ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
[LOGO]
SUSSEX BANCORP
1996
ANNUAL REPORT
<PAGE>
[GRAPHIC -- NEW JERSEY MAP WITH BANK BRANCHES HIGHLIGHTED]
"Our roots are in Sussex County."
OFFICE LOCATIONS
Main Office:
FRANKLIN
Rt. 23 Franklin
Bank - 827-2404
Administrative Offices - 827-2914
Branch Offices:
VERNON WANTAGE
Church Street, Vernon Route 23, Wantage
764-6175 875-9957
MONTAGUE NEWTON
Clove Road, Montague 15 Trinity Street, Newton
293-3488 383-2211
SPARTA ANDOVER
Woodport Road, Sparta Route 206, Andover
729-7223 786-5150
TABLE OF CONTENTS
A Message To Our Stockholders
Management Discussion
and Analysis
Report of Independent
Public Accountants
Consolidated Balance Sheets
Consolidated Statements
of Income
Consolidated Statements of Changes
in Stockholders' Equity
Consolidated Statements
of Cash Flows
Notes to Consolidated
Financial Statements
Five-Year Summary
Board of Directors and Officers
<PAGE>
A MESSAGE TO OUR STOCKHOLDERS
The directors and officers of Sussex Bancorp are pleased to report our 1996
results. Our year-end balance sheet reflects total loans of $65.5 million an
impressive 24.2% over the previous year. Deposits were up $7 million totaling
$93 million by year-end. We increased our provision for loan losses 103% over
1995. With emphasis on higher yielding commercial loans in 1997 we will continue
to focus upon a requisite loan loss reserve as our loan growth emerges during
the coming year. Net Income for 1996 was negatively impacted by a one-time
special assessment of $101,000 related to the recapitalization of the Savings
Association Insurance Fund (SAIF).
Certainly reviewing last years performance is important -- but where your
bank wants to be in the future and how we get there is what will ultimately
affect shareholder value.
During 1997 the Holding Company will seek to develop off-balance sheet
subsidiaries providing increased earnings without a substantial corresponding
capital investment. Negotiations with a nationally advertised risk management
and insurance brokerage company, a security firm and title company are now
underway with the intent to expand our product base as well as our market
penetration as soon as possible. A joint venture with Capital Funding, a New
Jersey based licensed mortgage banker, is near completion. This will afford our
mutual customers the benefits of a full loan menu including products ranging
from 30 year fixed mortgages to loans heretofore unavailable because of the
necessity to utilize non-conventional underwriting standards.
As the public becomes more at ease in utilizing modern technology the demand
from our customer base for off-site self-service banking will be increased.
Consequently, a substantial portion of our 1997 budget is committed to
developing additional banking channels such as more off-site ATM's, tele-banking
and other alternative retail delivery systems. Fee income from a service banking
business is growing at a rate far exceeding the growth rate of traditional
banking industry products. Sussex Bancorp is committed to a program of
technology up-grade that will maintain our position as a significant force in
our market area.
Your Board of Directors anticipate continuing our dividend policy that has
produced a combined stock and cash dividend to our shareholders for twenty
consecutive years. We believe your commitment to us deserves nothing less.
Sincerely,
/s/Donald L. Kovach
- -------------------
Donald L. Kovach
President/CEO
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
This section presents Management's discussion and analysis of and changes to the
Company's consolidated financial results of operations and condition and should
read in conjunction with the Company's financial statements and notes thereto
included herein.
MANAGEMENT STRATEGY
The Company's goal is to serve as a community-oriented financial institution
serving the Sussex County, New Jersey marketplace. All seven of the Company's
offices are located within Sussex County, New Jersey, and over 90% of all of the
Company's loans are made to borrowers located in Sussex County. Through the year
ended December 31, 1996, Management sought to reestablish a higher profile for
the Company in the markets which it serves after a period of lower visibility.
Management sought this heightened visibility through the aggressive offerings of
1- to 4-family home mortgage loans and time deposit accounts. Management
believes that by gaining market share in these areas, the Company will be able
to gain more ongoing customer relationships as well as additional customers
through its heightened visibility. Management believes its efforts to increase
market share during 1996 have been successful, as evidenced by the 30.3%
increase in 1-4 family residential mortgages and the 13.2% increase in period
end time deposits. Loan growth during 1996 was funded both by a shift of assets
out of lower yielding federal funds sold and by the increase in time deposits.
For 1997, Management's goals for the Company include (1) enhancing non-interest
income by offering additional products, such as insurance and securities
brokerage products, (2) managing the Company's interest rate risk by becoming,
in selected situations, a seller of 1- to 4-family residential mortgages, and
(3) diversifying the Company's loan portfolio by emphasizing the origination of
adjustable rate commercial loans and loans to individuals. Although Management
anticipates broadening the Company's product offerings, primarily through joint
ventures or agreements with third party providers, it has not entered into any
agreements with any such third parties as of the date hereof, and no assurances
can be given that the Company will successfully be able to negotiate any such
agreements or arrangements.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Company's net income was $522,000,
representing an increase of $21,000 over the $501,000 earned in 1995, which was
$99,000 less than the $600,000 earned in 1994. The net income per share for 1996
was $.76, compared to the reported net income per share of $.74 in 1995 and the
reported net income per share of $.90 in 1994.
The Company's results for 1996 were affected by an increase of $199,000 in net
interest income, partially offset by an increase in the provision for loan
losses, an increase in total other expenses caused by a one-time assessment of
$101,000 levied by the Federal Deposit Insurance Corporation ("FDIC") in
connection with the recapitalization of the Savings Association Insurance Fund
("SAIF") and an increase in income tax expense. The Company's SAIF insured
deposits were obtained through the Company's 1992 acquisition of the assets and
liabilities of a savings bank.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on loans
and other interest-earning assets and interest paid on deposits and other
interest-bearing liabilities. Net interest income is directly affected by
changes in volume and mix of interest-earning assets and interest-bearing
liabilities which support those assets, as well as changing interest rates when
differences exist in repricing dates of assets and liabilities.
<PAGE>
Net interest income, on a fully taxable basis (a 34% tax rate), increased by
$199,000 in 1996 to $4.0 million compared net interest income of $3.8 million in
1995. The increase in net income occurred as total interest income increased by
$660,000, or 10.9%, to $6.7 million, while interest expense increased by
$461,000, or 20.3%, to $2.7 million. Interest income increased primarily as a
result of an increase in interest earning assets, as the Company's average
earning assets increased by $9.5 million. The increase in volume was partially
offset by a decrease in rate as the Company's average yield on its interest
earning assets declined to 7.53% for the year ended December 31, 1996, compared
to 7.62% for the year ended December 31, 1995. The decrease in rate primarily
reflects the Company's strategy of gaining market share by offering lower priced
loan products.
Interest income on total loans increased from $4.6 million in 1995 to $5.0
million in 1996, an increase of $391,000. As discussed above, this increase was
primarily the result of an increase in the volume of the loan portfolio, offset
by a decline in average rate. The average yield on loans declined 15 basis
points from 8.48% in 1995 to 8.33% in 1996.
Total interest income on securities increased from $1.2 million in 1995 to $1.6
million in 1996, an increase of $338,000, or 27.7%. Average securities increased
from $21.9 million in 1995 to $26.2 million in 1996, an increase of $4.3
million.
Total interest expense increased from $2.3 million in 1995 to $2.7 million for
the year ended December 31, 1996, an increase of $461,000, or 20.3%. The
increase in interest expense was attributable both to an increase in the
Company's total deposits and an increase in the rates paid on deposits by the
Company. During 1996, the Company's average interest-bearing liabilities
outstanding increased by $7.6 million, to $75.1 million for the year ended
December 31, 1996 compared to $67.5 million for the year ended December 31,
1995. The increase in deposits occurred primarily in the Company's time
deposits, which bear higher interest rates than the Company's other deposits.
Average time deposits increased to $32.5 million, an increase of $8.5 million,
or 35.4%, from 1995 to 1996, and the average rate paid by the Bank on its time
deposits increased to 5.21% from 5.02% for the twelve months ended December 31,
1995.
