SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29030
SUSSEX BANCORP
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
New Jersey 22-3475473
(State of other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
399 Route 23, Franklin, New Jersey 07416 (973) 827-2914
(Address of principal executive offices) (Zip Code) (Issuer's Telephone Number
Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, no par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Issuer: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
The aggregate market value of the voting stock held by non-affiliates
of the Issuer as of February 27, 1998, was $13,564,325.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of February 27, 1998, was 700,749.
For the fiscal year ended December 31, 1997, the Issuer had total
revenues of $8,127,000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
10-KSB Item Document Incorporated
----------- ---------------------
Item 6. Management's Discussion Registrant's Annual Report
and Analysis or Plan of to Shareholders, under the
Operation caption "Management's
Discussion and Analysis
of Financial Conditions and
Results of Operation"
Item 7. Financial Statements Registrant's Annual Report
to shareholders under the
caption "Consolidated
Financial statements"
Item 9. Directors and Executive Proxy Statement for 1998
Officers of the Annual Meeting of
Company; Compliance Shareholders to be filed
with Section 16(a) of no later than April 29,
the Exchange Act. 1998.
Item 10. Executive Compensation Proxy Statement for 1998
Annual Meeting of
Shareholders to be filed
not later than April 29,
1998.
Item 11. Security Ownership of Proxy Statement for 1998
Certain Beneficial Annual Meeting of
Owners and Management Shareholders to be filed
no later than April 29,
1998.
Item 12. Certain Relationships Proxy Statement for 1998
and Related Annual Meeting of
Transactions Shareholders to be filed
no later than April 29,
1998
<PAGE>
PART I
ITEM 1: Description of Business
General
Sussex Bancorp (the "Company" or "Registrant") is a one-bank holding
company incorporated under the laws of the State of New Jersey in January, 1996
to serve as a holding company for the Sussex County State Bank (the "Bank"). The
company was organized at the direction of the Board of Directors of the Bank for
the purpose of acquiring all of the capital stock of the Bank (the
"Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as amended, (the
"Banking Act"), and pursuant to approval of the shareholders of the Bank, the
Company acquired the Bank and became its holding company on November 20, 1996.
As part of the Acquisition, shareholders of the Bank received one share of
common stock, no par value ("Common Stock") of the Company for each outstanding
share of the common stock of the Bank, $2.50 per share par value ("Bank Common
Stock"). The only significant asset of the Company is its investment in the
Bank. The company's main office is located at 399 Route 23, Franklin, Sussex
County, New Jersey 07416.
The Bank is a commercial bank formed under the laws of the State of New
Jersey in 1975. The bank operates from its main office at 399 Route 23,
Franklin, New Jersey 07416, and its six branch offices located at 7 Church
Street, Vernon, New Jersey; 266 Clove Road, Montague,. New Jersey; 172 Woodport
Road, Sparta, New Jersey; 455 Route 23, Wantage, New Jersey; 15 Trinity Street,
Newton, New Jersey; and 165 Route 206, Andover, New Jersey.
The Company is subject to the supervision and regulation of the Board
of Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits. The operations of the Company and
the Bank are subject to the supervision and regulation of the FRB, FDIC and the
New Jersey Department of Banking and Insurance (the "Department"). The principal
executive offices of the Company are located at 399 Route 23, Franklin, New
Jersey 07416, and the telephone number is (973) 827-2914.
Business of the Company
The Company's primary business is ownership and supervision of the
Bank. The Company, through the Bank, conducts a traditional commercial banking
business, and offers services including personal and business checking accounts
and time deposits, money market accounts and regular savings accounts. The
Company structures its specific services and charges in a manner designed to
attract the business of the small and medium sized business and professional
community as well as that of individuals residing, working and shopping in the
Sussex County, New Jersey trade area serviced by the Company. The Company
engages in a wide range of lending activities and offers commercial, consumer,
mortgage, home equity and personal loans.
Service Area
The Company's service area primarily consists of the Sussex County, New
Jersey market, although the Company makes loans throughout New Jersey. The
Company operates its main office in Franklin, New Jersey and six branch offices
in Vernon, Montague, Sparta, Wantage, Newton and Andover, New Jersey
<PAGE>
Competition
The Company operates in a highly competitive environment competing for
deposits and loans with commercial banks, thrifts and other financial
institutions, many of which have greater financial resources than the Company.
