Selected Financial Data
At or for the Years Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Selected Balance Sheet Data:
Assets $2,599,487 $2,112,172 $1,929,425 $2,002,529 $1,980,861
Cash and investments 1,058,096 800,425 739,201 848,421 948,898
Loans receivable (net) 1,364,465 1,217,008 1,089,605 1,031,844 901,211
Deposits 2,111,125 1,690,462 1,572,338 1,410,867 1,291,326
Borrowings and securities sold
under agreements to repurchase 222,398 205,280 160,096 407,279 528,752
Junior subordinated debentures (1) 72,167 - - - -
Guaranteed preferred beneficial interest
in Company's subordinated debt (1) - 59,274 57,327 57,327 57,838
Shareholders' equity 185,718 145,623 129,960 117,634 91,104
Selected Results of Operations:
Interest income $108,062 $112,894 $126,825 $150,656 $114,254
Net interest income 72,287 65,038 56,758 61,248 53,174
Provision for loan losses 4,825 4,175 7,795 2,580 1,989
Net interest income after
provision for loan losses 67,462 60,863 48,963 58,668 51,185
Non-interest income 17,356 13,178 10,516 8,183 9,751
Non-interest expense 66,036 58,965 57,695 54,447 46,955
Net income 13,336 10,378 1,328 8,780 9,714
Per Share Data:
Earnings Per Share
Basic $ 1.08 $ 0.82 $ 0.12 $ 0.78 $ 0.93
Diluted $ 1.00 $ 0.79 $ 0.11 $ 0.77 $ 0.87
Book Value $ 13.97 $ 12.40 $ 11.17 $ 10.39 $ 8.16
Selected Ratios:
Return on average assets 0.59% 0.50% 0.07% 0.43 % 0.58 %
Return on average equity 8.71% 7.63% 1.05% 8.85 % 11.08 %
Ratio of equity to assets 6.79% 6.55% 6.42% 4.86 % 4.60 %
(1) Effective December 31, 2003, the Company adopted new accounting standards
which required the deconsolidation of the Company's wholly-owned trust which
issued capital securities. See Note 2 to Consolidated Financial Statements
contained herein for further discussion.
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)
ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative on the Company's
financial condition and results of operations that should be read in conjunction
with the accompanying consolidated financial statements. It includes the
following sections:
o OVERVIEW
o CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
o RECENT ACCOUNTING PRINCIPLES
o RESULTS OF OPERATIONS
o LIQUIDITY AND CAPITAL RESOURCES
o FINANCIAL CONDITION
o FORWARD-LOOKING STATEMENTS
OVERVIEW
Sun Bancorp, Inc. (the "Company") is a multi-state Bank Holding Company
headquartered in Vineland, New Jersey. The Company's principal subsidiary is Sun
National Bank (the "Bank"). At December 31, 2003, the Company had total assets
of $2.6 billion, total deposits of $2.1 billion and total shareholders' equity
of $185.7 million. The Company's principal business is to serve as a holding
company for the Bank. As a registered holding company, the Company is subject to
the supervision and regulation of the Board of Governors of the Federal Reserve
System.
Through the Bank, the Company provides consumer and business banking services
through five regional banking groups and over 75 Community Banking Centers
located in 12 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, SBA loans and small business loans. The
Bank's commercial deposit services include business checking accounts, and cash
management services such as electronic banking, sweep accounts, lockbox
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 other 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 is a designated Preferred Lender with the New Jersey
Economic Development Authority.
Our goal is to be the premier community bank in every community we serve. In
early 2001, a new management team was assembled to direct the Company's
strategic focus of building and growing the fundamental banking business. This
leadership team is comprised of experienced bankers with proven track records in
building commercial banking franchises in New Jersey and who have previously
worked together to develop a successful banking franchise in New Jersey. As part
of the new strategic focus, the Company has sought to manage the overall asset
growth, reposition the balance sheet, improve capital ratios and profitability
and rationalize the Bank's branch network.
The Company's financial performance over the past three years reflects the
initiatives management has taken to achieve its goals. The Company experienced
rapid growth from 1994 to 2000, expanding from 3 to 70 branches and from $112
million in assets to $2.0 billion at December 31, 2000. As a result, the
Company's asset growth outpaced the growth of capital and infrastructure. During
the past three years under the direction of this new management team, the
Company has repositioned its balance sheet and rebuilt the infrastructure.
2
As a result of these efforts, total deposits have grown from $1.411 billion at
December 31, 2000, to $2.111 billion at December 31, 2003, and core deposits
(defined as all deposits less certificates of deposit) have grown from $781.9
million to $1.577 billion during that same time period, total loans have grown
from $1.042 billion at December 31, 2000, to $1.382 billion at December 31,
2003 and our net interest margin has increased from 3.31% at December 31, 2000,
to 3.57% at December 31, 2003. Additionally, we have completed the initial phase
of our branch rationalization program. These objectives have been achieved while
maintaining well capitalized ratios and managing credit risk and interest rate
risk. The Company remains committed to its near-term initiatives for revenue
growth and improved profitability by continuing to grow its relationship banking
business, rationalizing and improving its branch network and increasing fee
income.
Branch Franchise Strategy. Beginning in 2001, the Company began to implement a
strategy to maximize our market coverage and improve branch profitability with
the most efficient number of branches. Selling, consolidating or closing under
performing branches and adding branches in more attractive markets are
accomplishing the successful execution of this strategy. Through December 31,
2003, we have sold five branches and consolidated two branches into existing
offices. These seven branches had an average deposit size of approximately $11.4
million. In addition, over that same period we opened five de novo branch
offices. We have also had several recent acquisitions that have enhanced our
franchise and strengthened our market position in four critical counties in New
Jersey. In December 2003, the Bank acquired eight branches with approximately
$340 million of deposits from New York Community Bancorp. In February 2004, the
Company announced the acquisition of Community Bancorp of New Jersey which,
subject to normal shareholder and regulatory approval, will add eight new
branches with approximately $326 million of deposits. In conjunction with this
planned acquisition, the Company has announced that it will accelerate its
planned 2004 - 2005 branch rationalization program into 2004. The Company
anticipates that it will sell, consolidate or close a total of 14 branches in
2004 and incur a pretax restructuring charge of approximately $2.3 million, or
$0.11 per share. Going forward, we anticipate the branch consolidations/sales to
be accretive by $0.10 per share annually.
As a result of this branch rationalization program over the past three years, as
the table below demonstrates, the number of branch offices remains at 70 while
pro forma deposits have grown 65.1% from $1.4 billion at December 31, 2000 to
pro forma total deposits at December 31, 2003 of $2.3 billion. More importantly,
the average deposit size per branch has grown from $20.2 million to a pro forma
$33.3 million over this same period.
We will continue to take advantage of strategic opportunities in our marketplace
to grow our core business. We expect that the continued consolidation of the
banking industry and the customer disruption caused by larger regional bank
mergers will provide opportunities to expand our operations and increase our
market share through branch and whole bank acquisitions as well as from internal
growth and de novo branching.
Total Avg. Deposits
No. of Deposits /Branch
Branches ($ Millions) ($ Millions)
- --------------------------------------------------------------------------------
Dec. 31, 2000 70 $1,411 $20.2
Dec. 31, 2001 (+3 / -1) 72 1,572 21.8
Dec. 31, 2002 (+2 / -1) 73 1,690 23.2
Dec. 31, 2003 (+8(1) / -5) 76 2,111 27.8
- --------------------------------------------------------------------------------
- - Consolidation/Sale of Branches(2) -14 -108 7.7
+ Acquisition of CBNJ +8 +326 40.8
- --------------------------------------------------------------------------------
Pro Forma 70 2,329 33.3
- --------------------------------------------------------------------------------
(1) Eight branches were acquired from New York Community Bancorp in December
2003
(2) Total deposits and average deposits per branch represent anticipated
run-off as a result of consolidations and closings
3
Growth of Relationship Banking Business. As part of the implementation of our
strategic plan, we have shifted our focus from transactional banking to
providing our customers with value driven products and services designed to
create long-term, profitable relationships. Our business is organized across
three functional business lines which deliver our products and services on a
coordinated basis through our five Regional Banking Groups. Each Regional
Banking Group focuses on serving the specific needs of its market area and
building lasting and profitable relationships with customers. In this way, we
are able to deliver to customers the full range of our products and services
through management and experienced loan origination and credit professionals who
operate solely within that market and are responsive, flexible and highly
customer focused.
Growth in Fee Income. We believe that we can better serve our customers, achieve
our goal of becoming the lead bank for all of our customers' banking needs,
increase our profitability and diversify our income stream by delivering a wider
range of fee-based financial services products. We intend to increase both our
customer base and our share of customers' financial services business by
offering a diverse range of products and services. The fee income strategy is
designed to provide a more diverse menu of products to our increasing customer
base. To date, we have enhanced our existing fee-generating products and are
exploring additional products and services as part of our ongoing process of
innovation. In addition, we have hired new relationship managers with extensive
experience in lending and cross-selling these products and services in our
market area.
Building Our Infrastructure. We intend to upgrade our technology and existing
facilities to create a platform that will allow us to better serve our
customers. Since 2001, the Company has invested significant resources,
including, capital for computer hardware and software and security systems, in
upgrading our information technology across our business lines and throughout
our Regional Banking Groups as well as building improvements and additional
people in our lending, regional banking and corporate locations. Improvements to
our technology platform and facilities will also create an infrastructure which
will complement our branch franchise strategy and enable us to more efficiently
deliver products and services. Significant infrastructure costs included:
2003 2002 2001 Total
------------ ------------ ------------ ------------
Capitalized costs:
Capitalized computer hardware, software $1.5 million $0.3 million $0.4 million $2.2 million
Current period operating expenses:
Personnel, consulting services and other expenses 2.6 million 1.6 million 0.7 million 4.9 million
------------ ------------ ------------ ------------
Total $4.1 million $1.9 million $1.1 million $7.1 million
============ ============ ============ ============
During 2004, in the continuing effort to upgrade our technology and existing
facilities, the Company has committed to spend an additional $2.2 million on
computer hardware and software for Teller and Platform branch automation in
addition to a projected capital spending of approximately $2 million for new and
existing branches.
Maintaining Our Capital Position. Prudent capital management is the most
critical component to the successful execution of our strategic plan. It is our
stated intention to maintain "well capitalized" risk-based capital levels. The
Company has developed a capital plan 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, or in the alternative, when
appropriate, to consider various capital raising alternatives.
In December 2003, the Company completed the public offering of 1,495,000 shares
of common stock, which increased capital by approximately $30 million. The
proceeds of this offering were used primarily to provide the Bank with capital
to support the branch acquisition in December 2003 and for general corporate
purposes.
Also in December 2003, the Company completed the issuance of $40.0 million of
Pooled Floating Rate Capital Securities. The proceeds were used to redeem
approximately $30 million of 8.875% Sun Capital Trust II Preferred Securities
and for general corporate purposes.
4
The following table sets forth the risk-based capital amount and ratios at
December 31, 2003 for the Company and the Bank.
At December 31, 2003 Actual
----------------------
Amount Ratio
------ -----
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $195,197 11.35%
Sun National Bank $172,500 10.06%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $168,576 9.80%
Sun National Bank $154,536 9.02%
Leverage Ratio:
Sun Bancorp, Inc. $168,576 7.34%
Sun National Bank $154,536 6.77%
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The discussion and analysis of the financial condition and results of operations
are based on the Consolidated Financial Statements, which are prepared in
conformity with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenue and expenses. Management evaluates these estimates and
assumptions on an ongoing basis, including those related to the allowance for
loan losses, income taxes and goodwill. Management bases its estimates on
historical experience and various other factors and assumptions that are
believed to be reasonable under the circumstances. These form the basis for
making judgments on the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Allowance for Loan Losses. Through the Bank, the Company originates loans that
it intends to hold for the foreseeable future or until maturity or repayment.
The Bank may not be able to collect all principal and interest due on these
loans. Allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio as of the balance sheet date. The
determination of the allowance for loan losses requires management to make
significant estimates with respect to the amounts and timing of losses and
market and economic conditions. 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. 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. It is the policy of management to
provide for losses on unidentified loans in its portfolio in addition to
classified loans.
Management monitors its allowance for loan losses and on a quarterly basis and
makes adjustments to the allowance through the provision for loan losses as
economic conditions and other pertinent factors indicate. In this context, a
series of qualitative factors are used in a methodology as a measurement of how
current circumstances are affecting the loan portfolio. Included in these
qualitative factors are
o Levels of past due, classified and non-accrual loans, troubled debt
restructurings and modifications
o Nature and volume of loans
o Changes in lending policies and procedures, underwriting standards,
collections, charge offs and recoveries
o National and local economic and business conditions, including various
market segments
o Concentrations of credit and changes in levels of such concentrations
o Effect of external factors on the level of estimated credit losses in the
current portfolio.
5
Additionally, historic loss experience over the trailing eight quarters is taken
into account. In determining the allowance for loan losses, management has
established both specific and general pooled allowances. Values assigned to the
qualitative factors and those developed from historic loss experience provide a
dynamic basis for the calculation of reserve factors for both pass-rated loans
(general pooled allowance) and those criticized and classified loans without
Statement of Financial Accounting Standards ("SFAS") No. 114 reserves (specific
allowance). The amount of the specific allowance is determined through a
loan-by-loan analysis of certain large dollar commercial loans. Loans not
individually reviewed are evaluated as a group using expected loss ratios, which
are based on our historical charge-off experience and current market and
economic conditions. In determining the appropriate level of the general pooled
allowance and projecting losses management makes estimates based on internal
risk ratings, which take into account such factors as debt service coverage,
loan to value ratios and cost and timing of collateral repossession and
disposal. Estimates are periodically measured against actual loss experience.
Adjustments are made to future projections as assumptions are revised.
As changes in the Company's operating environment occur and as recent loss
experience ebbs and flows, the factors for each category of loan based on type
and risk rating will change to reflect current circumstances and the quality of
the loan portfolio.
Although the Company maintains its allowance for loan losses at levels
considered adequate to provide for the inherent risk of loss in its loan
portfolio, if economic conditions differ substantially from the assumptions used
in making the evaluations 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. Accordingly, a decline in the national economy or
the local economies of the areas in which the loans are concentrated could
result in an increase in loan delinquencies, foreclosures or repossessions
resulting in increased charge-off amounts and the need for additional loan loss
allowances in future periods. In addition, the Company'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.
Accounting for Income Taxes. The Company accounts for income taxes in accordance
with SFAS No. 109, which requires the recording of deferred income taxes that
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Management exercises significant judgment
in the evaluation of the amount and timing of the recognition of the resulting
tax assets and liabilities and the judgments and estimates required for the
evaluation are periodically updated based upon changes in business factors and
the tax laws.