The net interest spread, or the difference between the yield on earning assets
and the average cost of funds was 4.46% in 1996, 4.77% in 1995 and 5.07% in
1994, reflecting the Company's higher cost of funds and the decreased yield
earned by the Company on its interest earning assets during these periods as
Management implemented its strategy of increasing market share. COMPARATIVE
AVERAGE BALANCE SHEETS The following table reflects the components of the
Company's net interest income, setting forth for the period presented (1)
average assets, liabilities and stockholders' equity, (2) interest income earned
on interest earning assets, and interest expense paid on interest-bearing
liabilities, (3) average yields earned on interest earning assets and average
rates paid on interest-bearing liabilities, (4) the Company's net interest
spread, and (5) the Company's net yield on interest earning assets. Rates are
computed on a taxable equivalent basis.
<PAGE>
<TABLE>
<CAPTION>
Comparative Average Balance Sheets
Year Ended December 31,
1996 1995
===================================================================================================================================
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning assets:
Taxable loans (net of unearned
income) $59,111 $4,958 8.33% $52,976 $4,5678 .48%
Tax exempt securities 1,060 62 5.81% 3,823 2416 .31%
Taxable investment securities 25,131 1,512 6.24% 18,109 1,0516. 32%
Interest bearing deposits 0 0 0.00% 45 20 .00%
Federal funds sold 3,609 195 5.40% 4,472 2625 .88%
Total earning assets 88,911 6,727 7.53% 79,425 6,1237 .62%
Non-interest earning assets 8,576 8,386
Allowance for possible
loan losses (491) (492)
Total Assets $96,996 $87,319
Liabilities and Shareholders' Equity
Interest bearing liabilites:
NOW deposits $11,962 $223 1.86% $11,446 $2041 .82%
Savings deposits 26,789 672 2.51% 26,849 6692 .49%
Money market deposits 3,818 84 2.20% 5,203 1162 .21%
Time deposits 32,515 1,749 5.21% 23,981 1,2745 .02%
Subordinated debt 0 0 0.00% 0 00 .00%
Total interest bearing
liabilites 75,084 2,728 3.63% 67,479 2,2673 .36%
Non-interest bearing liabilites:
Demand deposits 13,165 11,879
Other liabilities 1,116 807
Total non-interest bearing
liablilites 14,281 12,686
Shareholders' equity 7,631 7,154
Total liabilities and shareholders'
equity $96,996 $87,319
Net interest differential $3,999 $3,856
Net yield on interest-earning
assets 4.46% 4.77%
</TABLE>
<PAGE>
The following table presents by category the major factors that contributed to
the changes in net interest income for each of the years ended December 31, 1996
and 1995, as compared to each respective previous period. Amounts have been
computed on a fully tax equivalent basis, assuming a federal income tax rate of
34%.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 versus 1995
=========================================================================================
Increase (Decrease)
Due to Change In:
Average Average
Volume Rate Net
- -----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest Income:
Taxable loans (net of
unearned income) $475 (84) 391
Tax exempt securites (161) (18) (179)
Taxable investment securities. 419 42 461
Interest bearing deposits. (2) 0 (2)
Federal funds sold. (47) (20) (67)
Total interest income. 684 (80) 604
Interest expense:
NOW deposits. 9 6 15
Savings deposits. 0 3 3
Money market deposits. (31) (1) (32)
Time deposits 463 12 475
Total interest expense 441 20 461
Net interest income $243 $(100) $143
</TABLE>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses in 1996 was $130,000 compared to
provisions of $64,000 and $187,000 in 1995 and 1994, respectively. The increase
for 1996 compared to 1995 reflects the increase in the Company's loan portfolio.
The decrease from 1994 to 1995 reflects reduced chargeoffs during 1995. The
Company anticipates that it will continue to increase its provision for possible
loan losses during 1997 to reflect both the increase in the Company's total loan
portfolio and increased diversification as the Company stresses the origination
of commercial and individual loans, which may entail a greater degree of risk
than loans secured by 1- to 4-family residential properties.
OTHER INCOME
The Company's other income is primarily generated through service charges on
deposit accounts. Other income increased $22,000 in 1996 compared to an increase
of $85,000 in 1995, reflecting the increase in the Company's total deposits. The
Company anticipates that other income may become an increasingly important
component of net income as the Company seeks to expand its product offerings
beyond loan and deposit products.
<PAGE>
OTHER EXPENSE
Total other expense increased from $3,641,000 in 1995 to $3,707,000 in 1996, an
increase of $66,000. Increases in net occupancy expenses and other operating
expenses were partially offset by decreases in salaries and employee benefits
and furniture and equipment expense. In addition, the Company incurred a $33,000
loss on the sale of real estate owned in 1996, compared to a gain of $3,000
recognized in 1995. Finally, other operating expenses increased by $79,000, or
6.4%, during 1996. This increase was primarily attributable to the one-time SAIF
assessment of $101,000. Excluding the special assessment, other operating
expenses decreased by $22,000.
Salary and employee benefits decreased by $63,000, or 3.6%, to $1.7 million for
the year ended December 31, 1996 from $1.8 million for the year ended December
31, 1995.
INCOME TAX EXPENSE
The Company's income tax provision, which includes both federal and state taxes,
was $322,000, $254,000 and $234,000 for the years ended December 31, 1996, 1995
and 1994, respectively. The increase provision for income taxes reflects both
the Company's increased net income and increase in the Company's effective tax
rate.
Financial Condition
At December 31, 1996, the Company had total assets of $101.8 million, compared
to total assets of $94.9 million at December 31, 1995. Total loans increased to
$65.5 million at December 31, 1996 from $52.7 million at December 31, 1995.
Total deposits increased to $92.9 million at December 31, 1996 from $85.9
million at December 31, 1995.
LOANS
Total loans increased from $52.7 million at December 31, 1995 to $65.5 million
at December 31, 1996, an increase of $12.8 million. Total loans increased by
$681,000, or 1.3%, from 1994 to 1995. The increase in the Company's loan
portfolio during 1996 occurred primarily in loans secured by one- to four-family
residential properties, which increased by $12.0 million, or 30.3%, to $51.6
million at December 31, 1996 from $39.6 million at December 31, 1995. The
increase in 1-4 family mortgage loans occurred as the Company sought to
aggressively reestablish its presence it the markets served by its branch
offices after a period of declining visibility. To implement this strategy, the
Company began to competitively price and promote its loan products, particularly
its 1-4 family mortgage loans. The Company's marketing strategy resulted in the
above described increase in mortgage loans, while the average rate earned on
taxable loans declining from 8.48% for the year ended December 31, 1995 to 8.33%
for the year ended December 31, 1996. Although the Company anticipates
continuing to provide competitively priced home mortgage products, the Company
does not anticipate continuing to be one of the lowest cost sources of home
mortgages in its trade area. In addition, the Company's commercial loans
increased by $170,000, to $1.8 million from $1.6 million, the Company's loans to
individuals, primarily automobile loans, increased by $476,000 to $2.1 million
from $1.6 million, and the Company's loans secured by non-residential properties
decreased by $193,000.
The increase in loan originations was funded during 1996 both by a $6.3 million
reduction in federal funds sold and through an increase in the Company's time
deposits.
<PAGE>
The Company has defined its primary market area to be Sussex County, New Jersey.
Over ninety percent of all loans in the Company's portfolio are made to
borrowers located in Sussex County. The majority of approved loans are secured
by real estate and the borrower's primary residences. The end of year loan to
deposit ratios for 1996, 1995 and 1994 were 69.9%, 60.7% and 69.3% respectively.
The Company retains all closed loans for its portfolio and seldom purchases
loans from third parties. The Company does enter into loan participations from
time to time, especially on larger loans, to reduce the Company's exposure and
to enable the Company to make loans in excess of its loan-to-one borrower limit.
During 1997, the Company anticipates becoming, on a selected basis, a seller of
1- to 4-family residential mortgages. The Company anticipates using selected
loan sales as an asset/liability management tool, but does not anticipate
becoming a participant in the secondary market. Rather, the Company anticipates
making selected sales to other locally-based financial institutions, with
servicing retained by the Company.
The following tables set forth certain information concerning the distribution
of the Company's loan portfolio and its interest rate sensitivity.