Many large financial institutions in New York City and other parts of New Jersey
compete for the business of New Jersey residents located in he Company's service
area. Certain of theses institutions have significantly higher lending limits
than the Company and provide services to their customers which the Company does
not offer.
Management believes the Company is able to compete on a substantially
equal basis with its competitors because it provides responsive personalized
services through management's knowledge and awareness of the Company's service
area, customers and business.
Employees
At December 31, 1997, the Company employed 68 full-time employees and
11 part-time employees. None of these employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
BANK HOLDING COMPANY REGULATION
General
As a bank holding company registered under the Bank Holding Company Act
of 1956, as amended, (the "BHCA"), the Company is subject to the regulation and
supervision of the FRB. The Company is required to file with the FRB annual
reports and other information regarding its business operations and those of its
subsidiaries. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the FRB determines to be so closely related to banking or
managing or controlling banks as to be properly incident thereto.
The BHCA requires, among other things, the prior approval of the FRB in
any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of any other bank, (ii) acquire direct or
indirect ownership or control of more than 5% of the outstanding voting stock of
any bank (unless it owns a majority of such bank's voting shares) or (iii) merge
or consolidate with any other bank holding company. The FRB will not approve any
acquisition, merger, or consolidation that would have a substantially
<PAGE>
anti-competitive effect, unless the anti-competitive impact of the proposed
transaction is clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The FRB also considers
capital adequacy and other financial and managerial resources and future
prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing acquisitions
or mergers.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries, unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the FRB is required to weigh the expected benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default. Under a policy of the FRB
with respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The FRB also has the
authority under the BHCA to require a bank holding company to terminate any
activity or to relinquish control of a non-bank subsidiary upon the FRB's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company.
Capital Adequacy Guidelines for Bank Holding Companies
The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidate basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less that $150 million in consolidated assets, the guidelines
will be applied on a bank-only basis unless: (a) the parent bank holding company
is engaged in non-bank activity involving significant leverage; or (b) the
parent company has a significant amount of outstanding debt that is held by the
general public. The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is 8%. At least 4% of the total capital is required to be "Tier 1",
<PAGE>
consisting of common stockholders' equity and certain preferred stock, less
certain goodwill items and other intangible assets. The remainder, "Tier II
Capital", may consist of (a) the allowance for loan losses of up to 1.25% of
risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid
capital instruments, (d) debt, (e) mandatory convertible securities, and (f)
qualifying subordinated debt. Total capital is the sum of Tier I and Tier II
capital less reciprocal holdings of other banking organizations' capital
instruments, investments in unconsolidated subsidiaries and any other deductions
as determined by the FRB (determined on a case-by-case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting. Most investment securities (including, primarily,
general obligation claims of states or other political subdivisions of the
United States) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations are given 100% risk-weighing. Transaction
related contingencies such as bid bonds, standby letters of credit backing
non-financial obligations, and undrawn commitments (including commercial credit
lines with an initial maturity of more than one year) have a 50% risk-weighing.
Short term commercial letters of credit have a 20% risk-weighing and certain
short-term unconditionally cancelable commitments have a 0% risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters. Insurance of Deposits
The Bank's deposits are insured up to a maximum of $100,000 per
depositor under the BIF. The FDIC has established a risk-based insurance premium
assessment system under which the FDIC has developed a matrix that sets the
assessment premium for a particular institution in accordance with its capital
level and overall regulatory rating by the institutions' primary federal
<PAGE>
regulatory. Under the matrix that is currently in effect, the assessment rate
ranges from 0 to 27 basis points of assessed deposits. In addition to the
deposit insurance premium assessment, under the deposit insurance funds act of
1996 (the "Deposit Act"), BIF insured institutions like the Bank are required to
contribute to the debt service and principal repayment on bonds issued by the
Federal Finance Corporation ("FICO") in the mid-1980s to fund a portion of the
thrift bailout. This assessment is currently set at 1.3 basis points of assessed
deposits.