Valuation of Goodwill. The Company assesses the impairment of goodwill at least
annually, and whenever events or significant changes in circumstance indicate
that the carrying value may not be recoverable. Factors that the Company
considers important in determining whether to perform an impairment review
include significant under performance relative to forecasted operating results
and significant negative industry or economic trends. If the Company determines
that the carrying value of goodwill may not be recoverable, then the Company
will assess impairment based on a projection of undiscounted future cash flows
and measure the amount of impairment based on fair value. In the fourth quarter
2003 and 2002, the Company performed, with the assistance of an independent
third party other than its independent auditors, its annual impairment test of
goodwill as required under the SFAS Nos. 142 and 147. Such testing is based upon
a number of factors, which are based upon assumptions and management judgments.
These factors include among other things, future growth rates, discount rates
and earnings capitalization rates. The test indicated that no impairment charge
was necessary for the years ended December 31, 2003 and 2002.
RECENT ACCOUNTING PRINCIPLES
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation Number ("FIN") 46, Consolidation of Variable Interest Entities.
In December 2003, the FASB issued a revision of FIN 46 (FIN 46(R)). 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 has
participated in the issue of preferred trust securities through various trusts
established for such purpose. These trusts are subject to the requirements of
FIN 46 and FIN 46(R). The adoption of the provisions of FIN 46 and FIN 46(R)
impacted the consolidation of four wholly-owned entities involved in the
issuance of trust preferred securities. Effective December 31, 2003, the Company
deconsolidated the wholly-owned issuing trust entities resulting in a
recharacterization of the
6
underlying consolidated debt obligation from the previous trust preferred
securities obligations to the junior subordinated debenture obligations that
exist between the Company and the issuing trust entities. The adoption of FIN 46
and FIN 46(R) did not have a material impact on the Company's financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, except for the provision of this statement that relate to
SFAS No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003 and for hedging relationships designated after
June 30, 2003. All provisions are to be applied prospectively except for the
provisions of this statement that relate to SFAS 133 Implementation Issues that
have been effective for fiscal quarters that began prior to June 15, 2003. These
provisions are to be applied in accordance with their respective effective
dates. The adoption of SFAS No. 149 did not have an impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The FASB is addressing
certain implementation issues associated with the application of SFAS No. 150.
In October 2003, the FASB decided to defer certain provisions of SFAS No. 150
related to mandatorily redeemable financial instruments representing
non-controlling interests in subsidiaries included in consolidated financial
statements. The Company will monitor the actions of the FASB and assess the
impact, if any, that these actions may have on the Company's financial
statements. Currently, the Company has no financial instruments entered into or
modified that require application of this Statement. The adoption of this
Statement has not had material impact on the Company's financial condition or
results of operations.
In December 2003, the FASB Emerging Issues Task Force ("EITF") reached consensus
on several issues being addressed in EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. The
objective of EITF No. 03-1 is to provide guidance on other-than-temporary
impairment and its application to debt and marketable equity securities. The
EITF reached consensus requiring disclosures, tabular and narrative, that
provide sufficient information to provide an understanding of the circumstances
leading to management's conclusion that the impairments are not
other-than-temporary. The requirements apply to financial statements for fiscal
years ending after December 15, 2003. The Company has followed the disclosure
requirements of EITF No. 03-1 in its consolidated financial statements for 2003.
RESULTS OF OPERATIONS
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.
2003 vs. 2002
Overview. Net income for the year ended December 31, 2003 was $13.3 million, or
$1.00 earnings per share, in comparison to $10.4 million, or $0.79 earnings per
share for the year ended December 31, 2002. As more fully described below, the
28.5% increase in net income was attributable to an increase in net interest
income of $7.2 million and an increase in non-interest income of $4.2 million,
partially offset by an increase in non-interest expense of $7.1 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) 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.
7
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,
------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Avg. Avg.
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Loans receivable (1), (2):
Commercial and industrial $1,087,067 $ 70,437 6.48 % $ 991,715 $ 70,134 7.07 %
Home equity 62,194 2,452 3.94 32,756 1,651 5.04
Second mortgage 50,302 3,369 6.70 51,751 3,874 7.49
Residential real estate 37,315 2,778 7.45 50,542 3,384 6.70
Other 52,365 4,227 8.07 55,508 4,779 8.61
---------- -------- ---------- --------
Total loans receivable 1,289,243 83,263 6.46 1,182,272 83,822 7.09
Investment securities (3) 732,821 25,726 3.51 682,433 29,346 4.30
Interest-bearing deposit with banks 8,464 57 0.68 10,318 88 0.85
Federal funds sold 31,599 301 0.95 44,891 703 1.57
---------- -------- ---------- --------
Total interest-earning assets 2,062,127 109,347 5.30 1,919,914 113,959 5.94
Non-interest-earning assets:
Cash and due from banks 63,963 60,705
Bank properties and equipment 29,661 28,634
Goodwill and intangible assets 39,016 40,076
Other assets, net 59,329 28,366
---------- ----------
Total non-interest-earning assets 191,969 157,781
---------- ----------
Total assets $2,254,096 $2,077,695
========== ==========
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 684,162 7,407 1.08 $ 584,808 10,789 1.84
Savings deposits 326,012 3,968 1.22 314,208 6,821 2.17
Time deposits 408,264 12,105 2.96 449,438 17,493 3.89
---------- -------- ---------- --------
Total interest-bearing deposits 1,418,438 23,480 1.66 1,348,454 35,103 2.60
---------- -------- ---------- --------
Borrowed money, short-term:
Federal funds purchased 4,653 81 1.74 682 15 2.20
Repurchase agreements with customers 71,828 348 0.48 74,602 739 0.99
Borrowed money, long-term:
FHLB advances 170,844 7,639 4.47 147,130 7,347 4.99
Debentures and trust securities (4) 60,660 4,227 6.97 55,536 4,481 8.07
Other borrowed money - - 3,242 171 5.27
---------- -------- ---------- --------
Total interest-bearing liabilities 1,726,423 35,775 2.07 1,629,646 47,856 2.94
---------- -------- ---------- --------
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits 338,385 287,164
Other liabilities 36,171 24,788
---------- ----------
Non-interest-bearing liabilities 374,556 311,952
---------- ----------
Total liabilities 2,100,979 1,941,598
---------- ----------
Shareholders' equity 153,117 136,097
---------- ----------
Total liabilities and shareholders'
equity $2,254,096 $2,077,695
========== ==========
Net interest income $ 73,572 $ 66,103
======== ========
Interest rate spread (5) 3.23 % 3.00 %
====== ======
Net interest margin (6) 3.57 % 3.44 %
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.45 % 117.81 %
====== ======
- ------------------
(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) Represents junior subordinated debentures in 2003 and guaranteed preferred
beneficial interest in Company's subordinated debt in 2002. (See Note 16 of
the Consolidated Financial Statements).
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
8
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,
2003 vs. 2002
-----------------------------------
Increase (Decrease)
Due to
-----------------------------------
Volume Rate Net
-------- -------- --------
Interest income:
Loans receivable:
Commercial and industrial $ 6,427 $ (6,124) $ 303
Home equity 1,224 (423) 801
Second mortgage (106) (399) (505)
Residential real estate (952) 346 (606)
Other (262) (290) (552)
-------- -------- --------
Total loans receivable 6,331 (6,890) (559)
Investment securities 2,053 (5,673) (3,620)
Interest-bearing deposit with banks (14) (17) (31)
Federal funds sold (172) (230) (402)
-------- -------- --------
Total interest-earning assets $ 8,198 $(12,810) $ (4,612)
Interest expense:
Deposit accounts:
Demand deposits $ 1,630 $ (5,013) $ (3,383)
Savings deposits 246 (3,099) (2,853)
Time deposits (1,493) (3,895) (5,388)
-------- -------- --------
Total deposits accounts 383 (12,007) (11,624)
Borrowings:
Federal funds purchased 70 (4) 66
Repurchase agreements with customers (26) (365) (391)
FHLB advances 1,107 (814) 293
Debentures and trust securities 391 (645) (254)
Other borrowed money (171) - (171)
-------- -------- --------
Total borrowed money 980 (1,183) (203)
-------- -------- --------
Total interest-bearing liabilities $ 1,754 $(13,835) $(12,081)
-------- -------- --------
Net change in interest income $ 6,444 $ 1,025 $ 7,469
======== ======== ========
Net interest income (on a tax-equivalent basis) increased $7.5 million or 11.3%
to $73.6 million for 2003 compared to $66.1 million for 2002. Of this amount,
$8.2 million was due to the 7.4% increase in the average balance of
interest-earning assets. The continuing low interest rate environment resulted
in a decrease in both interest income and expense, netting to a $1.0 million
increase in net interest income. Partially offsetting these increases was the
$1.8 million increase in interest expense attributed to the 5.9% increase in the
average balance of interest-bearing liabilities. Net interest spread increased
23 basis points in 2003 compared to 2002. In the lower interest rate environment
which characterized 2003 compared to 2002, the Company achieved a decline in
funding cost of 87 basis points which exceeded the decline in earning asset
yield of 64 basis points.
While a large number of depository institutions have reported a decreased net
interest margin for 2003, the Company increased its net interest margin to 3.57%
in 2003 from 3.44% in 2002. The increase in net interest margin was due to the
Company continuing to employ its relationship pricing strategy which facilitated
a favorable change in the mix of deposits between core and time deposits,
resulting in an increase of higher concentration, lower costing core deposits.
Also contributing to the increase was the Company's ability during 2003 to
reprice its deposit liabilities quicker than its loan products. The
repositioning of the Company's capital securities with the redemption of the
capital securities issued by Sun Capital Trust II and the issuance of new
capital securities also aided the improvement in net interest margin.
In connection with the December 2003 acquisition of branches from New York
Community Bank, the Company purchased short and intermediate term investments,
which the Company intends to redeploy into its loan portfolio as opportunities
become available. Until these funds are fully deployed during 2004 into a higher
yielding loan portfolio, the Company anticipates that its net interest margin
will be compressed during 2004.
9
Provision for Loan Losses. The Company recorded a provision for loan losses of
$4.8 million in 2003, an increase of $650,000 compared to a provision of $4.2
million for 2002. The larger 2003 provision was primarily the result of loan
portfolio growth. The ratio of allowance for loan losses to total loans was
1.27% at December 31, 2003 compared to 1.33% at December 31, 2002. At least
quarterly, management performs an analysis to identify the inherent risk of loss
in its loan portfolio. This analysis includes a qualitative 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.
Non-Interest Income. Non-interest income increased $4.2 million, or 31.7% for
the year ended December 31, 2003 compared to the year ended December 31, 2002.
The increase was primarily due to the $2.6 million gain on sale of branches. The
Company anticipates that it will sell, consolidate or close a total of 14
branches in 2004 and incur a pretax restructuring charge of approximately $2.3
million, or $0.11 per share. Going forward, we anticipate the branch
consolidations/sales to be accretive by $0.10 per share annually. Additionally,
the Company recorded gain on sale of investment securities of $2.5 million for
the years ended December 31, 2003 and 2002. Many factors are considered before
an investment security is sold, including the market interest rates, duration of
remaining portfolio and capital and liquidity needs on the Company. Because of
the uncertainties associated with these factors, management cannot predict with
any certainty if this trend will continue.
One of the Company's key strategic goals is building fee income by introducing
new products. Two new products introduced in 2003 contributed to the increase in
non-interest income. The Bank's Overdraft Protection Program increased service
charges by approximately $479,000 and the income recorded from our first year of
Bank Owned Life Insurance ("BOLI") was $984,700. Management anticipates that
both products will continue to increase our non-interest income in 2004, in
addition to other initiatives under consideration, although, the Company cannot
predict with any certainty the future levels of non-interest income.
Non-Interest Expenses. Non-interest expenses increased approximately $7.0
million, or 12.0% to $66.0 million for the year ended December 31, 2003 as
compared to $59.0 million for the same period for 2002. Salaries and employee
benefits increased $5.2 million, reflecting the effect of the increased staffing
in early 2002. Occupancy expense increased $875,000, due primarily to additional
branches, snow removal and security. Advertising increased $682,000 as a result
of continued and increased branding efforts and the conversion of the New York
Community branches.
Income Tax Expense. Income taxes increased $748,000, from $4.7 million for the
year ended December 31, 2002 to $5.4 million for the year ended December 31,
2003. The increase was due to a larger 2003 pretax income, partially offset by
decrease in the effective tax rate from 31.2% to 29.0%. Of the 2.2% decrease in
the effective tax rate, a 1.8% decrease was due to an increase in BOLI income,
which is exempt from income taxes.
2002 vs. 2001
Overview. Net income for the year ended December 31, 2002 was $10.4 million, or
$0.79 per share, in comparison to $1.3 million, or $0.11 per share for the year
ended December 31, 2001. 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.
10
Net Interest Income. 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
------------------------------------- -------------------------------------
Avg. Avg.
Average Yield/ Average Yield/
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 %
Home equity 32,756 1,651 5.04 23,847 1,956 8.20
Second mortgage 51,751 3,874 7.49 41,847 3,392 8.11
Residential real estate 50,542 3,384 6.70 53,572 3,985 7.44
Other 55,508 4,779 8.61 60,118 5.401 8.98
---------- -------- ---------- --------
Total loans receivable 1,182,272 83,822 7.09 1,061,848 86,600 8.16
Investment securities (3) 682,433 29,346 4.30 692,927 39,423 5.69
Interest-bearing deposit with banks 10,318 88 0.85 12,013 323 2.69
Federal funds sold 44,891 703 1.57 39,388 1,468 3.73
---------- -------- ---------- --------
Total interest-earning assets 1,919,914 113,959 5.94 1,806,176 127,814 7.08
Non-interest-earning assets:
Cash and due from banks 60,705 62,837
Bank properties and equipment 28,634 28,865
Goodwill and intangible assets 40,076 49,071
Other assets, net 28,366 17,746
---------- ----------
Total non-interest-earning assets 157,781 158,519
---------- ----------
Total assets $2,077,695 $1,964,695
========== ==========
Interest-bearing deposit accounts:
Interest-bearing demand deposits $ 584,808 10,789 1.84 $ 431,196 12,412 2.88
Savings deposits 314,208 6,821 2.17 214,849 5,929 2.76
Time deposits 449,438 17,493 3.89 593,352 33,917 5.72
---------- -------- ---------- --------
Total interest-bearing deposits 1,348,454 35,103 2.60 1,239,397 52,258 4.22
---------- -------- ---------- --------
Borrowed money, short-term:
Federal funds purchased 682 15 2.20 534 30 5.62
Repurchase agreements with customers 74,602 739 0.99 82,318 2,436 2.96
Repurchase agreements with FHLB - - 129,098 6,456 5.00
Borrowed money, long-term:
FHLB advances 147,130 7,347 4.99 52,789 3,413 6.47
Other borrowed money 3,242 171 5.27 1,160 36 3.10
Guaranteed preferred beneficial interest
in Company's subordinated debt 55,536 4,481 8.07 57,327 5,438 9.49
---------- -------- ---------- --------
Total interest-bearing liabilities 1,629,646 47,856 2.94 1,562,623 70,067 4.48
---------- -------- ---------- --------
Non-interest-bearing demand deposits 287,164 265,569
Other liabilities 24,788 10,299
---------- ----------
Non-interest-bearing liabilities 311,952 275,868
---------- ----------
Total liabilities 1,941,598 1,838,491
---------- ----------
Shareholders' equity 136,097 126,204
---------- ----------
Total liabilities and shareholders'
equity $2,077,695 $1,964,695
========== ==========
Net interest income $ 66,103 $ 57,747
-======= ========
Interest rate spread (4) 3.00 % 2.60 %
====== ======
Net interest margin (5) 3.44 % 3.20 %
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.81 % 115.59 %
====== ======
- ----------------
(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 interest margin represents net interest income as a percentage of
average interest-earning assets.