<TABLE>
<CAPTION>
December 31,
1996 1995
===========================================================================================================================
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $ 1,817 2.75% $ 1,647 3.10%
Real Estate-non residential
properties. 9,603 14.65% 9,796 18.60%
Residential properties 51,621 78.80% 39,620 75.10%
Construction. 381 0.60% 69 0.15%
Lease financing. 0 0 0 0.00%
Consumer 2,091 3.20% 1,615 3.05%
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans. $65,513 100.00% $52,747 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Within 1 Year 1 to 5 Years After 5 Years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans with fixed rates:
Commercial $313 $ 183 $189 $ 685
Real Estate 381 0 0 381
Loans with adjustable rates:
Commercial 283 827 22 1,132
Real Estate 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
$977 $1,010 $211 $2,198
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ASSET QUALITY
Non-performing assets consist of non-accrual loans and all loans over ninety
days delinquent and other real estate owned ("OREO"). Management ceases to
accrue interest on all loans when they are over ninety days delinquent. All
previously accrued interest is reversed unless management determines that the
loan is adequately collateralized and that the principal and interest will be
recovered within the original term of the loan.
Impaired loans include non accrual loans and loans which have been restructured
that were not paying in accordance with their original terms. As of December 31,
1996, the Company had two restructured loans with a remaining balance of
$483,000. As of year-end both loans are current and performing in accordance
with their restructured terms. Restructured loans are put on accrual basis if
the customer demonstrates the ability to repay the debt under the terms of the
renegotiation by a period of performance, by financial statements or other
evidence of ability to service debt.
OREO has been reduced since the year-end 1994 by 34%. The current total as of
December 31, 1996 is $396,477 which represent three properties. Management has
rented one property to the former owner, while final legal issues are resolved.
A contract was under consideration for another property. Properties are analyzed
by appraisals and/or broker opinions prior to being placed in OREO. The
outstanding loan balance is adjusted to reflect current market value and cost
associated with a sale. It is the practice of management to actively market all
OREO so that carrying costs are minimized. Thus, there are no remaining
properties which were on the 1994 and 1995 OREO lists, except for one property
which is part of a prospective bankruptcy plan under dispute by the Company.
In addition to active monitoring and collecting on all delinquent loans with an
emphasis on both the short and long term delinquent customers, management has an
active loan review process for commercial customers with aggregate loan amounts
unsecured of $100,000 or more and real estate secured of $250,000 or more. This
review consists of a detailed presentation for the Directors Loan Committee with
both a narrative and analysis of the customer and all relevant financial
information.
The Company has set goals to ensure the continued focus in the area of problem
loans. Management has produced significant reduction in all categories. While
there are inherent risks and uncertainties in the financial industry which can
be compounded by down turns in the local economy, management has developed
strategies and an overall plan to continue to minimize the impact of delinquent,
non-performing and OREO to the Company.
While the Company's loan portfolio has grown over the last three years, the
percentage and total amount of delinquent loans has dropped significantly.
Delinquent loans totaled $1.6 million at December 31, 1996, $3.3 million at
December 31, 1995 and $3.3 million at December 31, 1994, with the percentages to
the total portfolio of 2.44% for 1996, 6.26% for 1995 and 6.34% for 1994.
Management has worked aggressively to reduce losses from the portfolio via
aggressive collection efforts.
<PAGE>
The following table provides information concerning risk elements in the loan
portfolio.
<TABLE>
<CAPTION>
December 31,
1996 1995
================================================================================
<S> <C> <C>
Non-accrual loans $935 $1,621
Non-accrual loans to total loans. 1.43% 3.07%
Non-performing assets to total assets 1.31% 2.15%
Allowance for possible loan losses
as a percentage of non-performing loans 57.98% 27.80%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Management has established a model for calculating the adequacy of the Company's
Allowance for Loan Losses ("ALL"). Restructured loans, as well as loans
designated by the Company's internal loan watch list, are assigned a percentage
of their balance as a specific reserve. Additionally, all other delinquent loans
are grouped by the number of days delinquent with this amount assigned a general
reserve figure for this calculation. Historic and economic adjustments are also
factored in with the resulting figure compared to the current ALL.
The allowance for possible loan losses at year end of 1996 was $542,000 versus
$476,000 in 1995 and $478,000 in 1994. Management recognizes the importance of
adequate reserves and their proper allocation. Over time management reviews and
adjusts this reserve in line with our objectives and the underlying credit risk
inherent in the total portfolio.
The following table provides a three year analysis of the changes in the
allowance for possible loan losses:
Allowance for Loan Loss
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
=====================================================================================================
<S> <C> <C> <C>
Beginning Balance $476,453 $477,756 $440,353
Provision for Loan Loss 130,000 64,000 187,000
Loans Charged-off 66,444 68,119 182,799
Recoveries 1,996 2,817 33,203
- -----------------------------------------------------------------------------------------------------
Ending Balance $542,005 $476,454 $477,757
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth information concerning the allocation of the
Company's ALL.
<TABLE>
<CAPTION>
December 31,
1996 1995
=====================================================================================================
% of % of
Amount All Loans Amount All Loans
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Applicable to:
Commericial and industrial. $ 5,420 1.0% $ 4,765 1.0%
Real Estate:
Nonresidential properties. 77,507 14.3% 74,803 15.7%
Residential properties 444,986 82.1% 387,357 81.3%
Construction. 3,252 0.6% 1,429 0.3%
Consumer. 10,840 2.0% 8,100 1.7%
- -----------------------------------------------------------------------------------------------------
Total $542,005 100.00% $476,454 100.00%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Net charge-offs were $64,448 for 1996 as opposed to $65,303 in 1995 and $149,596
in 1994. Net charge-offs as a percent of year-end total loans were .10% in 1996,
.12% in 1995 and .28% in 1994.
SECURITIES PORTFOLIO
The following table shows the carrying value of the Company's security portfolio
as of the dates indicated. Securities held to maturity are stated at cost,
adjusted for amortization of premium and accretion of discounts. Securities
available for sale are stated at their fair value.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
===========================================================================================================================
(In Thousands)
<S> <C> <C> <C>
U. S. treasury securities and obligations of U. S. government
corporations and agencies:
Available for sale $22,154 $21,564 $15,369
Obligations of states and political subdivisions:
Held to maturity 652 1,671 4,865
Other investments:
Held to maturity 470 471 394
- ---------------------------------------------------------------------------------------------------------------------------
Total Securities $23,276 $23,706 $20,628
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DEPOSITS
Total deposits increased $7.0 million from $85.9 million at year-end 1995 to
$92.9 million at year-end 1996, an 8.1% increase. The increase was primarily
attributable to an increase in time deposits, which increased to $52.6 million,
an increase of $6.1 million, or 13.2%, from time deposits of $46.5 million at
year-end 1995. The increase in time deposits reflects Management's strategy of
reestablishing the Company in its trade areas, and growing the Company's balance
sheet through the origination of additional loans and using the time deposits as
a funding source for those loans. The increase in time deposits occurred as the
Company offered highly competitive rates for medium-term deposit products. The
time deposits originated in 1996 had an average maturity, at the time of
origination, of 20 months. It has been Management's experience that the majority
of its time deposit products have, upon maturity, stayed with the Company,
either in new time deposits or other deposit products, even if the Company has
lowered the rates initially paid on the time deposits at the time of their
origination. Management believes that through the Company's available for sale
securities portfolio and secondary liquidity sources, such as lines of credit
with the Federal Home Loan Bank of New York, the Company will have sufficient
liquidity to fund its operating needs, even if a substantial portion of the time
deposits do not renew.
The following tables provide information concerning the Company's deposits.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Average Balance Deposits:
NOW deposits $11,962 13.60% $11,446 14.40%
Savings deposits. 26,789 30.40% 26,849 33.80%
Money market deposits 3,818 4.30% 5,203 6.60%
Time deposits 32,515 36.80% 23,981 30.20%
Demand deposits 13,165 14.90% 11,879 15.00%
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $88,249 100.00% $79,358 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In Thousands)
Time Deposits ($100,000 and over)
Three months or less. $ 720
Over three months through six months. 1,235
Over six months through twelve months. 315
Over twelve months 607
- ---------------------------------------------------------------------------------------------------------------------------
Total $2,877
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
Liquidity is a measure of the Company's ability to provide sufficient cash flow
for current and future financial obligations and commitments on a timely basis.