Dividend Rights
Under the Banking Act, a bank may declare and pay dividends only if,
after payment of the dividend, the capital stock of the bank will be unimpaired
and either the bank will have a surplus of not less than 50% of its capital
stock or the payment of the dividend will not reduce the bank's surplus.
<PAGE>
ITEM 2. Description of Property
The Company conducts its business through its main office located at 399 Route
23, Franklin, New Jersey, and its six branch offices. The following table set
forth certain information regarding the Company's properties as of December 31,
1997.
DATE OF
LOCATION LEASED OR OWNED LEASE EXPIRATION
-------- --------------- ----------------
399 Route 23 Owned N/A
Franklin, New Jersey
7 Church Street Owned N/A
Vernon, New Jersey
266 Clove Road Leased April, 2002
Montague, New Jersey
172 Woodport Road Leased September, 1998
Sparta, New Jersey
455 Route 23 Owned(1) N/A
Wantage, New Jersey
15 Trinity Street Owned N/A
Newton, New Jersey
165 Route 206 Owned N/A
Andover, New Jersey
(1) The Company owns the building housing its Wantage branch. The land on which
the building is located is leased pursuant to a ground lease which runs until
December 31, 2020, and contains an option for the Company to extend the lease
for an additional 25 year term.
ITEM 3. Legal Proceedings
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank's business. Management
does not believe that there is any pending or threatened proceeding against the
Company of the Bank which, if determined adversely, would have a material effect
on the business, financial position or results of operation of the Company or
the Bank.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the registrant's shareholders
during the Fourth Quarter of fiscal 1997.
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Historically, there has been no established public market for the
common stock of the Company, which was periodically traded in the
over-the-counter market through the "pink sheets" published by the National
Quotation Bureau, Inc. However, commencing February 20, 1998, the Common Stock
began trading on the American Stock Exchange, closing at $22.25 at the close of
the first day's trading. As of December 31, 1997, the Company had approximately
696 holders of record of the Common Stock.
The Company, may pay dividends as declared from time to time by the
Company's Board of Directors out of funds legally available therefore, subject
to certain restrictions. Since dividends from the Bank will be the Company's
sole source of income, any restriction on the Bank's ability to pay dividends
will act as a restriction on the Company's ability to pay dividends. Under the
Banking Act, no cash dividend may be paid by the Bank unless, following the
payment of such dividend, the capital stock of the Bank will be unimpaired and
the Bank will have a surplus of no less than 50% of its capital stock or, if
not, the payment of such dividend will not reduce the surplus of the Bank. In
addition, the Bank cannot pay dividends in such amounts as would reduce its
capital below the regulatorily imposed minimums.
During fiscal 1997, the Company paid quarterly cash dividends of $0.06,
$0.10, $0.11 and $0.13 per share for an annual dividend payout ratio of 39%.
During fiscal 1996, the Company paid quarterly cash dividends of $0.00, $0.11,
$0.12, and $0.13 per share, an annual dividend payout ration of 46%. In
addition, the Company declared and paid a 2% Common Stock dividend during 1997,
and a 3% Common Stock dividend during 1996.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
The information required by this item is incorporated by reference from
the Registrant's 1997 Annual Report to Shareholders under the caption
"Management Discussion and Analysis".
ITEM 7. Financial Statements
The information required by this item is incorporated by reference from
the Registrant's 1997 Annual Report to Shareholders under the caption
"consolidated Financial Statements".
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective upon the completion of the audit of its 1997 financial
statements, the Registrant will replace Arthur Andersen, LLP ("Andersen"), its
current independent auditors, with Radics & Co., LLP, who will conduct the audit
of the Company's financial statements commencing with the 1998 fiscal year. The
decision to change auditors was recommended by the Audit Committee and was
approved by the Company's Board of Directors. For the fiscal years ended
December 31, 1996 and 1995 and up to the date of this report, there have been no
disagreements with Andersen on any matter of accounting principles or practices,
<PAGE>
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Andersen, would have caused it to make reference
to the subject matter of the disagreement in connection with their reports. The
independent auditor's report on the consolidated financial statements for the
fiscal years ended December 31, 1997 and 1996 expressed an unqualified opinion.
