along with the
assumed tax benefit from the exercise of non-qualified options. These purchases
were assumed to have been made at the average market price of the common stock,
which is based on the average price 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.
27
Stock Dividend - On April 25, 2002, May 17, 2001 and June 2, 2000, the Company's
Board of Directors declared 5% stock dividends, which were paid on May 23, 2002,
June 13, 2001 and June 21, 2000, respectively, to shareholders of record on May
2, 2002, May 31, 2001 and June 7, 2000, respectively. Accordingly, per share
information for the years ended December 31, 2001 and 2000 have been restated to
reflect the increased number of shares outstanding. The 2000 stock dividend and
a portion of the 2001 stock dividend were paid by reissuing treasury stock. (See
Note 27.)
Other Comprehensive Income - The Company classifies items of other comprehensive
income by their nature and displays the accumulated balance of other
comprehensive income separately from retained earnings and surplus in the equity
section of a statement of financial position. Amounts categorized as other
comprehensive income represent net unrealized gains or losses on investment
securities available for sale, net of income taxes. Reclassifications are made
to avoid double counting in comprehensive income items which are displayed as
part of net income for the period. These reclassifications are as follows:
Disclosure of reclassification amounts, net of taxes, for the years ended, 2002 2001 2000
- -------------------------------------------------------------------------------- ------------ --------- -----------
Disclosure of reclassification amounts, net of taxes, for the year ended
Net appreciation on securities available for sale arising during the year $ 7,615 $10,406 $15,841
Less: Reclassification adjustment for net gains (losses) included in net income (1,661) 261 (1,014)
------- -------- -------
Net change in unrealized gain (loss) on securities available for sale $ 5,954 $10,145 $16,855
======= ======= =======
Accounting for Stock Options - The Company accounts for stock-based compensation
using the intrinsic value method that recognizes as expense the difference
between the market value of the stock and the exercise price at grant date. The
Company has not recognized any compensation expense under this method. The
Company discloses the pro forma effects of accounting for stock-based
compensation using the fair value method (using the Black-Scholes model) as
described in SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation --Transition and Disclosure, an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial statements for fiscal years
ending after December 15, 2002. The Company has provided the required
disclosures in the tables below.
At December 31, 2002, the Company had three stock-based employee compensation
plans, which are described more fully in Note 16. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
For the Years Ended
December 31,
------------------------------------------
2002 2001 2000
------- ------ -------
Net income, as reported $10,378 $1,328 $ 8,780
Deduct: Total stock-based employee compensation expense
determined under fair value method (net of tax) (2,368) (844) (2,585)
------- ----- -------
Pro forma net income $ 8,010 $484 $ 6,195
======= ==== =======
Earnings per share:
Basic - as reported $0.86 $0.12 $0.82
Basic - pro forma $0.65 $0.04 $0.58
Diluted - as reported $0.83 $0.12 $0.81
Diluted - pro forma $0.62 $0.04 $0.57
28
Significant assumptions used to calculate the above fair value of the awards are
as follows:
2002 2001 2000
---- ---- ----
Weighted average fair value of options granted during the year $6.58 $5.29 $5.29
Risk free rate of return 4.30% 5.03% 5.29%
Expected option life in months 120 120 120
Expected volatility 38% 51% 71%
Expected dividends 0 0 0
Recent Accounting Principles - In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. The provisions of this statement related to the
rescission of SFAS No. 4 are effective for fiscal years beginning after May 15,
2002. Certain provisions of the statement relating to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. All other provisions of the
statement are effective for financial statements issued on or after May 15,
2002. This statement had no impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company currently has no guarantees
that would be required to be recognized, measured or disclosed under this
Interpretation.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. The Interpretation clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The Company is not a party to any variable interest entities covered by the
Interpretation.
Reclassifications - Certain reclassifications have been made in the 2001 and
2000 consolidated financial statements to conform to those classifications used
in 2002.
3. ACQUISITIONS
In November 2001, the Company completed its reorganization from a multi-bank
holding company to a single bank holding company with the merger of Sun National
Bank, Delaware into the Bank. Sun National Bank, Delaware was merged into
Delaware City Bank, a building and loan association located in Delaware City,
Delaware. The Company acquired all the outstanding shares of Delaware City Bank
for approximately $500,000 and immediately thereafter Delaware City Bank merged
into the Bank. The transaction had no material impact on the financial position,
results of operations, or cash flows of the Company and was accounted for as a
purchase.
29
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost of investment securities available for sale and the
approximate fair value were as follows:
December 31, 2002
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ------ ----- --------
U.S. Treasury obligations $ 54,400 $1,144 - $ 55,544
U.S. Government agencies and
mortgage-backed securities 567,200 6,362 $(251) 573,311
State and municipal obligations 70,672 1,106 (110) 71,668
Other 22,690 - (12) 22,678
-------- ------ ----- --------
Total $714,962 $8,612 $(373) $723,201
======== ====== ===== ========
30
December 31, 2001
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ------ ------- --------
U.S. Treasury obligations $ 51,809 $ 604 $ (24) $ 52,389
U.S. Government agencies and
mortgage-backed securities 551,584 2,135 (2,616) 551,103
State and municipal obligations 43,692 140 (1,021) 42,811
Other 1,255 - - 1,255
-------- ------ ------- --------
Total $648,340 $2,879 $(3,661) $647,558
======== ====== ======= ========
During 2002, the Company sold $171,391,000 of securities available for sale
resulting in a gross gain and gross loss of $2,546,000 and $29,000,
respectively. During 2001, the Company sold $115,976,000 of securities available
for sale resulting in a gross gain and gross loss of $472,000 and $76,000,
respectively. During 2000, the Company sold $75,274,000 of securities available
for sale resulting in a gross gain and gross loss of $7,000 and $318,000,
respectively.
The maturity schedule of the investment in debt securities available for sale is
as follows:
December 31, 2002
-----------------------
Amortized Estimated
Cost Fair Value
---- ----------
Due in one year or less $137,744 $138,785
Due after one year through five years 152,861 153,991
Due after five years through ten years 29,935 30,959
Due after ten years 15,724 15,876
-------- --------
336,264 339,611
Mortgage-backed securities 378,698 383,590
-------- --------
Total $714,962 $723,201
======== ========
At December 31, 2002, $147,567,000 of U.S. Treasury Notes and U.S. Government
Agency securities was pledged to secure public deposits.