11
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
-----------------------------------
Increase (Decrease)
Due to
-----------------------------------
Volume Rate Net
-------- -------- --------
Interest income:
Loans receivable:
Commercial and industrial $ 8,330 $(10,062) $ (1,732)
Home equity 592 (897) (305)
Second mortgage 756 (274) 482
Residential real estate (217) (384) (601)
Other (403) (219) (622)
-------- -------- --------
Total loans receivable 9,058 (11,836) (2,778)
Investment securities (589) (9,488) (10,077)
Interest-bearing deposit with banks (40) (195) (235)
Federal funds sold 182 (947) (765)
-------- -------- --------
Total interest-earning assets $ 8,611 $(22,466) $(13,855)
-------- -------- --------
Interest expense:
Deposit accounts:
Demand deposits $ 301 $ (1,924) $ (1,623)
Savings deposits 1,043 (151) 892
Time deposits (7,093) (9,331) (16,424)
-------- -------- --------
Total deposits accounts (5,749) (11,406) (17,155)
Borrowings:
Federal funds purchased (2) (13) (15)
Repurchase agreements with customers (210) (1,487) (1,697)
Repurchase agreements with FHLB (6,456) - (6,456)
FHLB advances 3,834 100 3,934
Other borrowed money 97 38 135
Guaranteed preferred beneficial interest
in Company's subordinated debt (166) (791) (957)
-------- -------- --------
Total interest-bearing liabilities $ (8,652) $(13,559) $(22,211)
-------- -------- --------
Net change in interest income $ 17,263 $ (8,907) $ 8,356
======== ======== ========
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.
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.
12
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. During 2001, the Company fully paid off
repurchase agreements with the Federal Home Loan Bank ("FHLB"), resulting in a
decrease of interest expense of $6.5 million.
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 ($216,000), deterioration and charge-off of several large loans including
loans to a developer of computer software ($2 million), a lessor of residential
real estate ($613,000), a cranberry grower ($520,000), a developer of
residential real estate ($484,000) and a retailer of trucks and truck parts
($388,000), 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.
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 securities.
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 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. For additional
information about the adoption of SFAS No. 147, see Notes 2 and 10 of the
Consolidated Financial Statements.
Income Tax Expense. Income taxes increased $4.5 million, from $156,000 for the
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 to the proportion of tax-free
municipal income to income before taxes.
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
daily operating 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, 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, 2004 total $323.0 million, excluding the pending
Community Bank acquisition. 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 $82.1 million at December 31, 2003, the Company
has additional secured borrowing capacity with the FHLB and other sources in the
amount of $40.0 million at December 31, 2003. Management will continue to
monitor the Company's liquidity and maintain it at a level that is adequate but
not excessive.
13
Net cash provided by operating activities for the year ended December 31, 2003
totaled $20.0 million, compared to $23.2 million for the year ended December 31,
2002 and $23.5 million for the year ended December 31, 2001. During 2003, the
Company used its cash provided from financing activities, primarily the net
increase in cash from acquisitions and sales of $238.4 million and net increase
in deposits of $122.1 million to fund our investing activities, primarily the
net increase in investments of $247.3 million, the net increase in loans of
$140.9 million and the purchase of $31.8 million BOLI.
During the planning and execution of the branch rationalization program, the
Company monitored its liquidity and capital positions. The Company anticipates
that it will sell, close or consolidate a total of 14 branches in 2004. The
Company anticipates funding this program primarily with the excess liquidity
obtained through the acquisition of eight branches from New York Community Bank
in December 2003 and the pending acquisition of the Community Bank of New
Jersey.
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. During 2003, this included the calling of
approximately $30 million of Trust Preferred Securities, the issuing of $40
million of Trust Preferred Securities and the issuance of 1,495,000 shares of
common stock. The following table sets forth the risk-based capital levels at
December 31, 2003 for the Company and the Bank.
To Be Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
At December 31, 2003 Actual Purposes Provisions
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $195,197 11.35% $137,608 8.00% N/A
Sun National Bank $172,500 10.06% $137,116 8.00% $171,395 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $168,576 9.80% $ 68,804 4.00% N/A
Sun National Bank $154,536 9.02% $ 68,558 4.00% $102,837 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $168,576 7.34% $ 91,865 4.00% N/A
Sun National Bank $154,536 6.77% $ 91,291 4.00% $114,114 5.00%
As part of its capital plan, the Company maintains trust preferred securities of
$61.3 million at December 31, 2003 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 $8.7 million at December 31, 2003 qualifies as Tier 2,
or supplementary capital of the Company.
Asset and Liability Management
Interest rate, credit and operational risks are among the most significant
market risks impacting the performance of the Company. Interest risk is reviewed
monthly by the Asset Liability Committee ("ALCO"), composed of senior management
representatives from a variety of areas within the Company. ALCO devises
strategies and tactics to maintain the net interest income of the Company within
acceptable ranges over a variety of interest rate scenarios. Should the
Company's risk modeling indicate an undesired exposure to changes in interest
rates, there are a number of remedial options available including changing the
investment portfolio characteristics, and changing loan and deposit pricing
strategies. Two of the tools used in monitoring the Company's sensitivity to
interest rate changes are gap analysis and net interest income simulation.
14
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 the 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, over the interest-bearing liabilities maturing or repricing within that
same time period. On a monthly basis the Company and the Bank monitor their gap,
primarily cumulative through both six months and one year maturities.
During most of 2003, the Company was asset sensitive, that is, the Company's
interest-earning assets had shorter maturity or repricing terms than its
interest-bearing liabilities. At December 31, 2003, the Company had a positive
position with respect to its exposure to interest rate risk maturing or
repricing within one year. Total interest-earning assets maturing or repricing
within one year exceeded interest bearing liabilities maturing or repricing
during the same time period by $244.1 million, representing a positive one-year
gap ratio of 9.39%. The December 31, 2003 one-year gap included $125.0 million
short-term investments related to the Company's acquisition of branches from New
York Community Bank. These short-term investments are expected to be reinvested
into either the loan portfolio or intermediate term investments during 2004.
The following table sets forth the maturity and repricing characteristics of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 2003. 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 $490,176 $203,803 $639,653 $ 48,447 $1,382,079
FHLB interest-bearing deposit 2,789 - - - 2,789
Investment securities 297,167 218,669 377,389 80,203 973,428
Federal funds sold 487 - - - 487
-------- -------- -------- -------- ----------
Total interest-earning assets 790,619 422,472 1,017,042 128,650 2,358,783
-------- -------- -------- -------- ----------
Interest-bearing demand deposits 259,781 118,571 350,494 55,607 784,453
Savings deposits 30,280 85,945 247,956 28,603 392,784
Time certificates 140,327 186,359 187,561 20,103 534,350
Federal funds purchased 2,500 - - - 2,500
Federal Home Loan Bank advances 4,749 14,547 137,589 7,079 163,964
Securities sold under agreements to repurchase 55,934 - - - 55,934
Trust preferred securities 50,000 20,000 - - 70,000
-------- -------- -------- -------- ----------
Total interest-bearing liabilities 543,571 425,422 923,600 111,392 2,003,985
-------- -------- -------- -------- ----------
Periodic Gap $247,048 $ (2,950) $ 93,442 $ 17,258 $ 354,798
======== ======== ======== ======== ==========
Cumulative Gap $247,048 $244,098 $337,540 $354,798
======== ======== ======== ========
Cumulative Gap Ratio 9.50% 9.39% 12.98% 13.65%
======== ======== ======== ========
Net Interest Income Simulation
The Company also uses simulation models to measure the impact of changing
interest rates on its operations. The simulation model attempts to capture the
cash flow and repricing characteristics of the current assets and liabilities on
the Company's balance sheet. Assumptions regarding such things as prepayments,
rate change behaviors, level and composition of new balance sheet activity and
new product lines are incorporated into the simulation model. Net interest
income is simulated over a twelve month horizon under a variety of linear yield
curve shifts, subject to certain limits agreed to by ALCO. The Company uses a
base interest rate scenario provided by Data Resources, Inc. ("DRI") a third
party econometric modeling service.
Actual results may differ from the simulated results due to such factors as the
timing, magnitude and frequency of interest rate changes, changes in market
conditions, management strategies and differences in actual versus forecasted
balance sheet composition and activity.
15
The following table shows the Company's estimated earnings sensitivity profile
versus the most likely DRI rate forecast as of December 31, 2003.
Change in Interest Rates Percentage Change in Net Interest Income
(basis points) Year 1
+200 -0.3%
+100 -0.3%
-100 -0.1%
Derivative Financial Instruments
The Company will utilize certain derivative financial instruments to enhance its
ability to manage interest rate risk that exist as part of its ongoing business
operations. Derivative financial instruments are entered into for periods that
match the related underlying exposures and do not constitute positions
independent of these exposures. The Company does not enter into derivative
financial instruments for trading purposes, nor is it a party to any leveraged
derivative financial instruments. The Company accounts for changes in the fair
value of fair value hedges and the corresponding hedged items as a component of
Other Non-Interest Income on the Company's Consolidated Statements of Income.
The gross unrealized gains and gross unrealized losses on the Company's
derivative financial instruments are included as a component of Other Assets or
Other Liabilities, respectively, in the Company's Consolidated Statements of
Financial Condition. The gross unrealized gains and gross unrealized losses on
the corresponding hedged items are included as part of the carrying value of the
hedged item in the Company's Consolidated Statements of Financial Condition.
Net interest income or net interest expense related to outstanding interest rate
swap agreements are accrued and recognized in earnings as an adjustment to the
related interest income or interest expense of the hedged asset/liability over
the life of the related agreement. Gains and losses associated with the
termination of interest rate swap agreements for identified positions are
deferred and amortized over the remaining lives of the related underlying
assets/liabilities as an adjustment to the yield/rate. Unamortized deferred
gains and losses associated with terminated interest rate swap agreements are
included in the underlying assets/liabilities hedged.
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.
16
FINANCIAL CONDITION
The Company's assets increased by $487.3 million, or 23.1% from $2.11 billion at
December 31, 2002 to $2.60 billion at December 31, 2003. A large portion of the
increase in both investments and deposits, as well as the goodwill and other
intangible assets, was attributed to the December 2003 acquisition of eight
branches from New York Community Bancorp with approximately $340 million of
deposits. Additionally, the Company increased net loans receivable by $147.5
million, investment in BOLI by $32.8 million, advances from the FHLB by $21.7
million, and trust securities by a net $10.4 million while decreasing repurchase
agreements by $5.9 million. Total capital increased by $40.1 million, or 27.5%
from $145.6 million at December 31, 2002 to $185.7 million at December 31, 2003,
primarily due to the issuance of common stock in December of $30.4 million and
net income of $13.3 million.
Loans. Net loans receivable increased $147.5 million, or 12.1%, from December
31, 2002 to December 31, 2003, due primarily to growth in commercial loans of
$125.3 million or 12.0% and home equity loans of $35.7 million or 80.0%, offset
by a decrease in mortgage loans and other loans of $12.5 million. The increase
in commercial loans was a result of organic growth as well as the hiring of
experienced loan origination and credit professionals from competing
institutions. This increase in commercial loans is net of approximately $125
million in unscheduled prepayments. The increase in the home equity loans is
driven from the Company's goal to increase residential lending through
relationship products. During 2003, the Company offered promotional rates on the
home equity products.
A large portion of the Bank's commercial and industrial loans are concentrated
in the hospitality, entertainment and leisure industries and general office
space. Many of these industries are dependent upon seasonal business and other
factors beyond the control of the industries, such as weather and beach
conditions along the New Jersey seashore. Any significant or prolonged adverse
weather or beach conditions along the New Jersey seashore could have an adverse
impact on the borrowers' ability to repay loans. In addition, because these
loans are concentrated in southern and central New Jersey, a decline in the
general economic conditions of southern or central New Jersey and the impact on
discretionary consumer spending could have a material adverse effect on the
Company's financial condition, results of operations and cash flows. At December
31, 2003, 11.5% of total loans outstanding are concentrated in hotel loans.