ITEM 9. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a)
Information concerning directors and executive officers is included in
the definitive Proxy Statement for the Company's 1998 Annual Meeting under the
captions "ELECTION OF DIRECTORS" and information concerning compliance with
Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE WITH
SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy Statement will
be filed with the Securities and Exchange commission no later than April 29,
1998.
The following table sets forth certain information about each executive
officer of the Company who is not also a director.
<TABLE>
<CAPTION>
Principal Occupation
Name, Age and Position Officer Since (1) During Past Five Years
- ---------------------- ----------------- ----------------------
<S> <C> <C>
Candace A. Leatham, 43 1984 Senior Vice President and
Senior Vice President Treasurer of the Bank
and Treasurer
</TABLE>
- --------------
(1) Includes prior service as an officer of the Bank.
ITEM 10. Executive Compensation
Information concerning executive compensation is incorporated by
reference from the Registrant definitive Proxy Statement for the Company's 1998
Annual Meeting under the captions "ANNUAL EXECUTIVE COMPENSATION AND ALL OTHER
COMPENSATION" and "COMPENSATION OF DIRECTORS". It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 29, 1998.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is included in the definitive Proxy statement for the Company's
1998 Annual Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT", which is incorporated herein by reference. It is
expected that such Proxy statement will be filed with the Securities and
Exchange commission no later than April 29, 1998.
<PAGE>
ITEM 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is included in the definitive Proxy Statement for the Company's 1998 Annual
Meeting under the caption "INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS", which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange commission
no later than April 29, 1998.
ITEM 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
3(i) Certificate of Incorporation of the Company (1)
3(ii) Bylaws of the Company(1)
10(i) 1995 Incentive Stock Option Plan(1)
10(ii) 1995 Stock Option Plan for Non-Employee Directors(1)
10(iii) 1988 Non-Qualified Stock Option(1)
13 Annual Report to Shareholders for the year ended
December 31, 1997.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(1) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27) from the
Company's Registration Statement on form 8-B, Registration No. 1-12569.
(b) Reports on form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUSSEX BANCORP
By: /s/Donald L. Kovach
-------------------
Donald L. Kovach
Chairman of the Board and
Dated: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
Chairman of the Board and
/s/ Donald L. Kovach Chief Executive Officer March , 1998
- ---------------------
Donald L. Kovach
Treasurer (Principal
/s/ Candace A. Leatham Financial Officer and March , 1998
- ----------------------- Principal Accounting
Candace A. Leatham Officer)
/s/ Irvin Ackerson Director March , 1998
- -----------------------
Irvin Ackerson
/s/ William E. Kulsar Secretary and Director March , 1998
- ---------------------
William E. Kulsar
/s/ Joel D. Marvil Director March , 1998
- ---------------------
Joel D. Marvil
/s/ Richard Scott Director March , 1998
- -----------------------
Richard Scott
/s/ Joseph Zitone Director March , 1998
- -----------------------
Joseph Zitone
</TABLE>
A MESSAGE TO OUR STOCKHOLDERS
The recent history of overall bank growth with increased profits is repeated in
our 1997 Annual Report.
Net income increased 35.6% from $522,000 at year-end 1996 to a total of $708,000
in 1997. By dedicating $210,000 of revenue to Loan Loss Reserve the goal of the
Board of Directors to achieve a 1.00% ratio to total loans was met with a
year-end reserve of $685,000. Loans went up 3.9% over 1996 to a total of $68.1
million while deposits increased $12.0 million, or 12.9%, over last year to a
year-end total of $104.9 million.
The 1996 Annual Report emphasized efforts of management to increase shareholder
value by maintaining a stabilized capital base balanced against a sustainable
growth rate. This approach entails the expansion of a product base to achieve a
one-stop financial service concept to hold and gain market share without large
capital commitments. Significant progress in that area was achieved in one year.
The affiliation of Capital Funding, a New Jersey licensed mortgage banker, was
completed providing loan customers with a larger loan menu than could be offered
within our underwriting limits. Affiliation with the Independent Bankers
Association of America (IBAA), made available non-deposit products such as
annuities, mutual funds, and discount security sales at our Franklin office
through a representative of (IBFS) Independent Bankers Financial Services.
(Telephone 973-827-9491) Automatic Clearing House (ACH) origination processing
is on-line to provide electronic off-site debit and credit transactions.