5. LOANS
The components of loans were as follows:
December 31,
---------------------------------
2002 2001
----------- -----------
Commercial and industrial $ 1,043,885 $ 911,145
Home equity 44,603 23,854
Second mortgages 47,458 49,047
Residential real estate 43,375 55,282
Installment 54,095 63,609
----------- -----------
Total gross loans 1,233,416 1,102,937
Allowance for loan losses (16,408) (13,332)
----------- -----------
Net loans $ 1,217,008 $ 1,089,605
=========== ===========
Non-accrual loans $ 9,963 $ 9,123
=========== ===========
31
There were no irrevocable commitments to lend additional funds on non-accrual
loans at December 31, 2002. The reduction in interest income resulting from
non-accrual loans was $984,000, $728,000 and $352,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. Interest income recognized on
these loans for the years ended December 31, 2002, 2001 and 2000 was $442,000,
$589,000 and $192,000, respectively.
Certain officers, directors and their associates (related parties) have loans
and conduct other transactions with the Company. Such transactions are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for other non-related party transactions. The aggregate
dollar amount of these loans to related parties as of December 31, 2002 and
2001, along with an analysis of the activity for the years ended December 31,
2002 and 2001, is summarized as follows:
For the Years Ended
December 31,
-------------------------------
2002 2001
---- ----
Balance, beginning of year $ 27,044 $ 26,571
Additions 12,836 10,004
Repayments (7,550) (9,531)
-------- --------
Balance, end of year $ 32,330 $ 27,044
======== ========
Under approved lending decisions, the Company had commitments to lend additional
funds totaling approximately $317,733,000 and $202,044,000 at December 31, 2002
and 2001, respectively. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on an individual basis. The type and amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower.
Most of the Company's business activity is with customers located within its
local market area. Generally, commercial real estate, residential real estate
and other assets secure loans. The ultimate repayment of loans is dependent, to
a certain degree, on the local economy and real estate market.
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,
-------------------------------------------
2002 2001 2000
-------- -------- --------
Balance, beginning of year $ 13,332 $ 10,486 $ 8,472
Charge-offs (1,609) (5,416) (601)
Recoveries 510 467 35
-------- -------- --------
Net charge-offs (1,099) (4,949) (566)
Provision for loan losses 4,175 7,795 2,580
-------- -------- --------
Balance, end of year $ 16,408 $ 13,332 $ 10,486
======== ======== ========
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of estimated losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118 issued by the FASB. A loan is considered to be impaired when, based upon
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan.
An insignificant delay or insignificant shortfall in amount of payments does not
necessarily result in the loan being identified as impaired. For this purpose,
delays less than 90 days are considered to be insignificant.
32
Impairment losses are included in the provision for loan losses. Large groups of
smaller balance, homogeneous loans are collectively evaluated for impairment,
except for those loans restructured under a troubled debt restructuring. Loans
collectively evaluated for impairment include consumer loans and residential
real estate loans, and are not included in the data that follow:
December 31,
--------------------------
2002 2001
------- ------
Impaired loans with related reserve for loan losses calculated under SFAS No. 114 $25,511 $1,643
Impaired loans with no related reserve for loan losses calculated under SFAS No. 114 4,051 6,101
------- ------
Total impaired loans $29,562 $7,744
======= ======
For the Years Ended
December 31,
-------------------------------
2002 2001 2000
---- ---- ----
Average impaired loans $13,471 $6,787 $2,389
======= ====== ======
Interest income recognized on impaired loans $1,936 $558 $101
======= ====== ======
Cash basis interest income recognized on impaired loans $2,013 $651 $107
======= ====== ======
During 2002, the Company classified two credits aggregating $13.5 million as
restructured loans within the definition of SFAS No. 15. These loans have had a
temporary modification of terms to provide near-term cash flow relief to the
borrowers. At December 31, 2002, these loans, as restructured, were current,
fully performing and well collateralized. These loans were not classified as
non-accrual and were not considered non-performing.
At December 31, 2002, there were two commercial loan relationships aggregating
$7.0 million for which payments are current, but where the borrowers were
experiencing financial difficulties, that were not classified as non-accrual. At
December 31, 2002, these loans were current, well collateralized, and were not
considered non-performing.
Interest payments on impaired loans are typically applied to principal unless
the ability to collect the principal amount is fully assured, in which case
interest is recognized on the cash basis.
Commercial loans and commercial real estate loans are placed on non-accrual at
the time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Generally, commercial loans are charged off no later
than 120 days delinquent unless the loan is well secured and in the process of
collection, or other extenuating circumstances support collection. Residential
real estate loans are typically placed on non-accrual at the time the loan is 90
days delinquent. Other consumer loans are typically charged off at 90 days
delinquent. In all cases, loans must be placed on non-accrual or charged off at
an earlier date if collection of principal or interest is considered doubtful.
7. RESTRICTED EQUITY INVESTMENTS
The cost of restricted equity investments was as follows:
December 31,
------------------------
2002 2001
------- -------
Federal Reserve Bank stock $ 4,270 $ 3,344
Federal Home Loan Bank stock 7,257 9,134
Atlantic Central Bankers Bank stock 83 83
------- -------
Total $11,610 $12,561
======= =======
33
8. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment consist of the following major classifications:
December 31,
-----------------------------
2002 2001
---- ----
Land $ 6,578 $ 6,578
Buildings 15,704 15,601
Leasehold improvements and equipment 18,881 15,356
-------- --------
41,163 37,535
Accumulated depreciation (11,695) (9,355)
-------- --------
Total $ 29,468 $ 28,180
======== ========
9. REAL ESTATE OWNED
Real estate owned consisted of the following:
December 31,
-------------------
2002 2001
---- ----
Commercial properties $447 $254
Residential properties 148 35
Bank properties 309 609
---- ----
Total $904 $898
==== ====
Expenses applicable to real estate owned include the following:
For the Years Ended
December 31,
2002 2001 2000
---- ---- ----
Net (gain) loss on sales of real estate $ (87) $ (44) $ 8
Provision for losses 117 73 56
Operating expenses, net of rental income 145 294 114
----- ----- -----
Total $ 175 $ 323 $ 178
===== ===== =====
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
For the Years Ended
December 31,
---------------------
2002 2001
---- ----
Balance, beginning of year $ 0 $ 0
Goodwill reclassified in accordance with SFAS No 147 19,672 -
------- -------
Balance, end of year $19,672 $ 0
======= =======
Information regarding the Company's intangible assets follows:
December 31, 2002
-------------------------------------
Carrying Accumulated
Amount Amortization Net
-------- -------- --------
Core Deposit Premium $ 22,198 $ 11,957 $ 10,241
-------- -------- --------
Excess of cost over fair value of assets acquired 49,579 20,365 29,214
Goodwill reclassified in accordance with SFAS No 147 (31,881) (12,209) (19,672)
-------- -------- --------
Net excess of cost over fair value of assets acquired 17,698 8,156 9,542
-------- -------- --------
Total intangible assets $ 39,896 $ 15,931 $ 19,783
======== ======== ========
34
December 31, 2001
-------------------------------------------
Carrying Accumulated
Amount Amortization Net
Core Deposit Premium $22,198 $ 9,265 $12,933
Excess of cost over fair value of assets acquired 49,579 18,875 30,704
------- ------- -------
Total intangible assets $71,777 $28,140 $43,637
======= ======= =======
Information regarding the Company's amortization expense follows:
Actual for Year Ended December 31,
2000 $ 7,879
2001 $ 7,820
2002 $ 4,182
Expected for Year Ending December 31,
2003 $ 3,699
2004 3,562
2005 1,930
2006 1,826
2007 1,810
Thereafter 6,956
-------
Total $19,783
=======
11. DEPOSITS
Deposits consist of the following major classifications:
December 31,
------------------------
2002 2001
---------- ----------
Demand deposits $ 949,827 $ 803,933
Savings deposits 328,508 275,146
Time certificates under $100,000 306,622 363,199
Time certificates $100,000 or more 105,505 130,060
---------- ----------
Total $1,690,462 $1,572,338
========== ==========
Of the total demand deposits, approximately $322,433,000 and $280,196,000 are
non-interest bearing at December 31, 2002 and 2001, respectively.