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 Company's underwriting standards, rates and terms, and are
approved according to the Company'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,
--------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------- ------------------ ------------------- ------------------- ----------------
Amount % Amount % Amount % Amount % Amount %
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Type of Loan:
- -------------
Commercial and industrial $1,169,164 85.69 $1,043,885 85.77 $ 911,145 83.62 $ 869,088 84.23 $750,707 83.32
Home equity 80,292 5.88 44,603 3.67 23,854 2.19 24,613 2.38 26,619 2.96
Second mortgage 51,531 3.78 47,458 3.90 49,047 4.50 35,056 3.40 27,448 3.05
Residential real estate 29,788 2.18 43,375 3.56 55,282 5.07 54,140 5.25 52,986 5.88
Other 51,304 3.76 54,095 4.45 63,609 5.84 59,433 5.76 51,633 5.73
Less: Loan loss allowance (17,614) (1.29) (16,408) (1.35) (13,332) (1.22) (10,486) (1.02) (8,472) (0.94)
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Net loans $1,364,465 100.00 $1,217,008 100.00 $1,089,605 100.00 $1,031,844 100.00 $900,921 100.00
========== ====== ========== ====== ========== ====== ========== ====== ======== ======
Type of Security:
- -----------------
Residential real estate:
1-4 family $ 185,364 13.58 $ 166,495 13.67 $ 146,157 13.41 $ 143,973 13.96 $118,837 13.19
Other 117,479 8.61 88,465 7.27 108,437 9.95 83,615 8.10 8,954 0.99
Commercial real estate 784,716 57.51 721,658 59.30 599,027 54.98 576,365 55.86 199,437 22.14
Commercial business loans 229,342 16.81 210,374 17.29 199,103 18.27 183,130 17.75 528,513 58.66
Consumer 33,642 2.47 36,333 2.99 36,640 3.36 40,879 3.96 38,817 4.31
Other 31,536 2.31 10,091 0.83 13,573 1.25 14,368 1.39 14,835 1.65
Less: Loan loss allowance (17,614) (1.29) (16,408) (1.35) (13,332) (1.22) (10,648) (1.02) (8,472) (0.94)
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Net loans $1,364,465 100.00 $1,217,008 100.00 $1,089,605 100.00 $1,031,844 100.00 $900,921 100.00
========== ====== ========== ====== ========== ====== ========== ====== ======== ======
17
The following table sets forth the estimated maturity of the Company's loan
portfolio at December 31, 2003. 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 $234,179 $483,929 $451,056 $(15,885) $1,153,279
Home equity 9,216 18 71,058 (483) 79,809
Second mortgage 661 23,359 27,511 (285) 51,246
Residential real estate 5,831 875 23,082 (247) 29,541
Other 9,227 14,195 27,882 (714) 50,590
-------- -------- -------- -------- ----------
Total $259,114 $522,376 $600,589 $(17,614) $1,364,465
======== ======== ======== ======== ==========
The following table sets forth the dollar amount of all loans due after December
31, 2004 which have pre-determined interest rates and which have floating or
adjustable interest rates.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
Commercial and industrial $585,061 $349,924 $ 934,985
Home equity 7,480 63,596 71,076
Second mortgage 50,870 - 50,870
Residential real estate 19,942 4,015 23,957
Other 33,203 8,874 42,077
-------- -------- ----------
Total $696,556 $426,409 $1,122,965
======== ======== ==========
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. If the loan continues to be
delinquent for 90 days or more, the Company usually declares the loan to be in
default, payment in full is demanded and steps are taken to liquidate any
collateral taken as security for the loan. 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 and residential real estate loans are typically
charged-off at 90 days delinquent, unless the loan is well secured and in the
process of collection or other extenuating circumstances support collection. 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.
Restructured Loans. At December 31, 2002, two credits aggregating $13.5 million
were classified as restructured loans within the definition of SFAS No. 15. One
credit representing two loans was an assisted living facility. The other credit
was one loan that was part of a relationship with a distributor of wicker
furniture. During 2003, the borrowers defaulted under the terms of the
previously approved modifications, and the loans were placed in non-accrual
status. Subsequent to being placed in non-accrual status, one credit was charged
down by $1,716,000 to the net realizable value of the underlying collateral. The
other credit was transferred into real estate owned in the amount of $2,461,000
via deed in lieu of foreclosure.
Potential Problem Loans. At December 31, 2003, there were two commercial loan
relationships aggregating $2.7 million for which payments are current, but where
the borrowers were experiencing financial difficulties. These relationships
include a shoe retailer and a private school. These loans were not classified as
non-accrual and were not considered non-performing. At December 31, 2003, these
loans were current, well collateralized or carried a specific reserve to address
any shortfall in collateral value.
18
Non-Performing Assets. Total non-performing assets increased $12.9 million from
$13.4 million at December 31, 2002 to $26.3 million at December 31, 2003. The
ratio of non-performing assets to net loans increased to 1.92% at December 31,
2003 compared to 1.10% at December 31, 2002. The increase in non-performing
assets was centered in two loans totaling $9,250,000 to the assisted living
facility previously identified as restructured and at December 31, 2003 were
considered non-accrual loans (see Restructured Loans, above) and in an increase
to real estate owned of $3,819,000 (see Real Estate Owned, below).
The loans to the assisted living facility have been charged down to the net
realizable value of the collateral and are considered well secured. An agreement
to sell the Bank's notes has been executed, due diligence is underway and
repayment in full is expected during the first half of 2004.
Management of the Company believes that all loans accruing interest are
adequately secured and in the process of collection.
Non-Performing Assets
At December 31,
------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Loans accounted for on a non-accrual basis:
Commercial and industrial $20,308 $ 8,879 $ 8,007 $ 2,933 $ 2,085
Home equity 46 14 201 65 8
Second mortgage - 100 130 38 5
Residential real estate 1,122 593 735 430 250
Other 92 377 50 240 232
------- ------- ------- ------- -------
Total $21,568 $ 9,963 $ 9,123 $ 3,706 $ 2,580
======= ======= ======= ======= =======
Accruing loans that are contractually past due 90 days or more:
Commercial and industrial $ 125 $ 1,837 $ 425 $ 114 $ 880
Home equity 47 30 42 36 339
Second mortgage - 122 190 153 54
Residential real estate 57 401 295 540 303
Other 19 115 146 332 226
------- ------- ------- ------- -------
Total $ 248 $ 2,505 $ 1,098 $ 1,175 $ 1,802
======= ======= ======= ======= =======
Total non-accrual and 90-day past due loans $21,816 $12,468 $10,221 $ 4,881 $ 4,382
Real estate owned 4,444 904 898 1,179 535
------- ------- ------- ------- -------
Total non-performing assets $26,260 $13,372 $11,119 $ 6,060 $ 4,917
======= ======= ======= ======= =======
Total non-accrual and 90-day past due loans to net loans 1.60% 1.02% 0.94% 0.47% 0.49%
Total non-accrual and 90-day past due loans to total assets 0.84% 0.59% 0.53% 0.24% 0.22%
Total non-performing assets to net loans 1.92% 1.10% 1.02% 0.59% 0.55%
Total non-performing assets to total assets 1.01% 0.63% 0.58% 0.30% 0.25%
Total allowance for loan losses to total non-performing loans 80.74% 131.60% 130.44% 214.83% 193.34%
Interest income that would have been recorded on loans on non-accrual status,
under the original terms of such loans, would have totaled $1.3 million for the
year ended December 31, 2003.
Real Estate Owned. 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.
19
Real estate owned consisted of the following:
December 31,
--------------------
2003 2002
------ ------
Commercial properties $4,013 $447
Residential properties 122 148
Bank properties 309 309
------ ----
Total $4,444 $904
====== ====
The increase in real estate owned was centered in two properties of the
distributor of wicker furniture, one of which secured a loan in the amount of
$3,819,000 that was previously identified as restructured (see Restructured
Loans and Non-Performing Assets, above). One property is currently under
agreement of sale and settlement is expected before the end of the first quarter
of 2004. The second property has been listed for sale. It is anticipated that
the sale proceeds of both properties will exceed their carrying values.
An analysis of the activity in real estate owned is as follows:
For the Years Ended
December 31,
-----------------------
2003 2002
------- ------
Balance, beginning of year $ 904 $ 898
Additions 4,214 1,111
Sales (674) (988)
Write down - (117)
------- ------
Balance, end of year $ 4,444 $ 904
======= ======
20
Allowances for Losses on Loans. The Company's allowance for losses on loans
increased to $17.6 million or 1.27% of loans at December 31, 2003. Provision for
loan losses was $4.8 million in 2003, $4.2 million in 2002 and $7.8 million in
2001. Net charge-offs were $3.6 million in 2003, $1.1 million in 2002 and $4.9
million in 2001. The 2003 net charge-offs amount was primarily related to four
relationships with loan amounts aggregating $3,518,000 that were written down to
net realizable value or charged off in 2003. Included in these relationships
were the loans to the assisted living facility previously classified as
restructured, (see Restructured Loans and Non-Performing Assets, above), a loan
to the distributor of wicker furniture transferred to real estate owned in 2003
(see Restructured Loans and Real Estate Owned, above), loans to a distributor of
office equipment and a loan to a commercial printing firm.
The following table sets forth information with respect to the Company's
allowance for losses on loans at the dates indicated:
At December 31,
----------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Allowance for losses on loans, beginning of year $16,408 $13,332 $10,486 $ 8,472 $ 6,993
Charge-offs:
Commercial 4,010 1,219 4,748 209 15
Mortgage 1 20 4 8 210
Other 369 371 665 384 311
------- ------- ------- ------- -------
Total charge-offs 4,380 1,610 5,417 601 536
------- ------- ------- ------- -------
Recoveries:
Commercial 700 457 423 - -
Mortgage - - - 25 10
Other 61 54 45 10 16
------- ------- ------- ------- -------
Total recoveries 761 511 468 35 26
------- ------- ------- ------- -------
Net charge-offs 3,619 1,099 4,949 566 510
Provision for loan losses 4,825 4,175 7,795 2,580 1,989
------- ------- ------- ------- -------
Allowance for losses on loans, end of year $17,614 $16,408 $13,332 $10,486 $ 8,472
======= ======= ======= ======= =======
Net loans charged-off as a percent of average loans outstanding 0.28% 0.09% 0.47% 0.06% 0.06%
======= ======= ======= ======= =======
21
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,
--------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance at end of year
applicable to:
Commercial and industrial $15,885 90.19% $14,806 84.63% $11,457 82.62% $ 8,676 83.38% $6,994 82.55%
Residential real estate 247 1.40 265 3.52 577 5.01 391 5.19 327 5.83
Home equity 483 2.74 263 3.62 268 2.16 343 2.36 254 2.93
Other 999 5.67 1,074 8.23 1,030 10.21 1,076 9.07 897 8.69
------- ------ ------- ------ ------- ------ ------- ------ ------ ------
Total allowance $17,614 100.00% $16,408 100.00% $13,332 100.00% $10,486 100.00% $8,472 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ====== ======
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 $240.2
million or 33.2% from $723.2 million at December 31, 2002 to $963.4 million at
December 31, 2003. The majority of the $240.2 million increase occurred in
December 2003 related to the Company's acquisition of branches from New York
Community Bank. The December 2003 purchases consisted of both short and
intermediate term investments, which the Company intends to redeploy into its
loan portfolio as opportunities become available.
The current estimated average life of the investment portfolio is 3.0 years with
an estimated modified duration of 2.3 years.
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 risk 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.
The following table sets forth the carrying value of the Company's portfolio of
investment securities available for sale.
At December 31,
----------------------------------------------------------------------------------------------------
2003 2002 2001
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 $ 70,252 $ (72) $ 70,180 $ 54,400 $ 1,144 $ 55,544 $ 51,809 $ 580 $ 2,389
U.S. Government agency and
mortgage-backed securities 810,453 356 810,809 567,200 6,111 573,311 551,584 (481) 551,103
State and municipal
obligations 58,651 2,022 60,673 70,672 996 71,668 43,692 (881) 42,811
Other securities 21,521 245 21,766 22,690 (12) 22,678 1,255 - 1,255
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $960,877 $ 2,551 $963,428 $714,962 $ 8,239 $723,201 $648,340 $ (782) $647,558
======== ======== ======== ======== ======== ======== ======== ======== ========
22
The following table provides the gross unrealized losses and fair value,
aggregated by investment category and length of time the individual securities
have been in a continuous unrealized loss position at December 31, 2003:
Less than 12 Months 12 Months or Longer Total
---------------------- --------------------- ----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
U.S. Treasury obligations $ 39,957 $ (118) - - $ 39,957 $ (118)
U.S. Government agencies and
mortgage-backed securities 298,600 (2,340) - - 298,600 (2,340)
State and municipal obligations 7,889 (82) $ 532 $ (33) 8,421 (115)
Other securities - - - - - -
-------- -------- -------- -------- -------- --------
Total $346,446 $ (2,540) $ 532 $ (33) $346,978 $ (2,573)
======== ======== ======== ======== ======== ========
At December 31, 2003, 99.9% of the unrealized losses in the available-for-sale
security portfolio were comprised of securities issued by U.S. Government
agencies, U.S. Government sponsored agencies and other securities rated
investment grade by at least one bond credit rating service. The Company
believes that the price movements in these securities are dependent upon the
movement in market interest rates particularly given the negligible inherent
credit risk for these securities. At December 31, 2003, the unrealized loss in
the category 12 months or longer ($33,000) represented one security currently
rated Aaa by three rating services.
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, 2003. 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 $55,164 1.14% $15,016 1.52% - - - - $70,180 1.22%
U.S. Government agency and
mortgage-backed securities 131,408 1.13 271,634 2.92 $337,877 3.80% $369,890 3.61% 810,809 2.99
State and municipal 6,092 2.28 7,880 2.96 15,894 3.59 30,807 4.98 60,673 4.08
obligations
Other securities 1,400 1.02 366 3.64 - - 20,000 3.11 21,766 2.98
-------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total $194,064 1.17% $294,896 2.85% $53,771 3.74% $420,697 3.69% $963,428 2.93%
======== ==== ======== ==== ======= ==== ======== ==== ======== ====
23
Bank Owned life Insurance. As stated earlier, one of the Company's key strategic
goals is building fee income. During 2003, the Company purchased $31.8 million
of BOLI. The additional increase of $985,000 at December 31, 2003 represents the
increases in the cash value of the BOLI, which was recorded as other
non-interest income in the consolidated statement of operations.
Deposits. Deposits at December 31, 2003 totaled $2.11 billion, an increase of
$420.7 million, or 25.0% over the December 31, 2002 balance of $1.69 billion.
During December 2003, the Bank acquired approximately $340 million of deposits
relating to the Community Bank of New York branch acquisition.
December 31,
-----------------------------------------
2003 2002 2001
---------- ---------- ----------
Demand deposits $1,183,991 $ 949,827 $ 803,933
Savings deposits 392,784 328,508 275,146
Time deposits under $100,000 390,312 306,622 363,199
Time deposits $100,000 or more 144,038 105,505 130,060
---------- ---------- ----------
Total $2,111,125 $1,690,462 $1,572,338
========== ========== ==========
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 2003 its relationship pricing
strategy that has helped to 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.