Sources of liquidity include deposits, liquidation or maturity of loans and
investments and short-term borrowings.
<PAGE>
It is management's intent to fund future loan demand with deposit growth, sales
of securities and, to a lesser extent, sales of mortgages. In addition, the Bank
is a member of Federal Home Loan Bank of New York and has available an overnight
line of credit in the amount of $4.3 million. The Bank did not borrow against
this line of credit during 1996. The Company believes that its current level of
liquidity is sufficient to meet its current and anticipated operational needs.
INTEREST RATE SENSITIVITY
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Interest rate sensitivity is the volatility of a
Company's earnings resulting from a movement in market interest rates.
The Company has developed an Asset and Liability Management Policy. The policy
provides for the Company to generally maintain a relatively balanced position
between interest rate sensitive assets and interest rate sensitive liabilities.
At December 31, 1996, the interest rate sensitivity position evident for
periodic intervals reflects an asset sensitive position.
<TABLE>
<CAPTION>
Rate Sensitivity Analysis
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Assets
0-3 Mos 3-12 Mos 1-5 Years 5+ Years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities. $ 1,922 $ 8,671 $12,683 0
Fed Funds 4,250 0 0 0
Commercial Loans (Fixed). 267 200 218 0
Commercial Loans (Variable) 0 283 8272 2
Home Equity (Fixed). 0 0 0 0
Home Equity (Variable). 4,549 0 0 0
Consumer Loans 1,269 2,748 6,975 5,124
SBA Loans (Variable). 0 0 0 0
Mortgages. 1,162 3,994 15,535 22,340
Deposit Loans 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Assets $13,419 $15,896 $36,238 $27,486
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Liabilities
0-3 Mos 3-12 Mos 1-3 Yrs 4-15 Yrs
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Certificate of Deposits. $ 7,746 $ 14,517 $14,129 $ 438
Money Market Deposit Accounts. 3,693 0 0 0
Savings Accounts. 2,650 23,852 0 0
Now Accounts. 1,205 10,852 0 0
Money Market Savings Accounts. 0 0 0 0
Subordinated Debt 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $15,294 $ 49,221 $14,12 $ 438
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Sensitivity Gap. $ (1,875) $(33,325) $22,109 $27,048
</TABLE>
<PAGE>
CAPITAL RESOURCES
Stockholders equity inclusive of Unrealized Gain (Loss) on Securities Available
for Sale, net of income taxes was $7,882,000 at December 31, 1996. The growth in
stockholders' equity is generated primarily through earnings retention.
The Company's and SCSB's regulators have classified and defined bank holding
company capital into the following components - (1) Tier I capital which
includes tangible stockholders' equity for common stock and certain perpetual
preferred stock, and Tier II capital, which includes a portion of the allowance
for possible loan losses, certain qualifying long-term debt and preferred stock
which does not qualify for Tier I capital.
The Company's and SCSB's regulators have implemented risk-based capital
guidelines which require banks and bank holding companies to maintain certain
minimum capital as a percent of such bank's assets and certain off-balance sheet
items adjusted for predefined credit risk factors (risk-adjusted assets). Banks
and bank holding companies are required to maintain, at a minimum, Tier I
capital as a percent of risk-adjusted assets of 4.0% and combined Tier I and
Tier II capital as a percent of risk-adjusted assets of 8.0%. As of December 31,
1996, the Company's Tier I and combined Tier I and Tier II capital ratios were
14.29% and 15.40%, respectively.
In addition to the risk-based guidelines discussed above, the Company's and
SCSB's regulators require that banks and bank holding companies which meets the
regulators' highest performance and operational standards maintain a minimum
leverage ratio (Tier I capital as a percent of tangible assets) of 3.0%. For
those banks and bank holding companies with higher levels of risk or that are
experiencing or anticipating significant growth, the minimum leverage ratio will
be proportionately increased. Minimum leverage ratios for each bank and bank
holding company are established and updated through the ongoing regulatory
examination process. As of December 31, 1996, the Company has a leverage ratio
of 6.90%.
EFFECT OF INFLATION
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, the level of
interest rates has a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or change with the same magnitude as
the prices of goods and services since such prices are affected by inflation.
Accordingly, the liquidity, interest rate sensitivity and maturity
characteristics of the Company's assets and liabilities are more indicative of
its ability to maintain acceptable performance levels. Management of the Company
monitors and seeks to mitigate the impact of interest rate changes by attempting
to match the maturities of assets and liabilities to manage its gap, thus
seeking to minimize the potential effects of inflation.[GRAPHIC OMITTED]
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Sussex Bancorp:
We have audited the accompanying consolidated balance sheets of Sussex
Bancorp (a New Jersey corporation) and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sussex Bancorp and subsidiary
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
----------------------
Arthur Andersen LLP
Roseland, New Jersey
January 10, 1997 (except
with respect to the matter
discussed in Note 10, as to
which the date is March 19, 1997)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH AND DUE FROM BANKS (Notes 2 and 11) $4,605,000 $3,652,000
FEDERAL FUNDS SOLD (Note 2):
Overnight 4,250,000 9,050,000
Term -- 1,500,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 8,855,000 14,202,000
- ---------------------------------------------------------------------------------------------------------------------------
SECURITIES (Notes 2 and 3):
Available for sale, at market value 22,154,000 21,564,000
Held to maturity, at amortized cost (market value of
$1,116,000 in 1996 and $2,142,000 in 1995) 1,122,000 2,142,000
- ---------------------------------------------------------------------------------------------------------------------------
Total securities 23,276,000 23,706,000
- ---------------------------------------------------------------------------------------------------------------------------
LOANS (Notes 2, 4 and 5) 65,513,000 52,747,000
Less--
Unearned income 49,000 123,000
Allowance for possible loan losses 542,000 476,000
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 64,922,000 52,148,000
- ---------------------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, net (Notes 2 and 7) 2,242,000 2,307,000
- ---------------------------------------------------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE 544,000 582,000
- ---------------------------------------------------------------------------------------------------------------------------
OTHER REAL ESTATE (Note 2) 396,000 329,000
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS (Notes 2 and 9):
Intangibles 870,000 954,000
Other 671,000 642,000
- ---------------------------------------------------------------------------------------------------------------------------
Total other assets 1,541,000 1,596,000
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $101,776,000 $94,870,000
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits --
Demand -- noninterest bearing $13,807,000 $13,010,000
Savings -- interest bearing 26,502,000 26,451,000
Time -- interest bearing (includes deposits $100,000
and over of $2,877,000 in 1996 and $2,346,000 in 1995) 52,580,000 46,464,000
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 92,889,000 85,925,000
Accrued interest payable and other liabilities 1,005,000 1,336,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 93,894,000 87,261,000
- ---------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY (Notes 2, 3, 8, 10
and 12):
Common stock -- no par value, authorized 5,000,000
and 2,000,000 shares in 1996 and 1995; issued and
outstanding 688,496 in 1996 and 647,236 in 1995 5,246,000 4,532,000
Retained earnings 2,729,000 3,023,000
Unrealized gain (loss) on securities available for sale, net of income taxes (93,000) 54,000
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,882,000 7,609,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $101,776,000 $94,870,000
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
================================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $4,958,000 $4,567,000 $4,386,000
Interest on Federal funds sold 195,000 262,000 81,000
Interest on deposits with banks -- 2,000 4,000
Interest on securities--
Taxable 1,512,000 1,051,000 886,000
Exempt from Federal income tax 45,000 168,000 159,000
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 6,710,000 6,050,000 5,516,000
INTEREST EXPENSE 2,728,000 2,267,000 1,656,000
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,982,000 3,783,000 3,860,000
PROVISION FOR POSSIBLE LOAN LOSSES
(Notes 2 and 5) 130,000 64,000 187,000
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 3,852,000 3,719,000 3,673,000
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 512,000 509,000 443,000
Safe deposit rental income 32,000 31,000 31,000
Trust department income (Note 2) 9,000 12,000 11,000
Other income 146,000 125,000 107,000
- --------------------------------------------------------------------------------------------------------------------------------
Total other income 699,000 677,000 592,000
- --------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 1,692,000 1,755,000 1,609,000
Net occupancy expense 357,000 334,000 335,000
Furniture and equipment expense 319,000 328,000 259,000
(Gain) loss on sale of other real estate, securities
and equipment 33,000 (3,000) (19,000)
Other operating expenses (Notes 2 and 14) 1,306,000 1,227,000 1,247,000