A summary of certificates by year of maturity is as follows:
Years Ending December 31,
2003 $286,515
2004 62,405
2005 22,341
Thereafter 41,866
--------
Total $412,127
========
35
A summary of interest expense on deposits is as follows:
For the Years Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Savings deposits $ 6,821 $ 5,929 $3,417
Time certificates 17,494 33,917 37,312
Interest-bearing demand deposits 10,789 12,412 12,320
------ ------ ------
Total $35,104 $52,258 $53,049
======= ======= =======
12. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Federal Home Loan Bank ("FHLB") advances are collateralized under a blanket
collateral lien agreement. Advances were as follows:
December 31,
-------------------------
2002 2001
---- ----
Convertible rate advances $45,000 $45,000
Term amortizing advances 89,060 29,008
Term non-amortizing advances 8,200 -
-------- -------
Total $142,260 $74,008
======== =======
Convertible rate advances represents three advances as follows:
December 31,
-------------------------------
2002 2001
---- ----
Original principal $10,000
Fixed interest rate 6.93%
Funding date June 27, 2000
Maturity date June 27, 2003
Convertible date June 27, 2002
Balance $10,000 $10,000
Original principal $10,000
Fixed interest rate 6.87%
Funding date June 29, 2000
Maturity date June 29, 2003
Convertible date June 29, 2002
Balance 10,000 10,000
Original principal $25,000
Fixed interest rate 6.49%
Funding date October 12, 2000
Maturity date October 12, 2007
Convertible date October 12, 2005
Balance 25,000 25,000
------- -------
Total $45,000 $45,000
======= =======
36
Payments are interest only and are made quarterly. On the convertible date and
each quarter thereafter, the FHLB has the option to convert these advances at
then current market rates. The Company has the option of replacing the funding
or repaying the advance.
Term amortizing advances are as follows:
December 31,
-----------------------------
2002 2001
---- ----
Original principal $1,800
Interest rate 5.404%
Monthly payment $12
Maturity date October 8, 2008
Balance $1,571 $1,632
Original principal $2,600
Interest rate 5.867%
Monthly payment $18
Maturity date November 26, 2018
Balance 2,291 2,376
Original principal $25,000
Interest rate 3.890%
Monthly payment $459
Maturity date November 15, 2006
Balance 20,381 25,000
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 10, 2007
Balance 21,189 -
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 30, 2007
Balance 21,189 -
Original principal $25,000
Interest rate 4.740%
Monthly payment $350
Maturity date January 30, 2009
Balance 22,439 -
------- -------
Total $89,060 $29,008
======= =======
Term non-amortizing advances - On June 6, 2002, the Company executed an $8.2
million Rural Development Commitment advance, at a rate of 4.854%, maturing on
June 6, 2007. Monthly payments are interest only during the term of the advance.
There is no convertible option.
Interest expense on FHLB advances was $7,347,000, $3,413,000 and $4,628,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
37
13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
During 2002 and 2001, the Company entered into overnight repurchase agreements
with customers. At December 31, 2002 and 2001, the amounts outstanding were
$61,860,000 and $84,928,000, respectively. At December 31, 2002, the amounts
were borrowed at interest rates ranging from 0.25% to 1.22%. At December 31,
2001, the amounts were borrowed at interest rates ranging from 0.25% to 2.00%.
Interest expense on customer repurchase agreements was $739,000, $2,437,000 and
$4,446,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Collateral for customer repurchase agreements were U.S. Treasury notes. The
market value of the collateral was approximately equal to the amounts
outstanding.
During 2001 and 2000, the Company entered into repurchase agreements with the
FHLB. At December 31, 2002 and 2001, there was no amount outstanding. Interest
expense on FHLB repurchase agreements was $6,456,000 and $21,410,000 for the
years ended December 31, 2001 and 2000, respectively. Collateral for the
repurchase agreements were U.S. Government agency collateralized mortgage
obligations.
14. OTHER BORROWED FUNDS
In connection with an acquisition in 1998, the Bank assumed a loan payable in
the amount of $1,160,000. The borrowing consisted of a single loan from the City
of Wilmington, Delaware (the "City") in accordance with the City's
"Loans-to-Lenders" program that provides low-cost financing to qualified
participants. The loan with the City was a variable rate, interest-only note
adjusted weekly and matured January 1, 2003. At December 31, 2002 and 2001, the
interest rate on the loan was 1.70% and 1.75% respectively.
15. STOCK REPURCHASE PLAN
In February 2002, the Board of Directors of the Company authorized the
initiation of a stock repurchase plan covering up to approximately 3%, or
320,000 shares, adjusted for stock dividend, of the Company's outstanding common
stock. The repurchases were made from time to time in open-market transactions,
subject to the availability of the stock. As of December 31, 2002, the Company
had 86,250 shares repurchased for an aggregate price of approximately
$1,046,000.
16. STOCK OPTION PLANS
In January 2002, the Board of Directors of the Company adopted a Stock Option
Plan (the "2002 Plan"). Options granted under the 2002 Plan may be either
qualified incentive stock options or nonqualified options as determined by the
Compensation Committee of the Board of Directors or the Board of Directors.