Activation of telephone banking is imminent. Statement savings was introduced
that will increase ATM usage and the number of cardholders. Sussex County State
Bank will be one of few community banks to issue its own credit card to be
offered to existing customers at preferential rates. Implementation of an
in-house asset/liability sensitivity software program was completed and utilized
for the first time in the preparation of year-end figures and the 1998 budget.
The contract to upgrade the bank's main frame computer and software has been
signed that will improve the system for the benefit of our customers and ensure
compliance with regulatory requirements into the next millennium.
The economic climate signals a stable or possible declining interest rate trend.
As a result maintaining our deposit base while increasing our interest spread
may be difficult in 1998. Hence, our focus will remain to increase revenues by
refining operations and generating non-interest income through the products and
services in place.
<PAGE>
[GRAPHIC-COMPANY LOGO]
Is the future of a Community Bank secure? Will our stockholders' investment
provide the return they deserve? These are questions often put to me by
directors and stockholders. Our dividend history speaks for itself by the
payment of a stock or cash dividend for twenty consecutive years. To secure a
market providing the liquidity for your investment you will find Sussex Bancorp
quoted on the national American Stock Exchange (AMEX) as Sussex B n (symbol
SBB). The answers are self evident.
The atmosphere at Sussex Bancorp remains one of community. The mutual respect
and pride of management and employees for each other, our customers and
community sets us apart from other financial institutions. We intend to keep it
that way.
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
the Company's loans are made to borrowers located in Sussex County. Through the
year ended December 31, 1997, management sought to establish relationships with
commercial borrowers to attain a greater market share in these areas and enhance
the Company's yield on interest-earning assets through the origination of higher
rate commercial loans. For 1998, management's goals for the Company include (1)
enhancing non-interest income by focusing on fee income, and (2) continuing to
emphasize the expansion of product base to achieve a one-stop financial service
concept to retain and gain market share. The Company will seek to increase
non-interest income through generating sales of annuities and mutual funds and
providing discount brokerage services through the Company's relationship with
Independent Bankers Financial Services, a registered broker-dealer, and through
growing the Bank's trust department.
Management of the Company has reviewed the Company's status regarding "year
2000" computer issues. The Company generally conducts its own data processing
functions on software provided by third party vendors. Failure of the Company to
adequately address any "year 2000" deficiencies in the Company's computer
operations could have a material adverse effect on the Company's results of
operations in future periods. However, management believes that it is taking all
necessary steps to ensure "year 2000" compliance, including working with its
vendor to obtain updated software which will be "year 2000" compliant.
Management believes this software will be operational for the Company prior to
year end 1998, leaving sufficient time for testing prior to year end 1999.
Management also believes the Company is in compliance with all bank regulatory
requirements regarding "year 2000" compliance.
Results of Operations
For the year ended December 31, 1997, the Company's net income was
$708,000, representing an increase of $186,000, or 35.6% over the $522,000
earned in 1996, and $207,000, or 41.3% more than the $501,000 earned in 1995.
The basic net income per share for 1997 was $1.03, compared to the reported
basic net income per share of $.76 in 1996 and the reported basic net income per
share of $.74 in 1995. The diluted net income per share for 1997 was $1.02,
compared to the reported diluted net income per share of $.75 in 1996 and the
diluted net income per share of $.74 in 1995.
The Company's results for 1997 were affected by an increase of $338,000 in
net interest income and $78,000 in non-interest income, offset by an increase in
the provision for loan losses of $80,000 and an increase of $79,000 in total
other expenses.
<PAGE>
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.
Net interest income, on a fully taxable basis (a 34% tax rate), increased
by $338,000 in 1997 to $4.3 million compared to net interest income of $4.0
million in 1996. The increase in net interest income occurred as total interest
income increased by $673,000, or 10%, to $7.4 million, while interest expense
increased by $335,000, or 12.3%, to $3.1 million. Interest income increased
primarily as a result of an increase in interest-earning assets, as the
Company's average earning assets increased by $10.4 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 7.39% for the year ended December 31,
1997, compared to 7.53% for the year ended December 31, 1996. The decrease in
rate primarily reflects the Company's offering of lower priced loan products
reflecting the competitive climate in the Bank's trade area.