- --------------------------------------------------------------------------------------------------------------------------------
Total other expenses 3,707,000 3,641,000 3,431,000
- --------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 844,000 755,000 834,000
PROVISION FOR INCOME TAXES (Notes 2 and 9) 322,000 254,000 234,000
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 522,000 $ 501,000 $ 600,000
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2) 684,309 672,808 667,290
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (Note 2) $ .76 $ .74 $ .90
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Unrealized
Gain(Loss) on
Common Stock Retained Securities Available
Shares Amount Earnings for Sale Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 634,838 $4,383,000 $2,434,000 $106,000 $6,923,000
Net income -- -- 600,000 -- 600,000
Cash dividends ($.32 per share) -- -- (216,000) -- (216,000)
Shares issued through dividend
reinvestment plan 1,873 22,000 -- -- 22,000
Change in unrealized loss on
securities available for sale,
net of income taxes
(Note 3) -- -- -- (683,000) (683,000)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 636,711 4,405,000 2,818,000 (577,000) 6,646,000
Net income -- -- 501,000 -- 501,000
Cash dividends ($.44 per share) -- -- (296,000) -- (296,000)
Shares issued through dividend
reinvestment plan 10,525 127,000 -- -- 127,000
Change in unrealized gain
on securities available for
sale, net of income taxes
(Note 3) -- -- -- 631,000 631,000
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 647,236 4,532,000 3,023,000 54,000 7,609,000
Net income -- -- 522,000 -- 522,000
Cash dividends ($.35 per share) -- -- (242,000) -- (242,000)
Stock dividend (5%) 32,660 569,000 (574,000) -- (5,000)
Stock options exercised 500 5,000 -- -- 5,000
Shares issued through dividend
reinvestment plan 8,100 140,000 -- -- 140,000
Change in unrealized gain
on securities available for
sale, net of income taxes
(Note 3) -- -- -- (147,000) (147,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 688,496 $5,246,000 $2,729,000 ($ 93,000) $7,882,000
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
=================================================================================================================================
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 522,000 $ 501,000 $ 600,000
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization 343,000 343,000 281,000
Provision for possible loan losses 130,000 64,000 187,000
Premium amortization on securities, net 39,000 127,000 177,000
Accretion of loan origination and
commitment fees, net (74,000) (40,000) (50,000)
Gain on sale of equipment -- -- (10,000)
Loss (gain) on sale of other real estate 33,000 (3,000) (9,000)
Deferred Federal income tax provision (benefit) 54,000 (6,000) 11,000
Decrease in accrued interest receivable 38,000 3,000 12,000
Decrease in other assets (39,000) (380,000) (353,000)
(Decrease) increase in accrued interest
payable and other liabilities (331,000) 834,000 (95,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments 193,000 942,000 151,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 715,000 1,443,000 751,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities --
Available for sale 10,232,000 11,280,000 1,588,000
Held to maturity 2,239,000 5,366,000 4,390,000
Purchases of securities --
Available for sale (11,105,000) (16,627,000) --
Held to maturity (1,220,000) (2,171,000) (4,871,000)
Proceeds from sale of other real estate 366,000 698,000 565,000
Proceeds from sale of equipment -- -- 10,000
Net increase in loans (13,235,000) (1,177,000) (4,925,000)
Capital expenditures (201,000) (304,000) (659,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,924,000) (2,935,000) (3,902,000)
- ---------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
=================================================================================================================================
<S> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand
deposits and savings accounts 848,000 (1,778,000) (719,000)
Net increase in time deposits 6,116,000 12,616,000 699,000
Exercise of stock options 5,000 -- --
Stock dividend, net of fractional shares paid (5,000) -- --
Payment of dividends, net of reinvestment (102,000) (169,000) (216,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 6,862,000 10,669,000 (236,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (5,347,000) 9,177,000 (3,387,000)
CASH AND CASH EQUIVALENTS, beginning of year 14,202,000 5,025,000 8,412,000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 8,855,000 $14,202,000 $5,025,000
=================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for --
Interest $ 2,968,000 $ 1,715,000 $1,670,000
Income taxes 182,000 201,000 138,000
Loans transferred to other real estate 473,000 417,000 695,000
================================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Sussex Bancorp (the "Parent Company") and its wholly-owned subsidiary, Sussex
County State Bank (the "Bank", or when consolidated with the Parent Company, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Effective November 20, 1996, all of the then outstanding common shares of the
Bank were exchanged for an equal number of shares of the Parent Company common
stock and the Parent Company acquired all of the outstanding common shares of
the Bank. This exchange of shares has been accounted for as a reorganization of
entities under common control resulting in no changes to the underlying carrying
amount of assets and liabilities.
The Bank, a New Jersey State Chartered commercial bank, commenced operation in
1976. It provides commercial banking and trust services for a broad range of
individual and corporate customers and various community bodies. The Bank
operates seven branches in Sussex County, New Jersey.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies of the Company applied in the
preparation of the accompanying consolidated financial statements follows.
Basis of Presentation and Use of Estimates --
The consolidated financial statements include the accounts of the Company and
its wholly--owned subsidiary. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Securities --
Securities which the Company has the ability and intent to hold until maturity
are classified as held to maturity. These securities are carried at cost
adjusted for amortization of premiums and accretion of discounts on a
straight-line basis which is not materially different from the interest method.
Securities which are held for indefinite periods of time and which management
intends to use as part of its asset/ liability strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk, increased
capital requirements or other similar factors, are classified as available for
sale and are carried at fair value. Differences between an investment's
amortized cost and fair value is charged/credited directly to stockholders'
equity, net of income taxes. The cost of securities sold is determined on a
specific identification basis. Gains and losses on sales of securities are
recognized in the income statement upon sale.
The Company has no securities held for trading purposes as of December 31, 1996
and 1995.
<PAGE>
Loans --
Interest is accrued on loans primarily based upon the principal amount
outstanding over the terms of the respective loan instruments. The general
policy of the Company is to discontinue the accrual of interest income on loans
where principal or interest is past due 90 days or more and timely collection
thereof is doubtful. Loan origination and commitment fees and the related costs
are deferred and accreted as a yield adjustment over the contractual life of the
related loans. The unaccreted balance is included in unearned income.
Allowance For Possible Loan Losses --
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
allowance is based on management's evaluation of potential losses in the loan
portfolio, after consideration of appraised collateral values, financial
condition of borrowers, as well as prevailing and anticipated economic
conditions. Credit reviews of the loan portfolio, designed to identify potential
charges to the allowance, are made on a periodic basis during the year by senior
management.
Impaired Loans --
The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures, as of January 1, 1995. SFAS No. 114 requires
that certain impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's original effective interest rate. As
a practical expedient, impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance. This statement is not applicable to large groups of
smaller-homogeneous loans, such as residential mortgage loans, credit card loans
and consumer loans, which are collectively evaluated for impairment.
The Company had previously measured the allowance for credit losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for loan losses was required as of
January 1, 1995.
Other Real Estate --
Other real estate includes loan collateral that has been formally repossessed.
All amounts have been transferred into and carried in other real estate at the
lower of the loan value or fair market value less estimated costs to sell the
underlying collateral. During 1996 and 1995, the Company incurred operating
expenses, net of rents received related to the operation of such properties and
made adjustments to their carrying values resulting in net expense of $17,000 in
1996 and net income of $17,000 in 1995, which is included in other income and
other operating expenses in the accompanying financial statements. In addition,
the Company realized a loss on sales of other real estate amounting to $33,000
in 1996 and a gain of $3,000 in 1995.
Intangibles --
Core deposit intangibles relating to premiums paid on the acquisition of
deposits are amortized on a straight-line basis over 15 years.
<PAGE>
Premises and Equipment --
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the shorter of the estimated lives of the related assets or the
lease term.
Maintenance and repairs are charged to operations as incurred.