For the Years Ended December 31,
------------------------------------------------------------------------------
2003 2002 2001
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Core deposits $1,576,775 74.7% $1,278,355 75.6% $1,079,079 68.6%
Time deposits 534,350 25.3 412,127 24.4 493,259 31.4
---------- ------ ---------- ------ ---------- ------
Total deposits $2,111,125 100.00% $1,690,462 100.00% $1,572,338 100.00%
========== ====== ========== ====== ========== ======
24
The following table sets forth average deposits by various types of demand and
time deposits:
For the Years Ended December 31,
-------------------------------------------------------------------------------
2003 2002 2001
--------------------- -------------------- ---------------------
Amount Avg. Cost Amount Avg. Cost Amount Avg. Cost
------ --------- ------ --------- ------ ---------
Non-interest-bearing demand deposits $ 338,385 $ 287,164 $ 265,510
Interest-bearing demand deposits 684,162 1.08% 584,808 1.84% 431,196 2.88%
Savings deposits 326,012 1.22 314,208 2.17 214,849 2.76
Time deposits 408,264 2.96 449,438 3.89 593,351 5.72
---------- ---- ---------- ---- ---------- ----
Total $1,756,823 1.66% $1,635,618 2.60% $1,504,906 3.47%
========== ==== ========== ==== ========== ====
The following table indicates the amount of certificates of deposit of $100,000
or more by remaining maturity at December 31, 2003.
Three months or less $ 56,456
Over three through six months 19,960
Over six through twelve months 18,677
Over twelve months 48,945
--------
Total $144,038
========
Borrowings. Borrowed funds, excluding debentures held by trusts, increased $17.1
million in 2003, to $222.4 million at December 31, 2003, from $205.3 million at
December 31, 2002. The increase was primarily the result of a net increase of
$21.7 million in advances from the FHLB offset by a decrease of $5.9 million in
securities sold under agreements to repurchase with customers. The additional
advances from the FHLB were used to match fund loans originated during 2003.
For the years ended December 31, 2003 and 2002, the maximum month-end amount of
advances borrowed from the FHLB was $199.4 million and $193.4 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, 2003 and 2002, the maximum month-end amount of securities
sold under agreements to repurchase with customers was $78.0 million and $86.2
million, respectively. The Company also purchased overnight federal funds from
correspondent banks. For the years ended December 31, 2003 and 2002, the maximum
month-end amount of federal funds purchased from correspondent banks was
approximately $42 million and $20 million, respectively.
25
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,
----------------------------------
2003 2002 2001
---- ---- ----
FHLB convertible rate advances outstanding at end of year $25,000 $45,000 $ 45,000
Interest rate 6.49% 6.76% 6.76%
Approximate average amount outstanding $25,000 $45,000 $ 45,000
Approximate weighted average rate 6.49% 6.76% 6.76%
FHLB term amortizing advances outstanding at end of year $80,764 $89,060 $ 29,008
Interest rate 4.27% 4.33% 4.19%
Approximate average amount outstanding $87,890 $92,191 $ 7,285
Approximate weighted average rate 4.29% 4.31% 4.88%
FHLB term non-amortizing advances outstanding at end of year $58,200 $ 8,200 -
Interest rate 3.40% 4.85% -
Approximate average amount outstanding $52,309 $ 4,695 -
Approximate weighted average rate 4.17% 4.92% -
FHLB repurchase agreements outstanding at end of year - - -
Interest rate - - -
Approximate average amount outstanding - - $129,097
Approximate weighted average rate - - 5.00%
FHLB overnight line of credit advances outstanding at end of year - - -
Interest rate - - -
Approximate average amount outstanding - $ 5,244 $ 504
Approximate weighted average rate - 1.88% 2.29%
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,
----------------------------------
2003 2002 2001
---- ---- ----
Securities sold under agreements to repurchase with customers outstanding at
end of year $55,934 $61,860 $84,928
Interest rate 0.35% 0.61% 0.59%
Approximate average amount outstanding $71,828 $74,602 $82,318
Approximate weighted average rate 0.48% 0.99% 2.96%
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.
26
Junior Subordinated Debentures Held by Trusts that Issued Capital Debt
The following is a summary of the outstanding capital securities issued by each
Issuer Trust and the junior subordinated debenture issued by the Company to each
Issuer Trust as of December 31, 2003:
Capital Securities Junior Subordinated Debentures
------------------------------------------- ---------------------------------------------------------
Stated Distribution Principal Redeemable
Issuer Trust Issuance Date Value Rate Amount Maturity Beginning
------------ ------------- ----- ---- ------ -------- ---------
6-mo LIBOR
Sun Trust III April 22, 2002 $20,000 plus 3.70% $20,619 April 22, 2032 April 22, 2007
3-mo LIBOR
Sun Trust IV July 7, 2002 10,000 plus 3.65% 10,310 October 7, 2032 July 7, 2007
3-mo LIBOR
Sun Trust V December 18, 2003 15,000 plus 2.80% 15,464 December 30, 2033 December 30, 2008
3-mo LIBOR
Sun Trust VI December 19, 2003 25,000 plus 2.80% 25,774 January 23, 2034 January 23, 2009
------- -------
Total $70,000 $72,167
======= =======
For more information regarding junior subordinated debentures held by trusts
that issued capital debt, refer to Note 16 of the notes to consolidated
financial statements contained herein.
Disclosures about Contractual Obligations and Commercial Commitments
The Company's contractual cash obligations at December 31, 2003 were as follows:
Payments Due by Period
-----------------------------------------------------------------------
Less than One to Four to Five After
Contractual Cash Obligations Total One Year Three Years Years Five Years
- ---------------------------- ----- -------- ----------- ----- ----------
Long-Term Debt (Notes 13 and 16) $346,392 $29,080 $67,769 $ 97,383 $152,160
Operating Leases (Note 21) 30,786 3,777 6,717 5,902 14,390
Purchase Obligations (off balance sheet) 10,387 4,982 5,405 - -
-------- ------- ------- -------- --------
Total Contractual Cash Obligations $387,565 $37,839 $79,789 $103,285 $166,550
======== ======= ======= ======== ========
The Company's contractual commitments (see Notes 6 and 21) at December 31, 2003
were as follows:
Amount of Commitment Expiration Per Period
----------------------------------------------------------
Unfunded Less than One to Three Four to Five After
Commitments Commitments One Year Years Years Five Years
- ----------- ----------- -------- ----- ----- ----------
Lines of Credit $268,265 $178,730 $17,312 - $72,223
Commercial Standby Letters of Credit 38,915 38,822 93 - -
Construction Funding 80,505 80,342 - - 163
Other Commitments 5,520 1,883 200 $503 2,934
-------- -------- ------- ---- -------
Total Commitments $393,205 $299,777 $17,605 $503 $75,320
======== ======== ======= ==== =======
Purchase Obligations includes significant contractual cash obligations. Included
in the table above are the minimum contractual obligations under legally
enforceable contracts with contract terms that are both fixed and determinable
and have greater than one year remaining at December 31, 2003. Of this amount,
$2.2 million represents an obligation for computer hardware and software for
Teller and Platform branch automation through 2004, and the remanding amounts
are primarily for services, including core processing system and
telecommunications maintenance.
27
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The guarantees are
primarily issued to support private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. In the event of a draw by the
beneficiary that complies with the terms of the letter of credit, the Company
would be required to honor the commitment. The Company takes various forms of
collateral, such as real estate assets and customer business assets to secure
the commitment. Additionally, all letters of credit are supported by
indemnification agreements executed by the customer. The maximum undiscounted
exposure related to these commitments at December 31, 2003 was $38.9 million,
and the portion of the exposure not covered by collateral was approximately
$11.9 million. We believe that the utilization rate of these letters of credit
will continue to be substantially less than the amount of these commitments, as
has been our experience to date.
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.
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sun Bancorp, Inc.
Vineland, New Jersey
We have audited the accompanying consolidated statement of financial condition
of Sun Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2003
and 2002, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2003. 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, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2003, the
Company adopted the provision of Financial Accounting Standards Board
Interpretation No. 46 (R) and the Company changed its method of accounting for
stock-based compensation adopting the fair value recognition provisions of
Statements of Financial Accounting Standards Nos. 123 and 148. 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
March 11, 2004
27
SUN BANCORP, INC. AND SUBSIDIARIES
- ----------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2003 AND 2002
(Dollars in thousands, except share amounts)
2003 2002
----------- -----------
ASSETS
Cash and due from banks $ 78,841 $ 63,041
Interest-bearing bank balances 2,789 2,435
Federal funds sold 487 138
----------- -----------
Cash and cash equivalents 82,117 65,614
Investment securities available for sale (amortized cost -
$960,877; 2003 and $714,962; 2002) 963,428 723,201
Loans receivable (net of allowance for loan losses -
$17,614; 2003 and $16,408; 2002) 1,364,465 1,217,008
Restricted equity investments 12,551 11,610
Bank properties and equipment, net 34,093 29,468
Real estate owned, net 4,444 904
Accrued interest receivable 11,266 11,012
Goodwill 50,600 19,672
Intangible assets, net 26,195 19,783
Deferred taxes, net 8,465 6,867
Bank owned life insurance 32,785 -
Other assets 9,078 7,033
----------- -----------
TOTAL $ 2,599,487 $ 2,112,172
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 2,111,125 $ 1,690,462
Advances from the Federal Home Loan Bank (FHLB) 163,964 142,260
Federal funds purchased 2,500 -
Loan payable - 1,160
Securities sold under agreements to repurchase 55,934 61,860
Junior subordinated debentures 72,167 -
Other liabilities 8,079 11,533
----------- -----------
Total liabilities 2,413,769 1,907,275
----------- -----------
Guaranteed preferred beneficial interest in Company's subordinated debt - 59,274
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued
Common stock, $1 par value, 25,000,000 shares authorized, issued and
outstanding: 13,381,310 in 2003 and 11,271,135 in 2002 13,381 11,271
Additional paid-in capital 151,631 114,930
Retained earnings 20,062 15,030
Accumulated other comprehensive income 1,690 5,438
Treasury stock at cost, 90,562 shares (1,046) (1,046)
----------- -----------
Total shareholders' equity 185,718 145,623
----------- -----------
TOTAL $ 2,599,487 $ 2,112,172
=========== ===========
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
28
SUN BANCORP, INC. AND SUBSIDIARIES
- ----------------------------------
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands, except share amounts)
2003 2002 2001
---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 83,263 $ 83,822 $ 86,600
Interest on taxable investment securities 21,428 25,693 35,523
Interest on non-taxable investment securities 2,511 2,085 1,946
Dividends on restricted equity investments 559 591 1,288
Interest on federal funds sold 301 703 1,468
------------ ------------ ------------
Total interest income 108,062 112,894 126,825
------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 23,480 35,104 52,258
Interest on funds borrowed 8,068 8,271 12,371
Interest on guaranteed preferred beneficial interest
in Company's subordinated debt 4,227 4,481 5,438
------------ ------------ ------------
Total interest expense 35,775 47,856 70,067
------------ ------------ ------------
Net interest income 72,287 65,038 56,758
PROVISION FOR LOAN LOSSES 4,825 4,175 7,795
------------ ------------ ------------
Net interest income after provision for loan losses 67,462 60,863 48,963
------------ ------------ ------------
NON-INTEREST INCOME:
Service charges on deposit accounts 7,650 6,940 6,923
Other service charges 397 441 389
Gain (loss) on sale of bank properties and equipment 164 (4) 33
Gain on sale of investment securities 2,467 2,517 396
Gain on sale of branches 2,629 - -
Other 4,049 3,284 2,775
------------ ------------ ------------
Total non-interest income 17,356 13,178 10,516
------------ ------------ ------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 33,421 28,208 24,229
Occupancy expense 8,768 7,893 7,306
Equipment expense 5,341 5,041 5,009
Data processing expense 3,438 3,428 3,147
Amortization of intangible assets 3,696 4,182 7,820
Advertising expense 1,836 1,154 1,267
Other 9,536 9,059 9,217
------------ ------------ ------------
Total non-interest expenses 66,036 58,965 57,995
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 18,782 15,076 1,484
INCOME TAXES 5,446 4,698 156
------------ ------------ ------------
NET INCOME $ 13,336 $ 10,378 $ 1,328
============ ============ ============
Basic earnings per share $ 1.08 $ 0.82 $ 0.12
============ ============ ============
Diluted earnings per share $ 1.00 $ 0.79 $ 0.11
============ ============ ============
Weighted average shares - basic 11,822,845 11,726,387 11,426,991
========== ========== ==========
Weighted average shares - diluted 12,734,806 12,176,718 11,628,044
========== ========== ==========
- ------------
See notes to consolidated financial statements
29
SUN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
----- ------- -------- ------------- ----- -----
BALANCE, JANUARY 1, 2001 $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 dividends - - (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
Comprehensive income:
Net income - - 13,336 - - -
Net change in unrealized gain on securitie
available for sale, net of taxes of $1,940 - - - (3,748) - -
--------
Comprehensive income - - - - - 9,588
--------
Exercise of stock options 34 386 - - - 420
Issuance of common stock 1,513 29,204 - - - 30,717
Stock dividends 563 7,735 (8,298) - - -
Cash paid for fractional interest
resulting from stock dividend - - (6) - - (6)
Trust preferred issuance costs write-off - (624) - - - (624)
------- -------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 2003 $13,381 $151,631 $20,062 $ 1,690 $(1,046) $185,718
======= ======== ======= ======== ======= ========
- --------------------------------------------------
See notes to consolidated financial statements
30
SUN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
Years Ended December 31,
---------------------------------------
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 13,336 $ 10,378 $ 1,328
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 4,825 4,175 7,795
Depreciation and amortization 2,673 2,387 2,463
Net amortization (accretion) of investment securities 2,927 3,518 (2,098)
Amortization of intangible assets 3,696 4,182 7,820
Gain on sale of investment securities available for sale (2,467) (2,517) (396)
(Gain) loss on sale of bank properties and equipment (164) 4 (33)
Write down of real estate owned - 117 310
Increase in cash value of bank owned life insurance (985) - -
Deferred income taxes 342 (1,780) (2,743)
Change in assets and liabilities which provided (used) cash:
Accrued interest receivable (254) 77 5,525
Other assets (502) 851 2,912
Other liabilities (3,454) 1,829 582
--------- -------- ---------
Net cash provided by operating activities 19,973 23,221 23,465
--------- -------- ---------
INVESTING ACTIVITIES:
Purchases of investment securities available for sale (902,019) (771,157) (658,167)
(Purchase) redemption of restricted equity securities (941) 951 17,684
Proceeds from maturities, prepayments or calls of investment
securities available for sale 469,704 528,918 660,659
Proceeds from sale of investment securities available for sale 185,940 174,616 116,372
Net increase in loans (140,928) (132,689) (65,583)
Purchase of bank properties and equipment (3,647) (3,689) (1,810)
Proceeds from sale of bank properties and equipment 34 10 33
Purchase of bank owned life insurance (31,800) - -
Proceeds from sale of real estate owned 674 988 362
--------- -------- ---------
Net cash (used in) provided by investing activities (422,983) (202,052) 69,550
--------- -------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 122,106 118,124 175,815
Net increase (decrease) in cash realized from branch acquisitions / sales 238,432 (13,035)
Net borrowings (repayments) under line of credit and repurchase agreements 18,278 45,184 (247,183)
Proceeds from exercise of stock options 420 868 670
Proceeds from loan payable 25,000 -
Repayment of loan payable (1,160) (25,000) -
Proceeds from issuance of guaranteed preferred beneficial interest in Company's
subordinated debt 40,000 30,000 -
Redemption of guaranteed preferred beneficial interest in Company's subordinated debt (29,274) (28,040) -
Payments for fractional interests resulting from stock dividend (6) (6) (4)
Repurchase of guaranteed preferred beneficial interest in Company's subordinated debt - (13) -
Proceeds from issuance of common stock 30,717 292 187
Treasury stock purchased - (1,046) -
--------- -------- ---------
Net cash provided by (used in) financing activities 419,513 165,363 (83,550)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,503 (13,468) 9,465
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 65,614 79,082 69,617
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 82,117 $ 65,614 $ 79,082
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 36,656 $ 48,862 $ 72,434
Income taxes paid $ 7,908 $ 2,770 $ 4,139
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans and bank properties and equipment to real estate owned $ 4,214 $ 1,111 $ 391
Trust preferred issuance costs write-off $ 624 $ 777 --
- ----------------------------------------------------------------------------
See notes to consolidated financial statements
31
SUN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(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 principal wholly owned
subsidiary, 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 in consolidation. Effective with the adoption of FIN 46 and FIN
46 (R) (see Recent Accounting Priciples, below), on December 31, 2003 the
Company deconsolidated Sun Capital Trust (liquidated in April 2002), Sun Capital
Trust II (liquidated in December 2003), Sun Capital Trust III, Sun Capital Trust
IV, Sun Capital Trust V and Sun Capital Trust VI, collectively, the "Issuing
Trusts".