Interest income on total loans increased from $5.0 million in 1996 to $5.5
million in 1997, an increase of $559,000. As discussed above, this increase was
primarily the result of an increase in the volume of the loan portfolio,
partially offset by a decline in average rate. The average yield on loans
declined 26 basis points from 8.33% in 1996 to 8.07% in 1997.
Total interest income on securities decreased to $1.5 million in 1997 from
the $1.6 million in 1996, a decrease of $57,000, or 3.8%. Average securities
decreased to $24.6 million in 1997 from $26.2 million in 1996, a decrease of
$1.6 million, reflecting maturities and calls of investment securities exceeding
new purchases.
2
<PAGE>
Total interest expense increased from $2.7 million in 1996 to $3.1 million
for the year ended December 31, 1997, an increase of $335,000, or 12.3%. 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 1997, the Company's average interest-bearing liabilities
outstanding increased by $7.1 million, to $82.2 million for the year ended
December 31, 1997 compared to the $75.1 million for the year ended December 31,
1996. 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 $37.9 million, an increase of $5.4 million,
or 16.5%, from 1996 to 1997, and the average rate paid by the Bank on its time
deposit increased to 5.41% from 5.21% for the twelve months ended December 31,
1996. The average rate paid on all of the Company's liabilities increased to
3.73% for 1997 from 3.63% for 1996.
The net interest margin was 4.31% in 1997, 4.46% in 1996, and 4.77% in
1995, reflecting the Company's higher cost of funds and the decreased yield
earned by the Company on its interest earning assets as management continues its
strategy of attempting to retain and increase its 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>
Year Ended December 31,
1997 1996
===========================================================================================================================
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) $ 67,694 $ 5,517 8.15% $59,111 $4,9588.33% 8.33%
Tax exempt securities 952 61 6.41% 1,060 625.81% 5.81%
Taxable investment securities 23,599 1,460 6.19% 25,131 1,5126.02% 6.02%
Federal Funds sold 7,059 366 5.18% 3,609 1955.40% 5.40%
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets 99,304 7,404 7.46% 88,911 6,7277.53% 7.53%
Non-interest earning assets 8,245 8,576
Allowance for possible loan losses (670) (491)
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $106,879 $96,996
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW deposits $12,593 $ 239 1.90% $11,962 2231.86% 1.86%
Savings deposits 28,109 705 2.51% 26,789 6722.51% 2.51%
Money market deposits 3,580 78 2.18% 3,818 842.20% 2.20%
Time deposits 37,874 2,041 5.39% 32,515 1,7495.37% 5.37%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 82,156 3,063 3.73% $75,084 $2,7283.63% 3.63%
Non-interest bearing liabilities:
Demand deposits $ 15,886 $13,165
Other liabilities 824 1,116
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing liabilities 16,710 14,281
Shareholders' equity 8,013 7,631
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $106,879 $96,996
Net interest differential $4,341 $3,999
Net yield on interest-earning assets 4.37% 4.46% 4.46%
</TABLE>
3
<PAGE>
The following table presents by category the major factors that contributed
to the changes in net interest income between the years ended December 31, 1997
and 1996. Amounts have been computed on a fully tax equivalent basis, assuming a
federal tax rate of 34%.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 versus 1996
===========================================================================================================================
Increase (Decrease)
Due to Change In:
Average Average
Volume Rate Net
===========================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C>
INTEREST INCOME:
Taxable loans (net of unearned income) $701 $(142) 559
Tax exempt securities (6) 5 (1)
Taxable investment securities (81) 29 (52)
Federal funds sold 180 (9) 171
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income $794 $(117) 677
INTEREST EXPENSE:
NOW deposits $ 12 $ 4 16
Savings deposits 35 (2) 33
Money market deposits (5) (1) (6)
Time deposits 292 0 292
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense $334 $ 1 335
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $460 $(118) 342
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses in 1997 was $210,000 compared to
provisions of $130,000 and $64,000 in 1996 and 1995, respectively. The increase
for 1997 compared to 1996 reflects both increases in the loan portfolio and the
increased diversity of the Company's loan portfolio, as the Company's commercial
loans and loans to individuals, loans secured by non-residential properties and
construction and land development loans all increased. These loans provide
different risk profiles than do loans secured by residential properties.