Income Taxes --
The Company uses the liability method of computing deferred income taxes.
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates, applicable to future
years, to differences between the financial reporting and the tax basis of
existing assets and liabilities.
Statement Of Cash Flows --
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, noninterest bearing amounts due from banks and Federal funds sold.
Generally, overnight Federal funds sold are for a one day period and term
Federal funds are sold for a 30 to 60-day period.
Net Income Per Common Share --
Per share amounts are computed by dividing net income by the weighted average
number of common shares outstanding during the year, adjusted for the effects of
stock dividends declared. The dilutive effect of stock options is not material.
Trust Operations --
Trust income is recorded on a cash basis, which approximates the accrual basis.
Securities and other property held by the Company in fiduciary or agency
capacities for customers of the trust department are not assets of the Company
and, accordingly, are not included in the accompanying consolidated financial
statements.
New Financial Accounting Standards --
The Financial Accounting Standards Board issued Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," in March 1995. This statement is effective for the year ended December 31,
1996. Statement No. 121 requires that long-lived assets to be held and used by
the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of adopting this statement no adjustments to the
carrying value of the Company's assets were necessary.
Reclassifications --
Certain reclassifications have been made to the December 31, 1995 and 1994
consolidated financial statements to conform them to the December 31, 1996
presentation.
<PAGE>
(3) SECURITIES:
Information relative to the Company's securities portfolio as of December 31, is
as follows --
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Available for Sale -
U. S. Treasury securities $ 8,068,000 $ 31,000 ($ 77,000) $ 8,022,000
U. S. Government mortgage-
backed securities 14,239,000 8,000 ( 115,000) 14,132,000
- ---------------------------------------------------------------------------------------------------------------------
Total $22,307,000 $ 39,000 ($192,000) $22,154,000
- ---------------------------------------------------------------------------------------------------------------------
Held to Maturity -
Obligations of state and political subdivisions $ 652,000 $-- ($ 6,000 $ 646,000
Other debt securities 470,000 -- -- 470,000
- ---------------------------------------------------------------------------------------------------------------------
Total $ 1,122,000 $-- ($ 6,000) $ 1,116,000
- ---------------------------------------------------------------------------------------------------------------------
1995
Available for Sale -
U. S. Treasury securities $ 7,637,000 $121,000 ($ 11,000) $ 7,747,000
U. S. Government mortgage-backed securities 13,835,000 41,000 ( 59,000) 13,817,000
- ---------------------------------------------------------------------------------------------------------------------
Total $21,472,000 $162,000 ($ 70,000) $21,564,000
- ---------------------------------------------------------------------------------------------------------------------
Held to Maturity -
Obligations of state and political subdivisions $ 1,671,000 $-- $ -- $ 1,671,000
Other debt securities 471,000 -- -- 471,000
- ---------------------------------------------------------------------------------------------------------------------
Total $ 2,142,000 $-- $ -- $ 2,142,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of securities at December 31,
1996, by contractual maturity, are shown below for securities to be held to
maturity and available for sale. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<PAGE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $1,122,000 $1,116,000
Due in one to five years 13,068,000 13,003,000 -- --
Due in five to ten years 2,000,000 1,982,000 -- --
Due after ten years 7,239,000 7,169,000 -- --
- ---------------------------------------------------------------------------------------------------------------------------
$22,307,000 $22,154,000 $1,122,000 $1,116,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities available for sale as of December 31, 1996 have been recorded at
their fair value with the net unrealized loss of $93,000 (net of income tax
effect of $60,000) reflected as a decrease to stockholders' equity. At December
31, 1996, U. S. Treasury securities having a book value of $198,000 were pledged
to secure public deposits and for other purposes as required by law.
(4) LOANS:
Loans outstanding by classification at December 31 are as follows --
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by one to four family
residential properties $51,621,000 $39,620,000
Loans secured by nonresidential properties 9,603,000 9,796,000
Loans to individuals 2,091,000 1,615,000
Commercial loans 1,817,000 1,647,000
Other loans 381,000 69,000
- ---------------------------------------------------------------------------------------------------------------------------
Gross loans $65,513,000 $52,747,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Loans made by the Company are generally made in the local and surrounding
communities in which it operates.
<PAGE>
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
The allowance for possible loan losses is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reflected in
operations in the periods in which they become known. Changes in the allowance
for possible loan losses are summarized as follows --
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $476,000 $478,000 $440,000
Provision charged to expense 130,000 64,000 187,000
Loans charged off (66,000) (68,000) (183,000)
Recoveries of charged off loans 2,000 2,000 34,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $542,000 $476,000 $478,000
===========================================================================================================================
</TABLE>
Nonperforming loans include nonaccrual loans, renegotiated loans (prior to
December 31, 1996) and loans which are 90 days delinquent. Nonaccrual loans
include loans for which accrual of interest income has been discontinued.
Renegotiated loans are loans for which the terms have been modified to provide a
reduction or deferral of interest or principal due to a deterioration in the
financial position of the borrower.
The principal amounts of nonperforming loans were $935,000 and $1,714,000 at
December 31, 1996 and 1995, respectively, which includes $935,000 and $1,621,000
of nonaccrual loans, respectively. If interest had been accrued on the
nonaccrual loans, the effect on net interest income would have been
approximately $68,000 and $101,000 in 1996 and 1995, respectively.
In accordance with SFAS No. 114, a loan is considered impaired when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. These loans consist primarily of
nonaccrual loans but may include loans that have been renegotiated that are
performing in accordance with their modified terms. As of December 31, 1996, the
Company's recorded investment in impaired loans and the related valuation
allowance calculated under SFAS No. 114 are as follows --
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans --
Valuation allowance required $1,418,000 $234,000 $2,310,000 $370,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This valuation allowance is included in the allowance for possible loan losses
on the accompanying balance sheet. The average recorded investment in impaired
loans for the period ended December 31, 1996 and 1995 was $1,864,000 and
$2,313,000, respectively.
<PAGE>
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful at which time
payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of $132,000 and $152,000 for the
period ended December 31, 1996 and 1995, respectively.
(6) RELATED PARTIES:
The Company has extended credit in the ordinary course of business to various
directors, executive officers and their associates. A summary of the changes in
such loans are as follows --
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of year $1,394,000
New loans 289,000
Repayments(922,000)
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 761,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1996, all loans to directors, executive officers and their
associates were current as to principal and interest payments.
Certain directors of the Company are associated with legal and accounting firms
that rendered various services to the Company. The Company paid the firms
approximately $82,000, $99,000 and $66,000 during 1996, 1995 and 1994,
respectively for legal and tax services.
(7) PREMISES AND EQUIPMENT:
A summary of premises and equipment as of December 31 are as follows --
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 417,000 $ 417,000
Buildings 1,525,000 1,513,000
Furniture and equipment 2,339,000 2,505,000
Leasehold improvements 198,000 163,000
- -------------------------------------------------------------------------------------------------------------------
4,479,000 4,598,000
Less-Accumulated depreciation and amortization 2,237,000 2,291,000
- -------------------------------------------------------------------------------------------------------------------
$2,242,000 $2,307,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(8) EMPLOYEE STOCK OWNERSHIP PLAN:
The Company maintains a qualified nonleveraged employee stock ownership plan for
substantially all employees. The plan provides that a contribution not to exceed
that allowed by the Internal Revenue Service may be made at the discretion of
the Board of Directors. No contributions were made in 1996 and 1995.
<PAGE>
In July 1994, the Company established a 401(k) savings plan covering
substantially all employees. Under the plan, the Company matches 50% of employee
contributions for all participants not to exceed 6% of their salary.
Contributions made by the Company were approximately $20,000, $16,000 and $8,000
in 1996, 1995 and 1994, respectively.