The Company and the Bank have their administrative offices in Vineland, New
Jersey. At December 31, 2003, the Company had 78 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
("SEC"). 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 in securities. 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. The Issuing Trusts are
Delaware business trusts which hold junior subordinated debentures issued by the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements - The preparation of
the consolidated 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, 2003 or 2002.
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 recorded as of trade date, 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.
32
Loans Held for Sale - Included in loans receivable is approximately $142,000 and
$3,010,000 of loans held for sale at December 31, 2003 and 2002, respectively.
These loans were carried at the lower of cost or estimated fair value, on an
aggregate basis.
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 other 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 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 - Land is carried at cost. Bank properties and
equipment are stated at cost, less accumulated depreciation. The provision for
depreciation is computed by the straight-line method based on the estimated
useful lives of the assets, as follows:
Buildings 40 years
Leasehold improvements Remaining lease term, including renewals, if applicable
Equipment 2.5 to 10 years
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 Intangible Assets - 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 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 2003
and 2002.
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).
33
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 for
the year ended December 31, 2001 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.
Net income:
Reported net income $1,328
Add: goodwill amortization, net of tax 5,161
-----
Adjusted net income $6,489
======
Basic earnings per share:
Reported basic earnings per share $0.12
Add: goodwill amortization, net of tax 0.47
-----
Adjusted basic net income per share $0.59
=====
Diluted earnings per share:
Reported diluted earnings per share $0.12
Add: goodwill amortization, net of tax 0.47
-----
Adjusted diluted net income per share $0.59
=====
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 with definite lives would be
based on the fair value of the asset. For the year ended December 31, 2001, the
Company recognized a $100,000 impairment loss, based on this evaluation. For the
years ended December 31, 2003 and 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.
Accounting for Derivative Financial Instruments and Hedging Activities - The
Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, on January 1, 2001. SFAS No. 133 required
that all derivative financial instruments be recorded in the Company's
consolidated statements of financial condition at fair value and established
criteria for designation and effectiveness of hedging relationships. The
adoption of SFAS Nos. 133 and 149 did not have an impact on the Company's
financial position or results of operations.
Earnings Per Share - Basic earnings per share is computed by dividing income
available to common shareholders (in 2003 and 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.
34
Stock Dividend - On March 19, 2003, April 25, 2002 and May 17, 2001, the
Company's Board of Directors declared 5% stock dividends, which were paid on
April 21, 2003, May 23, 2002 and June 13, 2001, respectively, to shareholders of
record on April 7, 2003, May 2, 2002 and May 31, 2001, respectively.
Accordingly, per share information for the years ended December 31, 2002 and
2001 have been restated to reflect the increased number of shares outstanding. A
portion of the 2001 stock dividend was paid by reissuing treasury stock.
Other Comprehensive Income - The Company classifies items of other comprehensive
income by their nature and displays the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Amounts
categorized as other comprehensive income represent net unrealized gains or
losses on 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, 2003 2002 2001
- ---------------------------------------------------------------------------- ------------ ------------ -------------
Net (depreciation) appreciation on securities available for sale
during the year $ (5,376) $ 7,615 $10,406
Less: Reclassification adjustment for net gains included in net income 1,628 1,661 261
-------- ------- -------
Net change in unrealized (loss) gain on securities available for sale $ (3,748) $ 5,954 $10,145
======== ======= =======
Accounting for Stock Options - 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. Prior to the fourth
quarter of 2003, the Company accounted for its granted stock options according
to Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees and related interpretations. All options granted prior to
2003 had an intrinsic value of zero on the date of grant under APB No. 25, and,
therefore, no stock-based employee compensation expense was recognized in the
Company's consolidated financial statements. During the fourth quarter of 2003,
the Company adopted, effective January 1, 2003, the fair value recognition
provisions of SFAS No. 123. Under the prospective method provisions of SFAS No.
148, the recognition provisions of SFAS No. 123 will be applied to all option
awards granted, modified, or settled after January 1, 2003.
The grant of "reload" options is authorized in two of the stock-based employee
compensation plans. 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 Company accounts for
the reload features as fixed plan accounting, in accordance with the FASB
Emerging Issues Task Force ("EITF") No. 90-7, Accounting for a Reload Stock
Option and FIN 44 Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25.
In addition, SFAS No. 148 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, 2003, the Company had three stock-based employee compensation
plans, which are described more fully in Note 18. 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 using the
Black-Scholes option pricing model to stock-based employee compensation.
35
For the Years Ended December 31,
------------------------------------------
2003 2002 2001
---- ---- ----
Net income, as reported $13,336 $10,378 $1,328
Add: Total stock-based employee compensation expense
included in reported net income (net of tax) 21 - -
Deduct: Total stock-based employee compensation expense
determined under fair value method (net of tax) (1,179) (2,368) (844)
------- ------- ------
Pro forma net income $12,178 $ 8,010 $ 484
======= ======= ======
Earnings per share:
Basic - as reported $1.08 $0.82 $0.12
Basic - pro forma $0.98 $0.62 $0.04
Diluted - as reported $1.00 $0.79 $0.11
Diluted - pro forma $0.91 $0.59 $0.04
Significant assumptions used to calculate the above fair value of the awards are
as follows:
2003 2002 2001
---- ---- ----
Weighted average fair value of options granted during the year $ 9.00 $ 6.58 $ 5.29
Risk free rate of return 4.40% 4.30% 5.03%
Expected option life in months 120 120 120
Expected volatility 40% 38% 51%
Expected dividends 0 0 0
Recent Accounting Principles - In January 2003, the FASB issued FASB
Interpretation Number ("FIN") 46, Consolidation of Variable Interest Entities.
In December 2003, the FASB issued a revision of FIN 46 (FIN 46(R)). 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 has
participated in the issue of preferred trust securities through various trusts
established for such purpose. These trusts are subject to the requirements of
FIN 46 and FIN 46(R). The adoption of the provisions of FIN 46 and FIN 46(R)
impacted the consolidation of four wholly-owned entities involved in the
issuance of trust Company preferred securities. Effective December 31, 2003, the
Company deconsolidated the wholly-owned issuing trust entities resulting in a
recharacterization of the underlying consolidated debt obligation from the
previous trust preferred securities obligations to the junior subordinated
debenture obligations that exist between the Company and the issuing trust
entities. Under the provisions of FIN 46(R), these securities were reclassified
as borrowed funds. The adoption of FIN 46 and FIN 46(R) did not have a material
impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, except for the provisions of this Statement that relate to
SFAS No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003 and for hedging relationships designated after
June 30, 2003. All provisions are to be applied prospectively except for the
provisions of this Statement that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003.
These provisions are to be applied in accordance with their respective effective
dates. The adoption of SFAS No. 149 did not have an impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The FASB is addressing
certain implementation issues associated with the application of SFAS No. 150.
In October 2003, the FASB decided to defer certain provisions of SFAS No. 150
related to mandatorily redeemable financial instruments representing
non-controlling interests in subsidiaries included in consolidated financial
statements. The Company will monitor the actions of the FASB and assess the
impact, if any, that these actions may have on the Company's financial
statements. Currently, the Company has no financial instruments entered into or
modified that require application of this Statement. The adoption of this
Statement has not had material impact on the Company's financial condition or
results of operations.
In December 2003, the EITF reached consensus on several issues being addressed
in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The objective of EITF No. 03-1 is to provide
guidance on other-than-temporary impairment and its application to debt and
marketable equity securities. The EITF reached consensus requiring disclosures,
tabular and narrative, that provide sufficient information to provide an
understanding of the circumstances leading to management's conclusion that the
impairments are not other-than-temporary. The requirements apply to financial
statements for fiscal years ending after December 15, 2003. The Company has
followed the disclosure requirements of EITF No. 03-1 to its consolidated
financial statements for 2003.
36
Reclassifications - Certain reclassifications have been made in the 2002 and
2001 consolidated financial statements to conform to those classifications used
in 2003.
3. ACQUISITIONS
On February 17, 2004, the Company entered into an Agreement and Plan of Merger
(the "Agreement") whereby the Company will acquire Community Bancorp of New
Jersey ("Community") in a stock-for-stock exchange merger valued at
approximately $83.2 million. The Agreement provides that Community shareholders
will receive 0.83 shares of common stock of the Company for each issued and
outstanding share of Community common stock (the "Per Share Stock
Consideration"). Community will be permitted under the Agreement to pay a
one-time special cash dividend in the amount of $0.75 per share to its
shareholders prior to the consummation of the proposed merger. The proposed
merger is subject to certain customary conditions for transactions of this type
including, among others, the Company and Community shareholder approval and
regulatory approval. The merger is expected to be consummated in the second
quarter of this year.
On December 17, 2003, the Company completed the acquisition the eight branches
from New York Community Bank ("NYCB") located in Atlantic, Camden and Gloucester
Counties in New Jersey. The branch acquisition included approximately $340
million in deposits and approximately $14 million in commercial and consumer
loans. In connection with this branch acquisition, the Company paid a premium of
approximately $40 million. Of that premium, $10.1 million relates to the core
deposit intangible which is being amortized over ten years on a straight-line
basis and $30.9 million consists of goodwill which is not subject to annual
amortization.
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.
4. AVERAGE RESERVE BALANCE REQUIREMENTS ON CASH AND AMOUNTS DUE FROM BANKS
The Bank is required to maintain an average reserve balance with the Federal
Reserve Bank. The amount of the average reserve balance at December 31, 2003 and
2002 was $1.1 million for both years.
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost of investment securities available for sale and the
approximate fair value were as follows:
December 31, 2003
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury obligations $ 70,252 $ 46 $ (118) $ 70,180
U.S. Government agencies and
mortgage-backed securities 810,453 2,696 (2,340) 810,809
State and municipal obligations 58,651 2,137 (115) 60,673
Other 21,521 245 - 21,766
-------- ------ ------- --------
Total $960,877 $5,124 $(2,573) $963,428
======== ====== ======= ========
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
======== ====== ===== ========
37
During 2003, the Company sold $215,270,000 of securities available for sale
resulting in a gross gain and gross loss of $2,743,000 and $276,000,
respectively. 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.
The following table provides the gross unrealized losses and fair value,
aggregated by investment category and length of time the individual securities
have been in a continuous unrealized loss position at December 31, 2003:
Less than 12 Months 12 Months or Longer Total
---------------------------- ------------------------------ ------------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ------ ---------- ------ ---------- ------
U.S. Treasury obligations $ 39,957 $ (118) - - $ 39,957 $ (118)
U.S. Government agencies and
mortgage-backed securities 298,600 (2,340) - - 298,600 (2,340)
State and municipal
obligations 7,889 (82) $532 $(33) 8,421 (115)
Other - - - - - -
-------- ------- ---- ---- -------- -------
Total $346,446 $(2,540) $532 $(33) $346,978 $(2,573)
======== ======= ==== ==== ======== =======
At December 31, 2003, 99.9% of the unrealized losses in the available-for-sale
security portfolio were comprised of securities issued by U.S. Government
agencies, U.S. Government sponsored agencies and other securities rated
investment grade by at least one bond credit rating service. The Company
believes that the price movements in these securities are dependent upon the
movement in market interest rates particularly given the negligible inherent
credit risk for these securities. At December 31, 2003 the unrealized loss in
the category 12 months or longer of $33,000 represented one security currently
rated Aaa by three rating services.
The maturity schedule of the investment in debt securities available for sale is
as follows:
December 31, 2003
----------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $275,839 $276,206
Due after one year through five years 203,390 203,544
Due after five years through ten years 14,521 15,186
Due after ten years 29,862 30,330
-------- --------
Subtotal 523,612 525,266
Mortgage-backed securities 437,265 438,162
-------- --------
Total $960,877 $963,428
======== ========
At December 31, 2003, $210.3 million of U.S. Treasury Notes and U.S. Government
Agency securities was pledged to secure public deposits.
38
6. LOANS
The components of loans were as follows:
December 31,
-------------------------------------
2003 2002
----------- -----------
Commercial and industrial $ 1,169,164 $ 1,043,885
Home equity 80,292 44,603
Second mortgages 51,531 47,458
Residential real estate 29,788 43,375
Other 51,304 54,095
----------- -----------
Total gross loans 1,382,079 1,233,416
Allowance for loan losses (17,614) (16,408)
----------- -----------
Loans, net $ 1,364,465 $ 1,217,008
=========== ===========
Non-accrual loans $ 21,568 $ 9,963
=========== ===========
There were no irrevocable commitments to lend additional funds on non-accrual
loans at December 31, 2003. The reduction in interest income resulting from
non-accrual loans was $1.3 million, $984,000, and $728,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Interest income recognized on
these loans for the years ended December 31, 2003, 2002 and 2001 was $534,000,
$442,000, and $589,000, 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, 2003 and
2002, along with an analysis of the activity for the years ended December 31,
2003 and 2002, is summarized as follows:
For the Years Ended
December 31,
-------------------------
2003 2002
------- -------
Balance, beginning of year $32,330 $27,044
Additions 6,159 12,836
Repayments (11,285) (7,550)
------- -------
Balance, end of year $27,204 $32,330
======= =======
Under approved lending decisions, the Company had commitments to lend additional
funds totaling approximately $393,205,000 and $317,733,000 at December 31, 2003
and 2002, 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.
7. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses is as follows:
For the Years Ended December 31,
-------------------------------------
2003 2002 2001
---- ---- ----
Balance, beginning of year $16,408 $13,332 $10,486
Charge-offs (4,380) (1,609) (5,416)
Recoveries 761 510 467
------- ------- -------
Net charge-offs (3,619) (1,099) (4,949)
Provision for loan losses 4,825 4,175 7,795
------- ------- -------
Balance, end of year $17,614 $16,408 $13,332
======= ======= =======
39
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of estimated losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118 issued by the FASB. A loan is considered to be impaired when, based upon
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan.
An insignificant delay or insignificant shortfall in amount of payments does not
necessarily result in the loan being identified as impaired. For this purpose,
delays less than 90 days are considered to be insignificant.
Impairment losses are included in the provision for loan losses. Large groups of
smaller balance, homogeneous loans are collectively evaluated for impairment,
except for those loans restructured under a troubled debt restructuring. Loans
collectively evaluated for impairment include consumer loans and residential
real estate loans, and are not included in the data that follow:
December 31,
-----------------
2003 2002
------- -------
Impaired loans with related allowance for loan losses
calculated under SFAS No. 114 $31,463 $25,511
Impaired loans with no related allowance for loan losses
calculated under SFAS No. 114 6,147 4,051
------- -------
Total impaired loans $37,610 $29,562
======= =======
Valuation allowance related to impaired loans $ 3,439 $ 4,514
======= =======
For the Years Ended
December 31,
------------------------------
2003 2002 2001
------- ------- -------
Average impaired loans $34,715 $13,471 $ 6,787
======= ======= =======
Interest income recognized on impaired loans $ 2,177 $ 1,936 $ 558
======= ======= =======
Cash basis interest income recognized on impaired loans $ 2,311 $ 2,013 $ 651
======= ======= =======
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 and commercial real
estate 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.
40
8. RESTRICTED EQUITY INVESTMENTS
The cost of restricted equity investments was as follows:
December 31,
----------------------------
2003 2002
------- -------
Federal Reserve Bank stock $ 4,270 $ 4,270
Federal Home Loan Bank stock 8,198 7,257
Atlantic Central Bankers Bank stock 83 83
------- -------
Total $12,551 $11,610
======= =======
9. BANK PROPERTIES AND EQUIPMENT
Bank properties and equipment consist of the following major classifications:
December 31,
----------------------------
2003 2002
-------- --------
Land $ 6,578 $ 6,578
Buildings 19,801 15,704
Leasehold improvements and equipment 21,348 18,881
-------- --------
47,727 41,163
Accumulated depreciation (13,634) (11,695)
-------- --------
Total $ 34,093 $ 29,468
======== ========
10. REAL ESTATE OWNED
Real estate owned consisted of the following:
December 31,
-------------------------
2003 2002
---- ----
Commercial properties $4,013 $ 447
Residential properties 122 148
Bank properties 309 309
------ ------
Total $4,444 $ 904
====== ======
Expenses applicable to real estate owned include the following:
For the Years Ended December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Net gain on sales of real estate $(707) $ (87) $ (44)
Write-down of real estate owned - 117 310
Operating expenses, net of rental income 110 145 57
----- ----- -----
Total $(597) $ 175 $ 323
===== ===== =====
11. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
For the Years Ended
December 31,
-------------------
2003 2002
------- -------
Balance, beginning of year $19,672 -
Goodwill reclassified in accordance with SFAS No. 147 - $19,672
Goodwill resulting from business combination 30,928 -
------- -------
Balance, end of year $50,600 $19,672
======= =======
Information regarding the Company's intangible assets subject to amortization is
as follows:
December 31, 2003
------------------------------
Carrying Accumulated
Amount Amortization Net
------ ------------ ---
Core Deposit Premium $32,306 $14,645 $17,661
Excess of cost over fair value of assets acquired 17,698 9,164 8,534
------- ------- -------
Total intangible assets $50,004 $23,809 $26,195
======= ======= =======
41
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 17,698 8,156 9,542
-------- -------- --------
Total intangible assets $ 39,896 $ 20,113 $ 19,783
======== ======== ========
Changes in the carrying amount of Company's intangible assets or the year ended
December 31, 2003 are as follows:
Balance, beginning of year $19,783
Addition resulting from business combination 10,108
Amortization expense (3,696)
-------
Balance, end of year $26,195
=======
Information regarding the Company's amortization expense follows:
Actual for Year Ended December 31,
2001 $ 7,820
2002 4,182
2003 3,696
Expected for Year Ending December 31,
2004 4,510
2005 2,957
2006 2,837
2007 2,837
2008 2,837
Thereafter 10,217
-------
Total $26,195
=======
12. DEPOSITS
Deposits consist of the following major classifications:
December 31,
----------------------------
2003 2002
---------- ----------
Demand deposits $1,183,991 $ 949,827
Savings deposits 392,784 328,508
Time deposits under $100,000 390,312 306,622
Time deposits $100,000 or more 144,038 105,505
---------- ----------
Total $2,111,125 $1,690,462
========== ==========
42
Of the total demand deposits, approximately $399,538,000 and $322,433,000 are
non-interest bearing at December 31, 2003 and 2002, respectively.
A summary of time deposits by year of maturity is as follows:
Years Ending December 31,
2004 $322,993
2005 47,082
2006 32,789
Thereafter 131,486
--------
Total $534,350
========
A summary of interest expense on deposits is as follows:
For the Years Ended December 31,
---------------------------------------
2003 2002 2001
------- ------- -------
Savings deposits $ 3,968 $ 6,821 $ 5,929
Time deposits 12,105 17,494 33,917
Interest-bearing demand deposits 7,407 10,789 12,412
------- ------- -------
Total $23,480 $35,104 $52,258
======= ======= =======
13. 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,
--------------------------
2003 2002
-------- --------
Convertible rate advances $ 25,000 $ 45,000
Term amortizing advances 80,764 89,060
Term non-amortizing advances 58,200 8,200
-------- --------
Total $163,964 $142,260
======== ========
Convertible rate advances are as follows:
December 31,
----------------------------
2003 2002
---- ----
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
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
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
------- -------
Total $25,000 $45,000
======= =======
43
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,
------------------------
2003 2002
---- ----
Original principal $1,800
Interest rate 5.404%
Monthly payment $12
Maturity date October 8, 2008
Balance $ 1,507 $ 1,571
Original principal $2,600
Interest rate 5.867%
Monthly payment $18
Maturity date November 26, 2018
Balance 2,203 2,291
Original principal $25,000
Interest rate 3.890%
Monthly payment $459
Maturity date November 15, 2006
Balance 15,578 20,381
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 10, 2007
Balance 16,436 21,189
Original principal $25,000
Interest rate 4.200%
Monthly payment $463
Maturity date January 30, 2007
Balance 16,436 21,189
Original principal $25,000
Interest rate 4.740%
Monthly payment $350
Maturity date January 30, 2009
Balance 19,230 22,439
Original principal $10,000
Interest rate 3.780%
Monthly payment $100
Maturity date February 21, 2013
Balance 9,374 -
------- -------
Total $80,764 $89,060
======= =======
44
Term non-amortizing advances are as follows:
December 31,
----------------------------
2003 2002
---- ----
Original principal $8,200
Fixed interest rate 4.85%
Funding date June 6, 2002
Maturity date June 6, 2007
Balance $ 8,200 $8,200
Original principal $15,000
Fixed interest rate 3.39%
Funding date February 14, 2003
Maturity date February 14, 2008
Balance 15,000 -
Original principal $10,000
Fixed interest rate 1.88%
Funding date April 25, 2003
Maturity date April 25, 2005
Balance 10,000 -
Original principal $15,000
Fixed interest rate 3.30%
Funding date April 25, 2003
Maturity date April 25, 2008
Balance 15,000 -
Original principal $10,000
Fixed interest rate 3.90%
Funding date September 5, 2003
Maturity date September 5, 2008
Balance 10,000 -
------- ------
Total $58,200 $8,200
======= ======
Interest expense on FHLB advances was $7,639,000, $7,347,000 and $3,413,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.
14. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
During 2003 and 2002, the Company entered into overnight repurchase agreements
with customers. At December 31, 2003 and 2002, the amounts outstanding were
$55,934,000 and $61,860,000, respectively. At December 31, 2003, the amounts
were borrowed at interest rates ranging from 0.14% to 0.92%. At December 31,
2002, the amounts were borrowed at interest rates ranging from 0.25% to 1.22%.
Interest expense on customer repurchase agreements was $348,000, $739,000 and
$2,437,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Collateral for customer repurchase agreements were U.S. Treasury notes. The fair
value of the collateral was approximately equal to the amounts outstanding.
45
15. OTHER BORROWED FUNDS
Originally assumed in connection with an acquisition in 1998, during January
2003, the Bank paid off 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, the interest rate on the loan was 1.70%.
16. JUNIOR SUBORDINATED DEBENTURES HELD BY TRUSTS THAT ISSUED CAPITAL DEBT
The Company had previously established Issuer Trusts that issued guaranteed
preferred beneficial interests in the Company's junior subordinated debentures.
Prior to FIN 46 and FIN 46 (R), the Company classified its Issuer Trusts after
total liabilities and before shareholders' equity on its consolidated statement
of financial position under the caption "Guaranteed Preferred Beneficial
Interest in Company's Subordinated Debt" and the retained common capital
securities of the Issuer Trusts were eliminated against the Company's investment
in the Issuer Trusts. Distributions on the preferred securities were recorded as
interest expense on the consolidated statement of income. Under the provisions
of FIN 46 (R), these securities were reclassified as borrowed funds.
As a result of the adoption of FIN 46 and FIN 46 (R), the Company deconsolidated
all the Issuer Trusts. As a result, the junior subordinated debentures issued by
the Company to the Issuer Trusts, totaling $72.2 million, are reflected in the
Company's consolidated statement of financial position in the liabilities
section at December 31, 2003, under the caption "Junior Subordinated
Debentures." The Company records interest expense on the corresponding
debentures in its consolidated statements of income. The Company also recorded
the common capital securities issued by the Issuer Trusts in "Other assets" in
its consolidated statement of financial position at December 31, 2003.
The following is a summary of the outstanding capital securities issued by each
Issuer Trust and the junior subordinated debentures issued by the Company to
each Trust as of December 31, 2003:
Capital Securities Junior Subordinated Debentures
------------------------------------------- ------------------------------------------------------
Stated Distribution Principal Redeemable
Trust Issuance Date Value Rate Amount Maturity Beginning
----- ------------- ----- ---- ------ -------- ---------
6-mo LIBOR
Sun Trust III April 22, 2002 $20,000 plus 3.70% $20,619 April 22, 2032 April 22, 2007
3-mo LIBOR
Sun Trust IV July 7, 2002 10,000 plus 3.65% 10,310 October 7, 2032 July 7, 2007
3-mo LIBOR
Sun Trust V December 18, 2003 15,000 plus 2.80% 15,464 December 30, 2033 December 30, 2008
3-mo LIBOR
Sun Trust VI December 19, 2003 25,000 plus 2.80% 25,774 January 23, 2034 January 23, 2009
------- -------
Total $70,000 $72,167
======= =======
While the capital securities have been deconsolidated in accordance with GAAP,
they continue to qualify as Tier 1 capital under federal regulatory guidelines.
The change in accounting guidance did not have an impact on the Tier 1
regulatory capital of either the Company or the Bank. In July 2003, the Board of
Governors of the Federal Reserve System issued a supervisory letter instructing
bank holding companies to continue to include the capital securities in their
Tier 1 capital for regulatory capital purposes until notice is given to the
contrary. The Federal Reserve intends to review the regulatory implications of
any accounting treatment changes and, if necessary or warranted, provide further
appropriate guidance. There can be no assurance that the Federal Reserve will
continue to allow institutions to include capital securities in Tier 1 Capital
for regulatory capital purposes.
46
The Issuer Trusts are wholly owned subsidiaries of the Company and have no
independent operations. The obligations of Issuer Trusts are fully and
unconditionally guaranteed by the Company. The debentures are unsecured and rank
subordinate and junior in right of payment to all indebtedness, liabilities and
obligations of the Company. Interest on the debentures is cumulative and payable
in arrears. Proceeds from any redemption of debentures would cause a mandatory
redemption of capital securities having an aggregate liquidation amount equal to
the principal amount of debentures redeemed.
Sun Trust III variable annual rate will not exceed 11.00% through five years
from its issuance. Sun Trust IV variable annual rate will not exceed 11.95%
through five years from its issuance. Sun Trust V and Sun Trust VI do not have
interest rate caps.
During 2002, the Company notified the holders of the outstanding capital
securities of Sun Trust I of its intention to call these securities
contemporaneously with the redemption of the Sun Trust I debentures on April 1,
2002. The Company wrote off the unamortized debt issuance costs of the called
securities in the amount of $777,000, net of income tax, through a charge to
equity.
During 2003, the Company notified the holders of the outstanding capital
securities of Sun Trust II of its intention to call these securities
contemporaneously with the redemption of the Sun Trust II debentures on December
31, 2003. The Company wrote off the unamortized debt issuance costs of the
called securities in the amount of $624,000, net of income tax, through a charge
to equity.
17. 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
336,000 shares, adjusted for stock dividends, 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, 2003,
the Company had 90,562 shares repurchased for an aggregate price of
approximately $1,046,000.
18. 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 826,875 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, 2003,
there were 822,037 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 1,207,504 shares
authorized for grants of options under the 1997 Plan. At December 31, 2003,
there were 1,197,955 options outstanding with the "reload" feature under the
1997 Plan.
47
In 1995, the Company adopted a Stock Option Plan (the "1995 Plan"). There are
711,643 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.