Although management attempts to provide an adequate allowance for loan losses, a
variety of factors including general economic conditions effect the adequacy of
the Company's allowance. No assurances can be given that increased provisions
will not be required in future periods. In addition, bank regulatory agencies
having jurisdiction over the Company and the Bank have authority to require
increases to the Company's allowance. These factors could result in additional
provisions for loan losses in future periods. The increase from 1995 to 1996
reflects the increase in the Company's loan portfolio.
<PAGE>
Other Income
The Company's other income is primarily generated through service charges
on deposit accounts. Other income increased $78,000 in 1997 to $744,000 compared
to $666,000 in 1996, which was a decrease of $14,000 over other income of
$680,000 in 1995. The Company plans to focus on developing additional
non-interest income in 1998. Although no assurances can be given regarding the
success of the Company's efforts, the Company believes that opportunities to
enhance non-interest income are available through increased use of the Bank's
trust powers and enhanced marketing of the Company's annuities, mutual fund and
discount brokerage services. In addition, the Company recognized a gain of
$44,000 on the sale of real estate owned in 1997, compared to a loss of $33,000
incurred in 1996.
4
<PAGE>
Other Expense
Total other expense increased from $3,674,000 in 1996 to $3,753,000 in
1997, an increase of $79,000. Net occupancy expenses remained flat from 1996 to
1997. Increases in salaries and employee benefits and furniture and equipment
expense of $215,000 were partially offset by decreases in other operating
expenses including a decrease of $139,000 in FDIC assessments.
Salary and employee benefits increased by $163,000, or 9.6%, to $1.9
million for the year ended December 31, 1997 from $1.7 million for the year
ended December 31, 1996. This increase is primarily attributable to an increase
in salaries of $98,000 and a $28,000 increase in medical insurance costs. The
increase in salaries was due to merit raises for senior management, and
additional management staff.
Income Tax Expense
The Company's income tax provision, which includes both federal and state
taxes, were $393,000, $322,000 and $254,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The increased provision for income taxes
reflects both the Company's increased net income and increases in the Company's
effective tax rate.
FINANCIAL CONDITION
At December 31, 1997, the Company had total assets of $114.3 million
compared to total assets of $101.8 million at December 31, 1996. Total loans
increased to $68.1 million at December 31, 1997 from $65.5 million at December
31, 1996. Total deposits increased to $104.9 million at December 31, 1997 from
$92.9 million at December 31, 1996.
Loans
Total loans increased from $65.5 million at December 31, 1996 to $68.1
million at December 31, 1997, an increase of $2.6 million, or 3.9%. Total loans
increased by $12.8 million, or 24.2%, from 1995 to 1996. The increase in the
Company's loan portfolio during 1997 occurred in commercial, consumer and
construction loans. Commercial loans increased by $682,000 or 37.5%, to $2.5
million at December 31, 1997 from $1.8 million at December 31, 1996. Consumer
loans increased by $433,000, or 20.7%, to $2.5 million at December 31, 1997 from
$2.1 million at December 31, 1996. Construction and development loans increased
to $877,000 at December 31, 1997. The Company had no construction and
development loans at December 31, 1996. The Company's strategy during 1997 was
to diversify its loan portfolio away from residential loans, with an emphasis on
commercial lending. Management believes that by focus on the total relationship
with commercial borrowers and offering "one stop shopping", the Company will
improve its net interest margin. Management anticipates continuing its efforts
to diversify the loan portfolio, and in particular to continue focusing on
commercial customers. The Company's marketing strategy in 1997 was to focus on
commercial loans and their overall account relationship to improve the Company's
average rate earned on taxable loans. The Company anticipates continuing to
pursue the commercial loan customer to provide the one-stop financial service
concept. In addition, the Company's loans secured by non-residential properties
increased by $1.1 million, to $10.7 million from $9.6 million, the Company made
the addition to its loan portfolio of a lease financing of $174,000 and the
Company's 1-4 family mortgage loans decreased by $364,000.
The increase in loan originations was funded during 1997 by an increase in
the Company's demand and 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 1997, 1996 and 1995 were 64.2%, 69.9% and 60.7% respectively.