Options granted under the 2002 Plan are at the estimated fair value at the date
of grant. There are 787,500 shares authorized for grants of options under the
2002 Plan. The grant of "reload" options is authorized under the 2002 Plan. The
award of a reload option allows the optionee to receive the grant of an
additional stock option, at the then current market price, in the event that
such optionee exercises all or part of an option (an "original option") by
surrendering already owned shares of common stock in full or partial payment of
the option price under such original option. The exercise of an additional
option issued in accordance with the "reload" feature will reduce the total
number of shares eligible for award under the Plan. Under the 2002 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. The vesting provision of the 2002 Plan allows 20% of options granted to
employees to vest six months after the date of grant, and 20% for each of the
next four anniversaries of the grant, subject to employment and other
conditions. The vesting provision of the 2002 Plan generally allows options
granted to directors to vest as of the date of grant. At December 31, 2002,
there were 772,800 options outstanding with the "reload" feature under the 2002
Plan.
In 1997, the Company adopted a Stock Option Plan (the "1997 Plan"). Options
granted under the 1997 Plan may be either qualified incentive stock options or
nonqualified options as determined by the Compensation Committee of the Board of
Directors or the Board of Directors. Options granted under the 1997 Plan are at
the estimated fair value at the date of grant. There are 1,180,993 shares
authorized for grants of options under the 1997 Plan. At December 31, 2002,
there were 1,174,028 options outstanding with the "reload" feature under the
1997 Plan.
In 1995, the Company adopted a Stock Option Plan (the "1995 Plan"). There are
697,671 shares authorized for grants of options under the 1995 Plan. Options
granted under the 1995 Plan were either qualified incentive stock options or
nonqualified options as determined by the Compensation Committee of the Board of
Directors or the Board of Directors. Options granted under the 1995 Plan were at
the estimated fair value at the date of grant.
Under the 1995 and 1997 Plans, the nonqualified options expire ten years and ten
days after the date of grant, unless terminated earlier under the option terms.
The incentive options expire ten years after the date of grant, unless
terminated earlier under the option terms. The vesting provision of the 1997
Plan allows for 50% of options to vest one year after the date of grant, and 50%
two years after the date of grant, subject to employment and other conditions.
All shares granted under the 1995 Plan are fully vested.
38
There are no equity compensation plans issued by the corporation that were not
approved by the shareholders.
Options granted and outstanding under the 1995, 1997 and 2002 Plans, adjusted
for 5% stock dividends granted where appropriate, are as follows:
Incentive Nonqualified Total
--------- ------------ -----
Options granted and outstanding:
December 31, 2002 at prices ranging from $4.10 to $18.10 per share 482,254 2,128,611 2,610,865
======= ========= =========
December 31, 2001 at prices ranging from $4.10 to $18.10 per share 416,137 1,438,515 1,854,652
======= ========= =========
December 31, 2000 at prices ranging from $2.38 to $18.10 per share 552,879 1,631,923 2,184,802
======= ========= =========
Activity in the stock option plans for the period beginning January 1, 2000 and
ending December 31, 2002 was as follows:
Weighted
Number Exercise Options
of Shares Price Exercisable
Outstanding Per Share Exercisable
----------- --------- -----------
January 1, 2000 2,211,510 $ 8.86 1,527,372
=========
Granted 102,767 $ 6.50
Exercised (71,107) $ 4.52
Expired (58,368) $11.59
----------
December 31, 2000 2,184,802 $ 8.82 1,767,429
=========
Granted 105,433 $ 8.06
Exercised (410,595) $ 3.77
Expired (24,988) $11.26
----------
December 31, 2001 1,854,652 $ 9.93 1,712,415
=========
Granted 1,029,800 $11.71
Exercised (189,754) $ 6.04
Expired (83,833) $13.18
----------
December 31, 2002 2,610,865 $10.69 1,757,909
========== =========
The following table summarizes stock options outstanding at December 31, 2002.
Options Outstanding Options Exercisable
------------------------------------------------------------ ---------------------------------------
Number of Weighted Average Weighted Weighted
Range of Options Remaining Average Exercise Options Exercisable Average Exercise
Exercise Price Outstanding Contractual Life Price Price
- --------------------------------------------------------------------------------------------------------------------------
$ 4.10 - $ 6.97 495,794 3.56 years $ 5.10 495,794 $ 5.10
$ 7.26 - $ 9.49 320,929 5.74 years $ 7.91 270,972 $ 7.88
$11.38 - $18.10 1,794,142 7.89 years $12.74 991,143 $13.75
--------- ---------
2,610,865 6.80 years $10.69 1,757,909 $10.41
========= =========
39
17. EMPLOYEE AND DIRECTOR STOCK PURCHASE PLANS
In 1997, the Company adopted an Employee Stock Purchase Plan ("ESPP") and a
Directors Stock Purchase Plan ("DSPP") (collectively, the "Purchase Plans")
wherein 379,267 shares were reserved for issuance pursuant to the Purchase
Plans. Under the terms of the Purchase Plans, the Company grants participants an
option to purchase shares of Company common stock with an exercise price equal
to 95% of market prices. Under the ESPP, employees are permitted, through
payroll deduction, to purchase up to $25,000 of fair market value of common
stock per year. Under the DSPP, directors are permitted to remit funds, on a
regular basis, to purchase up to $25,000 of fair market value of common stock
per year. Participants incur no brokerage commissions or service charges for
purchases made under the Purchase Plans. For the years ended December 31, 2002
and 2001, there were 7,222 shares and 9,496 shares, respectively, granted and
issued through the ESPP. For the years ended December 31, 2002 and 2001, there
were 4,855 shares and 8,342 shares, respectively, granted and issued through the
DSPP. At December 31, 2002 there were 198,799 and 14,355 shares remaining in the
ESPP and DSPP, respectively.
18. BENEFITS
The Company has established a 401(k) Retirement Plan (the "401(k) Plan") for all
qualified employees. Substantially all employees are eligible to participate in
the 401(k) Plan following completion of 90 days of service and attaining age 21.
The Company's match begins after one year of service. Vesting in the Company's
contribution accrues over four years at 25% each year. Effective January 1,
2002, the Company changed the directed trustee and record keeper for the 401(k)
Plan, adding more investment options for the participants, among other things.
Pursuant to the 401(k) Plan, employees could contribute up to 15% of their
compensation to a maximum of $11,000 in 2002 ($12,000 for certain eligible
participants) and $10,500 in 2001 and 2000. Effective January 1, 2002, employees
could contribute up to 50% of their compensation. The Company matches 50% of the
employee contribution, up to 6% of compensation. Beginning in 1998, the Company
match consisted of a contribution of Company common stock, at market value.