There are no equity compensation plans issued by the Company 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, 2003 at prices ranging from $3.90 to $18.95 per share 478,964 2,235,050 2,714,014
======= ========= =========
December 31, 2002 at prices ranging from $3.90 to $17.24 per share 506,367 2,235,057 2,741,424
======= ========= =========
December 31, 2001 at prices ranging from $3.90 to $17.24 per share 436,944 1,510,441 1,947,385
======= ========= =========
Activity in the stock option plans for the period beginning January 1, 2001 and
ending December 31, 2003 was as follows:
Weighted
Number Exercise
of Shares Price Options
Outstanding Per Share Exercisable
----------- --------- -----------
January 1, 2001 2,294,042 $ 8.40 1,603,740
Granted 110,705 $ 7.68 =========
Exercised (431,125) $ 3.59
Expired (26,237) $ 10.72
---------
December 31, 2001 1,947,385 $ 9.46 1,855,800
Granted 1,081,290 $ 11.15 =========
Exercised (199,242) $ 5.75
Expired (88,009) $ 12.55
---------
December 31, 2002 2,741,424 $ 10.18 1,845,804
Granted 15,000 $ 18.95 =========
Exercised (34,548) $ 11.02
Expired (7,862) $ 12.71
---------
December 31, 2003 2,714,014 $ 10.21 2,067,505
========= =========
48
The following table summarizes stock options outstanding at December 31, 2003:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- -----------------------------------
Number of Weighted Average Weighted Weighted
Range of Options Remaining Average Exercise Options Average Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------------------------- -----------------------------------
$ 3.90 - $ 6.91 512,799 2.50 years $ 4.84 512,799 $ 4.84
$ 7.04 - $ 9.03 326,953 4.66 years $ 7.54 326,953 $ 7.54
$10.84 - $11.72 1,398,268 7.48 years $11.07 806,239 $11.24
$12.44 - $18.95 475,994 5.46 years $15.32 421,514 $12.69
--------- ---------
2,714,014 5.84 years $10.21 2,067,505 $ 9.93
========= =========
19. 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 398,230 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, 2003
and 2002, there were 6,930 shares and 7,583 shares, respectively, granted and
issued through the ESPP. For the years ended December 31, 2003 and 2002, there
were 2,758 shares and 5,098 shares, respectively, granted and issued through the
DSPP. At December 31, 2003, there were 201,808 and 15,035 shares remaining in
the ESPP and DSPP, respectively.
20. 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 the Company's
match begins after one year of service and attaining age 21. Vesting in the
Company's contribution accrues over four years at 25% each year. Pursuant to the
401(k) Plan, employees could contribute up to 50% of their compensation to a
maximum of $12,000 in 2003 ($142,000 for certain eligible participants), $11,000
in 2002 and $10,500 in 2001. The Company matches 50% of the employee
contribution, up to 6% of compensation. Beginning in 1998, the Company match
consisted of a contribution of Company common stock, at market value. The
Company's contributions were purchased through a broker by the directed trustee.
The Company's contribution to the 401(k) Plan was $414,000, $320,000 and
$291,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The
Company expensed $23,000, $18,000 and $49,000 during 2003, 2002 and 2001,
respectively, to administer and audit the 401(k) Plan.
21. 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 $38,915,000 and $42,757,000 at December 31, 2003 and 2002,
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.
49
Certain office space of the Company and the Bank is leased from companies
affiliated with the Chairman of the Company's Board of Directors 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, 2003 are as follows.
Expiration date October 2017 March 2005 January 2006
Annual Rental $1,053 $40 $54
Renewal Option remaining N/A 1 five-year term 2 two-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, 2003 are 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, 2003. Future
minimum receipts under sub-lease agreements are not material.
2004 $ 3,777
2005 3,574
2006 3,143
2007 2,973
2008 2,929
Thereafter 14,390
-------
Total $30,786
=======
Rental expense included in occupancy expense for all operating leases was
$3,722,000, $3,636,000 and $3,195,000 for the years ended December 31, 2003,
2002 and 2001, respectively.
22. INCOME TAXES
The income tax provision consists of the following:
For the Years Ended
December 31,
------------------------------------------
2003 2002 2001
------- ------- ------
Current $ 5,104 $ 6,478 $2,899
Deferred 342 (1,780) (2,743)
------- ------- ------
Total $ 5,446 $ 4,698 $ 156
======= ======= ======
50
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
December 31,
----------------------------
2003 2002
------- -------
Deferred tax asset:
Allowance for loan losses $ 7,175 $ 6,663
Goodwill amortization 3,040 4,105
Compensation 17 413
Other - 322
Valuation allowance - (735)
------- -------
Total deferred tax asset 10,232 10,768
Deferred tax liability:
Property (846) (864)
Deferred loan fees (12) (14)
Unrealized gain on investment securities (861) (3,023)
Other (48) -
------- -------
Total deferred tax liability (1,767) (3,901)
------- -------
Net deferred tax asset $ 8,465 $ 6,867
======= =======
The provision for federal income taxes differs from that computed at the
statutory rate as follows:
For the Years Ended
December 31,
----------------------------------------------------------
2003 2002 2001
---- ---- ----
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
Tax computed at the statutory rate $ 6,574 35.0 $ 5,276 35.0 $ 520 35.0
Surtax exemption (188) (1.0) (150) (1.0) (15) (1.0)
Increase (decrease) in charge resulting from:
Goodwill amortization - - - - 42 2.8
Tax exempt interest (net) (819) (4.4) (650) (4.3) (571) (38.4)
Other, net (121) (0.6) 222 1.5 180 12.1
------- ---- ------- ---- ------- ----
Total $ 5,446 29.0 $ 4,698 31.2 $ 156 10.5
======= ==== ======= ==== ======= ====
23. EARNINGS PER SHARE
Earnings per share were calculated as follows:
For the Years Ended December 31,
------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income $ 13,336 $ 10,378 $ 1,328
Less: Trust Preferred issuance costs write-off 624 777 -
----------- ----------- -----------
Net income available to common shareholders $ 12,712 $ 9,601 $ 1,328
=========== =========== ===========
Dilutive stock options outstanding 2,724,207 2,261,514 1,025,940
Average exercise price per share $ 10.17 $ 9.00 $ 5.90
Average market price - diluted $ 18.92 $ 12.35 $ 8.97
Average common shares outstanding 11,822,845 11,726,387 11,426,991
Increase in shares due to exercise of options - diluted 911,961 450,331 201,053
----------- ----------- -----------
Adjusted shares outstanding - diluted 12,734,806 12,176,718 11,628,044
=========== =========== ===========
Net earnings per share - basic $ 1.08 $ 0.82 $ 0.12
Net earnings per share - diluted $ 1.00 $ 0.79 $ 0.11
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 - 498,794 921,444
52
24. 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.
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, 2003,
that the Company and the Bank meet all applicable capital adequacy requirements.
As of December 31, 2003, 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, 2003
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $195,197 11.35% $137,608 8.00% N/A
Sun National Bank $172,500 10.06% $137,116 8.00% $171,395 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $168,576 9.80% $ 68,804 4.00% N/A
Sun National Bank $154,536 9.02% $ 68,558 4.00% $102,837 6.00%
Leverage Ratio:
Sun Bancorp, Inc. $168,576 7.34% $ 91,865 4.00% N/A
Sun National Bank $154,536 6.77% $ 91,291 4.00% $114,114 5.00%
At December 31, 2002
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $176,688 12.16 % $116,224 8.00% N/A
Sun National Bank $165,322 11.40 % $116,021 8.00% $145,026 10.00%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc. $145,459 10.15 % $ 58,112 4.00% N/A
Sun National Bank $148,639 10.25 % $ 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%
53
25. 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. AccFrdingly,
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, 2003 December 31, 2002
--------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets:
Cash and cash equivalents $ 82,117 $ 82,117 $ 65,614 $ 65,614
Investment securities available for sale 963,428 963,428 723,201 723,201
Loans receivable, net 1,364,465 1,408,271 1,217,008 1,263,396
Restricted equity investments 12,551 12,551 11,610 11,610
Liabilities:
Demand deposits 1,183,991 1,185,991 949,827 949,827
Savings deposits 392,784 392,784 328,508 328,508
Time deposits 534,350 534,149 412,127 419,025
FHLB advances 163,964 169,970 142,260 151,399
Junior subordinated debentures 72,167 68,392 - -
Loan payable - - 1,160 1,160
Securities sold under agreements to repurchase 55,934 55,934 61,860 61,860
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.
Junior subordinated debentures and FHLB advances - The fair value was estimated
by discounting approximate cash flows of the borrowings to achieve a current
market yield.
Commitments to extend credit and letters of credit - The majority of the 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, 2003 and 2002. 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, 2003 and 2002, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
54
26. 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. At December 31,
2003, the Company was asset sensitive, that is the Company's assets had shorter
maturity or repricing terms than its liabilities. Generally, an asset sensitive
position will benefit the Company's earnings during periods of rising rates and
will tend to negatively impact earnings during periods of declining interest
rates. Conversely, a liability sensitive position would benefit the Company
during periods of declining rates and negatively impact earnings in a period of
increasing interest rates. Management monitors the relationship between the
interest rate sensitivity of the Company's assets and liabilities.
27. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The condensed financial statements of Sun Bancorp, Inc. are as follows:
Condensed Statements of Financial Condition December 31,
----------------------------
2003 2002
-------- --------
Assets
Cash $ 15,860 $ 6,382
Investments in subsidiaries:
Bank subsidiary 233,021 193,531
Non-bank subsidiaries 2,167 1,854
Accrued interest and other assets 7,820 5,848
-------- --------
Total $258,868 $207,615
======== ========
Liabilities and Shareholders' Equity
Junior subordinated debentures $ 72,167 -
Other liabilities 983 $ 864
-------- --------
Total liabilities 73,150 864
Guaranteed preferred beneficial interest
in Company's subordinated debt - 61,128
Shareholders' Equity 185,718 145,623
-------- --------
Total $258,868 $207,615
======== ========
55
Condensed Statements of Income
For the Years ended December 31,
------------------------------------------
2003 2002 2001
------- ------- -------
Net interest expense $(4,227) $(4,633) $(5,438)
Management fee 2,602 2,279 4,327
Other expenses (2,613) (2,133) (4,375)
------- ------- -------
Loss before equity in undistributed income of subsidiaries
and income tax expense (4,238) (4,487) (5,486)
Equity in undistributed income of subsidiaries 16,426 13,520 5,218
Income tax benefit (1,148) (1,345) (1,596)
------- ------- -------
Net income $13,336 $10,378 $ 1,328
======= ======= =======
Condensed Statements of Cash Flows
For the Years ended December 31,
------------------------------------
2003 2002 2001
-------- -------- --------
Operating activities:
Net income $ 13,336 $ 10,378 $ 1,328
Adjustments to reconcile net income to
net cash used in operating activities -
Undistributed income of subsidiaries (16,427) (13,520) (5,218)
Changes in assets and liabilities which (used) provided cash:
Accrued interest and other assets (2,596) (2,702) (2,888)
Accounts payable and accrued expenses 119 307 278
-------- -------- --------
Net cash used in operating activities (5,568) (5,537) (6,500)
-------- -------- --------
Investing activities -
Dividends from subsidiary 4,189 8,015 5,916
-------- -------- --------
Net cash provided by investing activities 4,189 8,015 5,916
-------- -------- --------
Financing activities:
Proceeds from other borrowings - 25,000 -
Repayment of other borrowings - (25,000) -
Proceeds from issuance of Trust Preferred Securities 40,000 30,000 -
Redemption of Trust Preferred Securities (29,274) (28,000) -
Exercise of stock options 420 784 670
Proceeds from issuance of common stock 30,717 376 187
Capital contribution to banking subsidiary (31,000) - -
Repurchase of guaranteed preferred beneficial interest
in Company's subordinated debt - (13) -
Purchase of treasury stock - (1,046) -
Payments for fractional interests resulting from stock dividend (6) (6) (4)
-------- -------- --------
Net cash provided by financing activities 10,857 2,095 853
-------- -------- --------
Increase in cash 9,478 4,753 269
Cash, beginning of year 6,382 1,809 1,540
-------- -------- --------
Cash, end of year $ 15,860 $ 6,382 $ 1,809
======== ======== ========
56
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. On April 1, 2002, the Company wrote off the unamortized debt issuance
costs of the called securities in the amount of $777,000, net of income tax,
through a charge to equity. On December 31, 2003, the Company wrote off the
unamortized debt issuance costs of the called securities in the amount of
$624,000, net of income tax, through a charge to equity.
Three Months Ended
------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
2003
Interest income $26,505 $26,383 $27,485 $27,689
Interest expense 7,886 8,097 9,828 9,964
------- ------- ------- -------
Net interest income 18,619 18,286 17,657 17,725
Provision for loan losses 1,165 2,275 710 675
Non-interest income 4,010 5,487 3,868 3,991
Non-interest expense 17,459 16,659 16,394 15,524
------- ------- ------- -------
Income before income taxes 4,005 4,839 4,421 5,517
Income taxes 871 1,522 1,294 1,759
Net income, as reported 3,134 3,317 3,127 3,758
Less: Trust Preferred issuance costs write-off 624 - - -
------- ------- ------- -------
Net income available to common shareholders $ 2,510 $ 3,317 $ 3,127 $ 3,758
======= ======= ======= =======
Basic earnings per share $ 0.21 $ 0.28 $ 0.27 $ 0.32
======= ======= ======= =======
Diluted earnings per share $ 0.19 $ 0.26 $ 0.25 $ 0.31
======= ======= ======= =======
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
Non-interest income 3,861 3,259 3,257 2,801
Non-interest expense 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 $ 0.25 $ 0.19 $ 0.10 $ 0.13
Goodwill amortization, net of tax - 0.05 0.05 0.05
------- ------- ------- -------
Adjusted basic earnings per share $ 0.25 $ 0.24 $ 0.15 $ 0.18
====== ====== ====== ======
Diluted earnings per share $ 0.24 $ 0.18 $ 0.09 $ 0.13
Goodwill amortization, net of tax - 0.05 0.05 0.05
------- ------- ------- -------
Adjusted diluted earnings per share $ 0.24 $ 0.23 $ 0.14 $ 0.18
====== ====== ====== ======
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.
******
57
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
---- ---
2003
Fourth Quarter $ 27.20 $ 21.56
Third Quarter 23.17 19.17
Second Quarter 19.86 13.24
First Quarter 14.57 12.86
2002
Fourth Quarter $ 13.81 $ 12.12
Third Quarter 13.33 9.53
Second Quarter 14.00 11.97
First Quarter 12.32 9.39
There were 365 holders of record of the Company's common stock as of March 4,
2004. 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 4,
2004, there were 13,301,123 shares of the Company's common stock outstanding.
The Company paid 5% stock dividends on April 21, 2003, May 23, 2002 and June 13,
2001. 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, 2003 is available without
charge upon written request to Sun Bancorp, Inc. Shareholder Relations, 226
Landis Avenue, Vineland, NJ 08360.
58