(9) INCOME TAXES:
The components of the provision for income taxes for 1996, 1995 and 1994, are as
follows --
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes (benefit) --
Current $198,000 $190,000 $183,000
Deferred 54,000 (6,000) 11,000
State 70,000 70,000 40,000
- -------------------------------------------------------------------------------------------------------------------------------
Total $322,000 $254,000 $234,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Cumulative temporary differences at December 31, 1996 and 1995 are
as follows --
<TABLE>
<CAPTION>
Deferred Tax
Asset (Liability)
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for possible loan losses $184,000 $162,000
Loan fee income recognition 37,000 42,0000
Accrued liabilities -- 51,000
Depreciation and amortization (134,000) (114,000)
Discount accretion (1,000) --
Unrealized (gain) loss on securities available for sale 62,000 (36,000)
- ---------------------------------------------------------------------------------------------------------------------------------
$148,000 $105,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
A comparison of income tax expense at the Federal statutory rate in 1996, 1995
and 1994 to the Company's provision for income taxes is as follows--
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
At statutory rate $287,000 $257,000 $284,000
Increase (decrease) from statutory rate resulting from
Tax-exempt interest income (12,000) (46,000) (45,000)
State income taxes, net of Federal tax benefit 46,000 46,000 27,000
Other 1,000 (3,000) (32,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $322,000 $254,000 $234,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(10) STOCKHOLDERS' EQUITY:
Stock Dividends --
On March 20, 1996 and on March 19, 1997 the Company declared a 3% and 2% stock
dividend, respectively. The December 31, 1996 balance sheet and all share and
per share amounts have been restated to give effect for these stock dividends.
Nonqualified Stock Option Plan --
During 1988, the stockholders approved a nonqualified stock option plan (the
1988 Plan). As of December 31, 1996, there were 32,494 authorized shares of the
Company's common stock to be granted.
Options may be granted to any officer of the Parent Company or the Bank, at a
grant price not to be less than the higher of the par value of the stock or 85%
of its fair market value at the grant date. Options are exercisable when granted
with the option period determined by the Company's Board of Directors, but not
to exceed five years. As of December 31, 1996, no options have been granted.
Stock Option Plan for Nonemployee Directors --
During 1995, the stockholders approved a stock option plan for nonemployee
directors (the Director Plan). As of December 31, 1996, there were 32,640
authorized shares of the Company's common stock to be granted. Upon approval of
the Director Plan, each director was granted an option to purchase 2,550 shares.
In addition to the foregoing, each person serving as a nonemployee director on
the date of each annual meeting of the shareholders who is elected or reelected
as a nonemployee director of the Company at such annual meeting of stockholders,
shall be granted an option to purchase 510 shares of the Company's common stock
with a maximum of 7,650 shares total. The option price under each grant shall
not be less than the fair market value on the date of the grant. Options are
exercisable in their entirety six months after the date of the grant and expire
after 10 years. As of December 31, 1996, 17,850 options at $11.03 and 2,550
options at $17.40 were outstanding, of which all were exercisable and none have
been forfeited.
<PAGE>
Incentive Stock Option Plan --
During 1995, the stockholders approved an incentive stock option plan for
executives of the Company (the Executive Plan). As of December 31, 1996 there
were 65,280 authorized shares of the Company's common stock to be granted.
Executive Plan options are granted at the sole discretion of the Board of
Directors. The option price under each grant shall not be less than the fair
market value on the date of grant. The Company may establish a vesting schedule
that must be satisfied before the options may be exercised; but not within six
months after the date of grant and have a term not longer than 10 years from the
date of grant. No options were granted or outstanding as of December 31, 1996.
Transactions under the plan are summarized as follows --
<TABLE>
<CAPTION>
Number Exercise
of Price
Shares Per Share
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, January 1, 1995 -- $ --
Options granted 18,360 11.03
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 18,360 11.03
Options granted 2,550 17.40
Options exercised (510) 11.03
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 20,400 $11.03-$17.40
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans and its stock purchase
plan. Had compensation cost for the Company's three stock based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement 123, the
Company's net income and income per share would have been reduced to the pro
forma amounts as follows --
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income --
As reported $522,000 $501,000
Pro forma 516,000 481,000
Income per share --
As reported $ .76 $ .76
Pro forma .75 .71
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The average fair value of options granted during 1996 and 1995 was $3.95 and
$1.84, respectively. The fair value of each option grant of the Director Plan is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1996 and 1995,
respectively: dividend yield of 2.0% and 4.1% for both years; expected
volatility of 15.8% and 15.7%, risk-free interest rates of 6.3% and 6.7%; and
expected lives of five years for 1996 and 1995.
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996 --
<TABLE>
<CAPTION>
Number Number
Exercise Outstanding at Remaining Exercisable at
Price December 31, 1996 Contractual Life December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$11.03 17,850 8.5 years 17,850
17.40 2,550 9.5 years 2,550
- ------------------------------------------------------------------------------------------------------------------------------
20,400 20,400
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES:
Litigation --
The Company from time-to-time may be a defendant in legal proceedings relating
to the conduct of its business. In management's judgment, the consolidated
financial position or results of operations of the Company will not be affected
materially by the outcome of any present legal proceedings.
Commitments With Off-Balance Sheet Risk --
The balance sheet does not reflect various commitments relating to financial
instruments which are used in the normal course of business. Management does not
anticipate that the settlement of those financial instruments will have a
material adverse effect on the Company's financial position. These instruments
include commitments to extend credit and letters of credit. These financial
instruments carry various degrees of credit risk, which is defined as the
possibility that a loss may occur from the failure of another party to perform
according to the terms of the contract.
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Company receives a fee for
providing a commitment. The Company was committed to advance $7,381,000 to its
borrowers as of December 31, 1996; such commitments generally expire within one
year.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. The Company has entered into
standby letter of credit contracts with its customers totaling $16,000 as of
December 31, 1996, which generally expire within one year.
Required Cash Balances --
Cash balances reserved to meet regulatory requirements amounted to approximately
$549,000 and $400,000 at December 31, 1996 and 1995, respectively.
Operating Leases --
The Company leases one of its branch offices from a company which is majority
owned by a director at an annual rental of $18,000.
<PAGE>
The minimum annual rental commitments for all noncancellable leases for bank
premises subsequent to December 31, 1996, are as follows --
<TABLE>
<CAPTION>
<S> <C>
1997 $ 53,000
1998 53,000
1999 31,000
2000 28,000
2001 and thereafter 54,000
- ---------------------------------------------------------------------------------
Total $219,000
- ---------------------------------------------------------------------------------
</TABLE>
Total rental expense amounted to $53,000, $53,000 and $54,000 in 1996, 1995 and
1994, respectively.
(12) REGULATORY CAPITAL REQUIREMENTS:
The Parent Company and the Bank are subject to various regulatory capital
requirements administered by the 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 Parent Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Parent Company and the Bank must meet specific capital guidelines
that involve quantitative measures of the Parent Company's and the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Parent Company's and the Bank's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Parent Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Parent Company and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. The Parent Company has not
been notified by the Federal Reserve Bank of its capital category. To be
categorized as wellcapitalized, the Bank must maintain minimum total risk based,
Tier I risk based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institution's category.
The Parent Company's and the Bank's actual capital amounts and ratios are also
presented in the table. For both 1996 and 1995, the Parent Company's and the
Bank's actual capital amounts and ratios are the same.
<PAGE>
<TABLE>
<CAPTION>
To Be
Well-Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
- -------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996 -
Total Capital (to Risk Weighted Assets) $7,553,000 15.40% 3,924,000 8.0% $4,906,000 10.0%
Tier I Capital (to Risk Weighted Assets) 7,011,000 14.29 1,962,000 4.0 2,943,000 6.0
Tier I Capital (to Average Assets) 6,891,000 6.90 3,996,000 4.0 4,995,000 5.0
As of December 31, 1995 -
Total Capital (to Risk Weighted Assets) 7,231,000 16.33 3,543,000 8.0 4,429,000 10.0
Tier I Capital (to Risk Weighted Assets) 6,755,000 15.25 1,772,000 4.0 2,657,000 6.0
Tier I Capital (to Average Assets) 6,601,000 7.11 3,712,000 4.0 4,640,000 5.0
</TABLE>
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following is a summary of fair value versus the carrying value of the
Company's financial instruments. For the Company, as for most financial
institutions, the bulk of its assets and liabilities are considered financial
instruments. Many of the Company's financial instruments lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction.
It is also the Company's general practice and intent to hold its financial
instruments to maturity and not engage in trading or sales activities.