Through December 31, 2001, the Company's contributions were included in
shareholders' equity as an issuance of common stock or the reissuance of common
stock held as treasury shares. Beginning January 1, 2002, the Company's
contributions were purchased through a broker by the directed trustee. Effective
January 1, 2002, the Company amended the 401(k) Plan to adopt the provisions of
GUST and EGTRRA, a series of tax legislation, and to change the directed
trustee. The Company's contribution to the 401(k) Plan was $320,000, $291,000
and $272,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company expensed $18,000, $49,000 and $32,000 during 2002, 2001 and 2000,
respectively, to administer and audit the 401(k) Plan.
40
19. 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 $42,757,000 and $28,133,000 at December 31, 2002 and 2001,
respectively), which are not reflected in the accompanying consolidated
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.
Certain office space of the Company and the Bank is leased from companies
affiliated with the chairman under separate agreements with the Company. The
Bank is the sub-tenant of one of these leases. Terms of these three agreements
at December 31, 2002 were as follows.
Expiration date October 2017 March 2005 January 2004
Annual Rental $1,035 $40 $48
Renewal Option Remaining N/A 1 five-year term 3 five-year terms
Annual Rental Increases CPI Fixed Fixed
Certain office space of the Bank is leased from companies affiliated with
certain Directors under separate agreements with the Bank. Terms of these two
agreements at December 31, 2002 were as follows.
Expiration date December 2011 February 2005
Annual Rental $132 $96
Renewal Option Remaining N/A 1 five-year term
Annual Rental Increases Fixed for 5 years Fixed
The Company believes that each of the related party transactions described above
were on terms as fair to the Company as could have been obtained from
unaffiliated third parties.
The following table shows future minimum payments under non-cancelable operating
leases with initial terms of one year or more at December 31, 2002. Future
minimum receipts under sub-lease agreements are not material.
2003 $ 3,528
2004 3,413
2005 3,214
2006 2,988
2007 2,906
Thereafter 15,320
-------
Total $31,369
=======
Rental expense included in occupancy expense for all operating leases was
$3,636,000, $3,195,000 and $3,105,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
41
20. INCOME TAXES
The income tax provision consists of the following:
For the Years Ended
December 31,
---------------------------------
2002 2001 2000
------- ------ -------
Current $ 6,478 $2,899 $5,174
Deferred (1,780) (2,743) (1,550)
------- ------ ------
Total $ 4,698 $ 156 $3,624
======= ====== ======
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
December 31,
-------------------------
2002 2001
---- ----
Deferred tax asset:
Allowance for loan losses $ 6,663 $4,613
Deferred loan fees - 58
Goodwill amortization 4,105 3,766
Compensation 413 -
Other real estate - 346
Unrealized loss on investment securities - 266
Other 322 -
Valuation allowance (735) -
------- ------
Total deferred tax asset 10,768 9,049
Deferred tax liability:
Property (864) (721)
Deferred loan fees (14) -
Unrealized gain on investment securities (3,023) -
Other - (174)
------- ------
Total deferred tax liability (3,901) (895)
------- ------
Net deferred tax asset $ 6,867 $8,154
======= ======
42
The provision for federal income taxes differs from that computed at the
statutory rate as follows:
For the Years Ended
December 31,
-----------------------------------------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Tax computed at the statutory rate $5,276 35.0 $520 35.0 $4,342 35.0
Surtax exemption (150) (1.0) (15) (1.0) (76) (0.6)
Increase (decrease) in charge resulting from:
Goodwill amortization - - 42 2.8 58 0.5
Tax exempt interest (net) (650) (4.3) (571) (38.4) (777) (6.3)
Other, net 222 1.5 180 12.1 77 0.6
------ ---- ---- ---- ------ ----
Total $4,698 31.2 $156 10.5 $3,624 29.2
====== ==== ==== ==== ====== ====
21. EARNINGS PER SHARE
Earnings per share were calculated as follows:
For the Years Ended
December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
Net income $10,378 $1,328 $8,780
Less: Trust Preferred issuance costs write-off 777 - -
---------- ---------- ----------
Net income available to common shareholders $ 9,601 $1,328 $8,780
========== ========== ==========
Dilutive stock options outstanding 2,153,823 977,086 953,356
Average exercise price per share $ 9.45 $6.20 $4.35
Average market price - diluted $12.97 $9.42 $6.71
Average common shares outstanding 11,167,988 10,882,849 10,703,028
Increase in shares due to exercise of options - diluted 428,885 191,479 201,656
---------- ---------- ----------
Adjusted shares outstanding - diluted 11,596,873 11,074,328 10,904,684
========== ========== ==========
Net earnings per share - basic $0.86 $0.12 $0.82
Net earnings per share - diluted $0.83 $0.12 $0.81
Options that could potentially dilute basic EPS in the future
that were not included in the computation of diluted EPS because
to do so would have been antidilutive for the period presented 475,042 877,566 1,231,466
========== ========== ==========
43
22. REGULATORY MATTERS
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 Company's and 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.
The ability of the Bank to pay dividends to the Company is controlled by certain
regulatory restrictions. Permission from the Office of the Comptroller of the
Currency (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. Under such restrictions, the amount available for payment of dividends to
the Company by the Bank totaled $14.7 million at December 31, 2002.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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, 2002,
that the Company and Bank meet all applicable capital adequacy requirements.
As of December 31, 2002, the most recent notification from the OCC 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 Total Capital, Tier 1 Capital and Leverage Ratios as set forth in the
table below.
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
At December 31, 2002
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $176,688 12.15% $116,224 8.00% N/A
Sun National Bank $165,322 11.39% $116,021 8.00% $145,026 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $147,459 10.14% $ 58,112 4.00% N/A
Sun National Bank $148,639 10.24% $ 58,010 4.00% $ 87,016 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $147,459 6.84% $ 86,291 4.00% N/A
Sun National Bank $148,639 6.97% $ 85,244 4.00% $106,556 5.00%
At December 31, 2001
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $157,949 12.23% $103,338 8.00% N/A
Sun National Bank $152,206 11.82% $103,010 8.00% $128,763 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $130,332 10.09% $ 51,669 4.00% N/A
Sun National Bank $138,424 10.75% $ 51,505 4.00% $ 77,258 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $130,332 6.90% $ 75,546 4.00% N/A
Sun National Bank $138,424 7.34% $ 75,443 4.00% $ 94,304 5.00%
44
23. 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, 2002 December 31, 2001
--------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets:
Cash and cash equivalents $ 65,614 $ 65,614 $ 79,082 $ 79,082
Investment securities available for sale 723,201 723,201 647,558 647,558
Loans receivable, net 1,217,008 1,263,396 1,089,155 1,171,426
Restricted equity investments 11,610 11,610 12,561 12,561
Liabilities:
Demand deposits 949,827 949,827 803,933 803,933
Savings deposits 328,508 328,508 275,146 275,146
Certificates of deposit 412,127 419,025 493,259 499,305
FHLB advances 142,260 151,399 74,008 78,254
Loan payable 1,160 1,160 1,160 1,160
Securities sold under agreements to repurchase 61,860 61,860 84,928 84,928
Cash and cash equivalents - For cash and cash equivalents, the carrying amount
is a reasonable estimate of fair value.