Therefore, significant estimations and present value calculations were used by
the Company for the purpose of this disclosure.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and the recorded book balances, were as follows --
Financial instruments actively traded in the secondary market have been valued
using available market prices.
<TABLE>
<CAPTION>
December 31
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,855,000 $ 8,855,000 $14,202,000 $14,202,000
Securities available for sale (Note 3) 22,154,000 22,154,000 21,564,000 21,564,000
Securities held to maturity (Note 3) 1,122,000 1,116,000 2,142,000 2,142,000
</TABLE>
Financial instruments with stated maturities have been valued using a present
value discounted cash flow with a discount rate approximating current market for
similar assets and liabilities. For those loans and deposits with floating
interest rates, it is assumed that estimated fair values generally approximate
the recorded book balances.
<PAGE>
<TABLE>
<CAPTION>
December 31
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, including accrued interest $65,446,000 $65,057,000 $52,730,000 $52,999,000
Deposits, including accrued interest 93,329,000 94,573,000 86,604,000 87,400,000
</TABLE>
There is no material difference between the notional amount and the estimated
fair value of off-balance sheet unfunded loan commitments which totaled
$7,381,000 at December 31, 1996. Standby letters of credit totaling $16,000 as
of December 31, 1996 are based on fees charged for similar agreements;
accordingly, the estimated fair value of standby letters of credit is nominal.
See also Note 11 for additional discussion relating to these off balance-sheet
activities.
(14) OTHER OPERATING EXPENSES:
The major components of other operating expenses are as follows --
<TABLE>
<CAPTION>
December 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FDIC and other assessments $ 150,000 $ 108,000 $ 169,000
Legal and professional fees 123,000 167,000 97,000
Audit and examination fees 85,000 48,000 80,000
Courier service 85,000 78,000 54,000
Core deposit amortization 84,000 84,000 84,000
Stationary and supplies 83,000 69,000 87,000
Advertising 76,000 70,000 14,000
Postage and freight 74,000 74,000 70,000
Data processing fees 57,000 59,000 44,000
Telephone 54,000 56,000 56,000
Bonding and insurance 45,000 62,000 59,000
Directors' fees 40,000 39,000 39,000
Other 350,000 313,000 394,000
- -------------------------------------------------------------------------------------------------------------------------------
$1,306,000 $1,227,000 $1,247,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(15) CONDENSED FINANCIAL STATEMENTS OF SUSSEX BANCORP (PARENT COMPANY ONLY):
<TABLE>
<CAPTION>
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance sheet
Assets -- Investment in Bank subsidiary
(equity method) $7,882,000
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity-
Liabilities -- Other liabilities $ --
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 5,003,000
Retained earnings 2,972,000
Net unrealized holding losses on securities
available for sale, net of tax (93,000)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 7,882,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,882,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Statement of Income
Operating Income-
Dividends from Bank subsidiary $102,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiary 102,000
Provision for Income Taxes (a) --
- ---------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary 102,000
Equity in Undistributed Income of Subsidiary 420,000
- ---------------------------------------------------------------------------------------------------------------------------
Net income $522,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) No Federal income tax is applicable to the dividends and other income
received from subsidiary since the Parent Company and subsidiary file a
consolidated Federal income tax return.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Statement of Cash Flows
Cash Flows from Operating Activities-
Net income $522,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Equity in undistributed income of subsidiary (420,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 102,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Cash dividends paid (102,000)
Stock dividend, net of fractional shares paid (5,000)
Exercise of stock options 5,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (102,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents --
Cash and Cash Equivalents, beginning of year --
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
THE SUSSEX BANCORP, INC. FIVE-YEAR SUMMARY
(not covered by report of independent public accountants)
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income $ 6,710,000 $ 6,050,000 $ 5,516,000 $ 5,382,000 $ 5,525,000
Interest expense 2,728,000 2,267,000 1,656,000 1,903,000 2,483,000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,982,000 3,783,000 3,860,000 3,479,000 3,042,000
Provision for possible
loan losses 130,000 64,000 187,000 101,000 23,000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible
loan losses 3,852,000 3,719,000 3,673,000 3,378,000 3,019,000
Other income 699,000 677,000 592,000 636,000 555,000
Other expense 3,707,000 3,641,000 3,431,000 3,535,000 3,293,000
- -------------------------------------------------------------------------------------------------------------------------------
Income before provision
for income taxes 844,000 755,000 834,000 479,000 281,000
Provision for income taxes 322,000 254,000 234,000 129,000 89,000
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 522,000 $ 501,000 $ 600,000 $ 350,000 $ 192,000
===============================================================================================================================
AVERAGE NUMBER OF
SHARES OUTSTANDING (a) 684,309 672,808 667,209 667,209 667,209
PER SHARE INFORMATION:
Net income $.76 $.74 $.90 $.52 $.29
Cash dividends (b) .35 .44 .32 .19 0
Stock dividends (b) 5% 0% 0% 0%4.75%
Dividend payout ratio 45% 58% 35% 35% 0%
PERFORMANCE YIELDS:
Return on average assets .54% .57% .73% .43%.25%
Return on average
stockholders' equity 6.84% 6.98% 8.84% 5.20%2.96%
Average equity/average assets 7.87% 8.11% 8.24% 8.20% 8.30%
END OF PERIOD DATA:
Total assets $101,776,000 $94,870,000 $82,243,000 $82,444,000 $90,962,000
Total deposits 92,889,000 85,925,000 75,087,000 75,107,000 84,190,000
Total stockholders' equity 7,882,000 7,609,000 6,646,000 6,923,000 6,594,000
Average assets 96,996,000 88,535,000 82,344,000 82,122,000 78,179,000
Average stockholders' equity 7,630,000 7,178,000 6,785,000 6,735,000 6,485,000
===============================================================================================================================
<PAGE>
(a) The average number of shares outstanding was computed based on the average
number of shares outstanding during each period as adjusted for stock dividends.
(b) Cash and stock dividends per common share are based on the actual number of
common shares outstanding on the dates of record as adjusted for subsequent
stock dividends. There is currently no established trading market for the
Company's CommonStock. As of March 18, 1997 there were 709 holders of record of
the Common Stock.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SUSSEX BANCORP, INC.
BOARD OF DIRECTORS and EXECUTIVE OFFICERS
Donald L. Kovach Chairman of the Board, President andChief Executive Office
Irvin Ackerson Excavator, AckersonExcavating
William Kulsar CPA, Caristia, Kulsar and Wade, P.A.
Joel D. Marvil President and Chief Executive Officer, Ames Rubber Corporation
Richard Scott Dentist, Richard W. Scott, D.D.S.
Joseph Zitone General Contractor, Zitone Construction Co.
SUSSEX COUNTY STATE BANK
BOARD OF DIRECTORS
Donald L. Kovach Chairman of the Board, President andChief Executive Office
TerryThompson Secretary, Senior Vice President/COO
Irvin Ackerson Excavator, Ackerson Excavating
William Kulsar CPA, Caristia, Kulsar and Wade, P.A.
Candace Leatham Senior Vice President/Treasurer
Joel D. Marvil President and Chief Executive Officer
Richard Scott Dentist, Richard W. Scott, D.D.S.
Joseph Zitone General Contractor, Zitone Construction Co.
OFFICERS
Donald L. Kovach President/Chief Executive Officer
Candace Leatham Senior Vice President/Treasurer
Terry Thompson Senior Vice President &COO
Mary Cannistra Vice President/Personnel Officer
Elizabeth Martin Vice President/Operations Officer
Valerie Seufert Vice President/Senior Lending Officer
Samuel Tolley Vice President/Loans &Compliance
Donald Hobart Assistant Vice President/Branch Manager-Sparta
Mardella Venable Assistant Vice President/Branch Manager-Newton
Darlene Davids Assistant Secretary/Branch Manager-Vernon
Laurie Grafeld Assistant Secretary/Branch Manager-Montague
Colleen Herman Assistant Secretary/Branch Manager-Wantage
Janice Mandeville Assistant Secretary/Loan Administrations
Maryann Parker Assistant Secretary/Branch Manager-Franklin
Margaret Sisco Assistant Secretary/Deposit Operations
Diana Whitehead Assistant Secretary/Asst. Operations Officer
Pepper Puccetti Executive Secretary
</TABLE>