Investment securities - For investment securities, fair values are based on
quoted market prices.
Loans receivable - The fair value was estimated by discounting approximate cash
flows of the portfolio to achieve a current market yield.
Restricted equity securities - Ownership in equity securities of bankers' bank
is restricted and there is no established market for their resale. The carrying
amount is a reasonable estimate of fair value.
Demand deposits, savings deposits and certificates of deposit - The fair value
of demand deposits and savings deposits is the amount payable on demand at the
reporting date. The fair value of certificates of deposit is estimated using
rates currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase and loan payable - The fair value
is estimated to be the amount payable at the reporting date.
FHLB advances - The fair value was estimated by discounting approximate cash
flows of the borrowings to achieve a current market yield.
45
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 not assignable by either the Bank or the borrowers, they
only have value to the Bank and the borrowers.
No adjustment was made to the entry-value interest rates for changes in credit
performing commercial loans and real estate loans for which there are no known
credit concerns. Management segregates loans in appropriate risk categories.
Management believes that the risk factor embedded in the entry-value interest
rates along with the general reserves applicable to the performing commercial
and real estate loan portfolios for which there are no known credit concerns
result in a fair valuation of such loans on an entry-value basis.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2002 and 2001. 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, 2002 and 2001, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
24. INTEREST RATE RISK
The Company's exposure to interest rate risk results from the difference in
maturities and repricing characteristics of the interest-bearing liabilities and
interest-earning assets and the volatility of interest rates. For the majority
of 2002, the Company was asset sensitive. At December 31, 2002, the Company's
assets have shorter maturity or repricing terms 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 increasing interest rates. Management monitors the
relationship between the interest rate sensitivity of the Company's assets and
liabilities.
25. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S SUBORDINATED DEBT
Guaranteed preferred beneficial interest in Company's subordinated debt consists
of the following:
December 31,
-------------------
2002 2001
------- -------
Sun Trust I - $28,040
Sun Trust II $29,274 29,287
Sun Trust III 20,000 -
Sun Trust IV 10,000 -
------- -------
$59,274 $57,327
======= =======
46
In 1997, the Company's subsidiary, Sun Capital Trust ("Sun Trust I") issued
$28.75 million of 9.85% Preferred Securities ("Sun Trust I Preferred
Securities") with a stated value and liquidation preference of $25 per share.
The proceeds from the sale of Sun Trust I Preferred Securities were utilized by
Sun Trust I to invest in $28.75 million of 9.85% Junior Subordinated Debentures
(the "Sun Trust I Debentures") of the Company, due March 2027.
In 1998, Sun Capital Trust II ("Sun Trust II"), a statutory business trust
created under Delaware law that is a subsidiary of the Company, issued $29.9
million, 8.875% Preferred Securities (the "Sun Trust II Preferred Securities")
with a stated value and liquidation preference of $10 per share. The obligations
of Sun Trust II under Sun Trust II Preferred Securities issued are fully and
unconditionally guaranteed by the Company. The proceeds from the sale of Sun
Trust II Preferred Securities were utilized by Sun Trust II to invest in $29.9
million of 8.875% Junior Subordinated Debentures (the "Sun Trust II Debentures")
of the Company. Sun Trust II Debentures are unsecured and rank subordinate and
junior in right of payment to all indebtedness, liabilities and obligations of
the Company, except that they rank pari passu with the Sun Trust III and Sun
Trust IV Debentures described below. Sun Trust II Debentures represent the sole
assets of Sun Trust II. Interest on Sun Trust II Preferred Securities is
cumulative and payable quarterly in arrears. The Company has the right to
optionally redeem Sun Trust II Debentures prior to the maturity date of December
31, 2028, on or after December 31, 2003, at 100% of the stated liquidation
amount, plus accrued and unpaid distributions, if any, to the redemption date.
Under the occurrence of certain events, the Company may redeem in whole, but not
in part, Sun Trust II Debentures prior to December 31, 2003. Proceeds from any
redemption of Sun Trust II Debentures would cause a mandatory redemption of Sun
Trust II Preferred Securities having an aggregate liquidation amount equal to
the principal amount of Sun Trust II Debentures redeemed.
In 2002, the Company notified the holders of the outstanding $28.0 million of
9.85% Sun Trust I Preferred Securities of its intention to call these securities
contemporaneously with the redemption of the Sun Trust I Debentures on April 1,
2002. The Company wrote down the unamortized debt issuance costs of the called
securities in the amount of $777,000, net of income tax, through a charge to
equity. The Company funded this call with short-term borrowings of $25.0 million
and a $3.0 million dividend from Sun.
In March 2002, the Company formed a subsidiary, Sun Capital Trust III ("SunTrust
III"). During April 2002, SunTrust III issued $20.0 million of Pooled Floating
Rate Capital Securities ("Sun Trust III Capital Securities") with a stated value
and liquidation preference of $1,000 per share. The proceeds were used to pay
down $20.0 million of short-term borrowings, used to partially fund the Sun
Trust I security call described above. The variable annual rate of interest
resets semi-annually and is equal to LIBOR plus 3.70% (the "Coupon Rate"), with
an initial rate of 6.02%, and will not exceed 11.00% through five years from its
issuance. The Coupon Rate at December 31, 2002 was 5.32%. The obligations of Sun
Trust III under Sun Trust III Capital Securities are fully and unconditionally
guaranteed by the Company. The proceeds from the sale of Sun Trust III Capital
Securities were utilized by Sun Trust III to invest in Sun Trust III Debentures,
(the "Sun Trust III Debentures") of the Company. Sun Trust III Debentures are
unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company, except that they rank
pari passu with Sun Trust II and Sun Trust IV Debentures. Sun Trust III
Debentures represent the sole assets of Sun Trust III. Interest on Sun Trust III
Preferred Securities is cumulative and payable semi-annually in arrears. The
Company has the right to optionally redeem Sun Trust III Debentures prior to the
scheduled maturity date of April 22, 2032, 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, Sun Trust III Debentures prior to April 22, 2007. Proceeds from any
redemption of Sun Trust III Debentures would cause a mandatory redemption of Sun
Trust III Capital Securities having an aggregate liquidation amount equal to the
principal amount of Sun Trust III Debentures redeemed.
47
In June 2002, the Company formed a subsidiary, Sun Capital Trust IV ("SunTrust
IV"). During July 2002, SunTrust IV issued $10.0 million of Pooled Floating Rate
Capital Securities ("Sun Trust IV Capital Securities") with a stated value and
liquidation preference of $1,000 per share. The proceeds were used to pay down
$5.0 million of short-term borrowings used to partially fund the Sun Trust I
security call described above, and for general corporate purposes. The variable
annual rate of interest resets quarterly and is equal to LIBOR plus 3.65% (the
"Coupon Rate"), with an initial rate of 5.51%, and will not exceed 11.95%
through five years from its issuance. The Coupon Rate at December 31, 2002 was
5.43%. The obligations of Sun Trust IV under Sun Trust IV Capital Securities are
fully and unconditionally guaranteed by the Company. The proceeds from the sale
of Sun Trust IV Capital Securities were utilized by Sun Trust IV to invest in
Sun Trust IV Debentures, (the "Sun Trust IV Debentures") of the Company. Sun
Trust IV Debentures are unsecured and rank subordinate and junior in right of
payment to all indebtedness, liabilities and obligations of the Company, except
that they rank pari passu with Sun Trust II and Sun Trust III Debentures
described above. Sun Trust IV Debentures represent the sole assets of Sun Trust
IV. Interest on Sun Trust IV Preferred Securities is cumulative and payable
quarterly in arrears. The Company has the right to optionally redeem Sun Trust
IV Debentures prior to the scheduled maturity date of October 7, 2032, 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, Sun Trust IV Debentures prior to July 7, 2007.
Proceeds from any redemption of Sun Trust IV Debentures would cause a mandatory
redemption of Sun Trust IV Capital Securities having an aggregate liquidation
amount equal to the principal amount of Sun Trust IV Debentures redeemed.
Under the terms of the Sun Trust II Debentures, the Sun Trust III Debentures and
the Sun Trust IV Debentures (the "Debentures"), the Company has the right, with
certain limitations, to defer the payment of interest on the Debentures at any
time for a period not exceeding twenty consecutive quarterly periods, ten
consecutive semi-annual periods and twenty consecutive quarterly periods,
respectively. Consequently, distributions to the holders of the Sun Trust II
Preferred Securities would be deferred and accumulate at 8.875% per annum.
Distributions to the holders of the Sun Trust III Preferred Securities would be
deferred and accumulate at a variable rate, compounded semi-annually.
Distributions to the holders of the Sun Trust IV Preferred Securities would be
deferred and accumulate at a variable rate, compounded quarterly.
During 2002, the Company repurchased 1,300 shares of Sun Trust II preferred
securities for approximately $13,000. During 2000, the Company repurchased
22,800 shares of Sun Trust II preferred securities for approximately $228,000.
Sun Trust II, Sun Trust III and Sun Trust IV are wholly owned subsidiaries of
the Company, have no independent operations and issued securities that contained
a full and unconditional guarantee of their parent, the Company.
48
26. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The condensed financial statements of Sun Bancorp, Inc. are as follows:
Condensed Statements of Financial Condition December 31,
----------------------
2002 2001
Assets
Cash $ 6,382 $ 1,809
Investments in subsidiaries 195,385 183,355
Accrued interest and other assets 5,848 4,490
-------- --------
Total $207,615 $189,658
======== ========
Liabilities and Shareholders' Equity
Other liabilities $ 864 $ 557
------ ------
Total liabilities 864 557
Guaranteed preferred beneficial interest in Company's subordinated debt 61,128 59,141
Shareholders' Equity 145,623 129,960
-------- --------
Total $207,615 $189,658
======== ========
Condensed Statements of Income
For the Years ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Net interest expense $ (4,633) $ (5,438) $ (5,437)
Management fee 2,280 4,327 3,452
Other expenses (2,133) (4,374) (3,369)
-------- -------- --------
Loss before equity in undistributed income of subsidiaries
and income tax expense (4,486) (5,485) (5,354)
Equity in undistributed income of subsidiaries 14,864 6,813 14,134
Income tax expense - - -
-------- -------- --------
Net income $ 10,378 $ 1,328 $ 8,780
======== ======== ========
Condensed Statements of Cash Flows
For the Years ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Operating activities:
Net income $ 10,378 $ 1,328 $ 8,780
Adjustments to reconcile net income to net cash
used in operating activities -
Undistributed income of subsidiaries (14,864) (6,813) (14,134)
Changes in assets and liabilities which (used) provided cash:
Accrued interest and other assets (1,358) (1,293) (604)
Accounts payable and accrued expenses 307 278 143
-------- -------- --------
Net cash used in operating activities (5,537) (6,500) (5,815)
-------- -------- --------
Investing activities -
Dividends from subsidiary 8,015 5,916 5,486
--------
Net cash provided by investing activities 8,015 5,916 5,486
--------
Financing activities:
Proceeds from other borrowings 25,000 - -
Repayment of other borrowings (25,000) - -
Proceeds from issuance of Trust Preferred Securities 30,000 - -
Redemption of Trust Preferred Securities (28,000) - -
Exercise of stock options 784 670 898
Proceeds from issuance of common stock 376 187 14
Repurchase of guaranteed preferred beneficial
interest in Company's subordinated debt (13) - (511)
Purchase of treasury stock (1,046) - -
Payments for fractional interests resulting from
stock dividend (6) (4) (17)
-------- -------- --------
Net cash provided by financing activities 2,095 853 384
-------- -------- --------
Increase in cash 4,753 269 55
Cash, beginning of year 1,809 1,540 1,485
-------- -------- --------
Cash, end of year $ 6,382 $ 1,809 $ 1,540
======== ======== ========
49
27. SUBSEQUENT EVENT
On March 19, 2003, the Company's Board of Directors declared 5% stock dividends,
payable on April 21, 2003, to shareholders of record on April 7, 2003.
28. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the last two
years restated for stock dividends (amounts are in thousands, except per share
amounts). As required by SFAS No. 147, the Company retroactively ceased
amortization of goodwill beginning as of January 1, 2002 and restated earnings
for the quarterly periods ended March 31, 2002, June 30, 2002 and September 30,
2002.
Three Months Ended
---------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
2002
Interest income $27,690 $28,971 $28,615 $27,618
Interest expense 10,962 12,124 12,167 12,603
------- ------- ------- -------
Net interest income 16,728 16,847 16,448 15,015
Provision for loan losses 990 1,000 1,110 1,075
Other operating income 3,861 3,259 3,257 2,801
Other expenses 15,371 15,062 14,851 13,681
------- ------- ------- -------
Income before income taxes 4,228 4,044 3,744 3,060
Income taxes 1,336 1,268 1,171 923
------- ------- ------- -------
Net income, as reported 2,892 2,776 2,573 2,137
Goodwill amortization, net of tax - 544 544 544
------- ------- ------- -------
Adjusted net income 2,892 2,232 2,029 1,593
Less: Trust Preferred issuance costs write-off - - 777 -
------- ------- ------- -------
Net income available to common shareholders $ 2,892 $ 2,232 $ 1,252 $ 1,593
======= ======= ======= =======
Basic earnings per share $ 0.26 $ 0.20 $ 0.11 $ 0.14
Goodwill amortization, net of tax - 0.05 0.05 0.05
------- ------- ------- -------
Adjusted basic earnings per share $ 0.26 $ 0.25 $ 0.16 $ 0.19
======= ======= ======= =======
Diluted earnings per share $ 0.25 $ 0.19 $ 0.10 $ 0.14
Goodwill amortization, net of tax - 0.05 0.05 0.05
------- ------- ------- -------
Adjusted diluted earnings per share $ 0.25 $ 0.24 $ 0.15 $ 0.19
======= ======= ======= =======
2001
Interest income $28,005 $31,024 $32,828 $34,968
Interest expense 14,070 17,058 18,468 20,471
------- ------- ------- -------
Net interest income 13,935 13,966 14,360 14,497
Provision for loan losses 410 2,345 3,744 1,296
Other operating income 2,814 2,831 2,637 2,234
Other expenses 14,871 15,090 14,391 13,643
------- ------- ------- -------
Income (loss) before income taxes 1,468 (638) (1,138) 1,792
Income taxes (benefit) 423 (300) (477) 510
------- ------- ------- -------
Net income (loss) $ 1,045 $ (338) $ (661) $ 1,282
======= ======= ======= =======
Basic earnings per share $ 0.09 $ (0.03) $ (0.06) $ 0.12
======= ======= ======= =======
Diluted earnings per share $ 0.09 $ (0.03) $ (0.06) $ 0.12
======= ======= ======= =======
Basic and diluted earnings per share are computed independently for each of the
quarters presented. Consequently, the sum of the quarters may not equal the
annual earnings per share.
50
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Shares of the Company's common stock have been quoted on the Nasdaq National
Market under the symbol "SNBC" since November 1997. From August 1996 to November
1997, the Company's common stock was quoted on the Nasdaq Small Cap Market. The
following table sets forth the high and low closing sale prices (adjusted for
stock dividends) for the common stock for the calendar quarters indicated, as
published by the Nasdaq Stock Market. The prices reflect inter-dealer prices,
with retail markup, markdown, or commission, and may not represent actual
transactions.
High Low
---- ---
2002
Fourth Quarter $ 14.50 $ 12.73
Third Quarter 14.00 10.01
Second Quarter 14.70 12.57
First Quarter 12.94 9.86
2001
Fourth Quarter $ 10.86 $9.00
Third Quarter 13.33 9.75
Second Quarter 10.00 7.11
First Quarter 8.79 6.80
There were 373 holders of record of the Company's common stock as of March 21,
2003. This number does not reflect the number of persons or entities who held
stock in nominee or "street" name through various brokerage firms. At March 21,
2003, there were 11,186,561 shares of the Company's common stock outstanding.
The Company paid 5% stock dividends on May 23, 2002, June 13, 2001 and June 21,
2000. To date, the Company has not paid cash dividends on its common stock.
Future declarations of dividends by the Board of Directors would depend upon a
number of factors, including the Company's and the Bank's financial condition
and results of operations, investment opportunities available to the Company or
the Bank, capital requirements, regulatory limitations, tax considerations, the
amount of net proceeds retained by the Company and general economic conditions.
No assurances can be given, however, that any dividends will be paid or, if
payment is made, will continue to be paid.
The ability of the Company to pay cash dividends is dependent upon the ability
of the Bank to pay dividends to the Company. Because the Bank is a depository
institution insured by the Federal Deposit Insurance Corporation ("FDIC"), it
may not pay dividends or distribute capital assets if it is in default on any
assessment due the FDIC. In addition, the Office of the Comptroller of the
Currency regulations impose certain minimum capital requirements that affect the
amount of cash available for the payment of dividends by the Bank. Under Federal
Reserve policy, the Company is required to maintain adequate regulatory capital
and is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where it might not do so
absent such a policy. This policy could have the effect of reducing the amount
of cash dividends declarable by the Company.
Additional information: The Company's Annual report on Form 10-K (excluding
exhibits) for the fiscal year ended December 31, 2002 is available without
charge upon written request to Sun Bancorp, Inc. Shareholder Relations, 226
Landis Avenue, Vineland, NJ 08360.
51
CORPORATE DIRECTORY
SUN BANCORP, INC. and SUN NATIONAL BANK SUN BANCORP, INC. SUN NATIONAL BANK
DIRECTORS Executive Management Executive Management
Bernard A. Brown Bernard A. Brown Bernard A. Brown
Thomas A. Bracken Chairman of the Board Chairman of the Board
Ike Brown
Jeffrey S. Brown Sidney R. Brown Thomas A. Bracken
Sidney R. Brown Vice Chairman of the Board President and CEO
Peter Galetto, Jr.
Linwood C. Gerber Thomas A. Bracken Dan A. Chila, CPA
Douglas J. Heun, CPA President and CEO Executive Vice President, Cashier and CFO
Anne E. Koons
Vito J. Marseglia Dan A. Chila, CPA A. Bruce Dansbury
Alfonse M. Mattia, CPA Executive Vice President and CFO Executive Vice President
George A. Pruitt, Ph.D.
Anthony Russo, III John P. Neary
Edward H. Salmon, Ph.D. Executive Vice President
John D. Wallace
Louis J. Pellicori
Executive Vice President
Bart A. Speziali
Executive Vice President
Thomas J. Holt
Senior Vice President
Thomas J. Townsend
Senior Vice President
Sandy Wandelt
Senior Vice President
52