The following tables set forth certain information concerning the
distribution of the Company's loan portfolio and its interest rate sensitivity.
5
<PAGE>
<TABLE>
<CAPTION>
December
1997 1996
Amount Percent Amount Percent
===========================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial and Industrial $ 2,499 3.67% $ 1,8172.75% 2.75%
Real Estate non-residential properties 10,665 15.67% 9,60314.65% 14.65%
Residential properties 51,257 75.31% 51,62178.80% 78.80%
Construction 877 1.29% 00.00% 0.00%
Other Loans 241 0.35% 3810.60% 0.60%
Consumer 2,524 3.71% 2,0913.20% 3.20%
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans. $68,063 100.0% $65,513100.0% 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997, the Company had three restructured loans with a remaining
balance of $334,000. As of year-end the 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.
The Company seeks to actively manage its non-performing and questionable
assets. OREO has been reduced since year-end 1994 by 100%. The Company currently
has no OREO properties. 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. The Company has set goals to ensure the continued
focus on problem loans.
Delinquent loans totaled $1.7 million at December 31, 1997, $1.6 million at
December 31, 1996 and $3.3 million at December 31, 1995, with the percentages to
the total portfolio of 2.49% for 1997, 2.44% for 1996 and 6.26% for 1995.
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,
1997 1996
================================================================================
(Dollars in Thousands)
<S> <C> <C>
Non-accrual loans $ 730 $ 935
Non-accrual loans to total loans 1.07% 1.43%
Non-performing assets to total assets 0.64% 1.31%
Allowance for possible loan
losses as a percentage of
non-performing loans 93.80% 57.98%
</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 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.
6
<PAGE>
The allowance for possible loan losses at year-end of 1997 was $685,000
versus $542,000 in 1996 and $476,000 in 1995. Management recognizes the
importance of adequate reserves and their proper allocation. Over time
management reviews and adjusts this reserve in line with the Company's
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:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
===========================================================================================================================
<S> <C> <C> <C>
Beginning Balance $ 542,005 $ 476,453 $ 477,756
Provision for Loan Loss 210,000 130,000 64,000
Loans Charged-off 67,780 66,444 68,119
Recoveries 833 1,996 2,817
- ---------------------------------------------------------------------------------------------------------------------------
Ending Balance $ 685,058 $ 542,005 $ 476,454
</TABLE>
The following table sets forth information concerning the allocation of the
Company's ALL.
<TABLE>
<CAPTION>
December 31,
1997 1996
% of % of
Amount All Loans Amount All Loans
===========================================================================================================================
<S> <C> <C> <C> <C>
Balance Applicable to:
Commercial and industrial $ 25,142 3.7% $ 5,420 1.0%
Real Estate:
Nonresidential properties 107,349 15.7% 77,507 14.3%
Residential properties 515,917 75.3% 444,986 82.1%
Construction 8,837 1.3% 3,252 0.6%
Consumer 25,416 3.7% 10,840 2.0%
Other loans 2,397 0.3% 0 0.0%
- ---------------------------------------------------------------------------------------------------------------------------
Total $685,058 100.0% $542,005 100.0%
</TABLE>
Net Charge-offs were $66,947 for 1997 compared to $64,448 in 1996 and
$65,503 in 1995. Net charge-offs as a percent of year-ended total loans were
.10% in 1997, .10% in 1996 and .12% in 1995.
<PAGE>
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,
1997 1996 1995
===========================================================================================================================
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
Available for sale $ 26,600 $ 22,154 $ 21,564
Obligations of state and political subdivisions:
Held to maturity 2,082 652 1,671
Other investments:
Held to maturity 624 470 471
- ---------------------------------------------------------------------------------------------------------------------------
Total Securities $ 29,306 $ 23,276 $ 23,706
</TABLE>
The Company's securities increased from $23.3 million at December 31, 1996,
to $29.3 million at December 31, 1997, although the average balance of
investment securities declined in 1997. The $6.0 million increase in securities
at December 31, 1997 was due
7
<PAGE>
to the Company investing excess federal funds sold as management determined that
the Company's liquidity was sufficient to meet anticipated funding needs through
the end of the year.
Deposits
Total deposits increased $12.0 million from $92.9 million at year-end 1996
to $104.9 million at year-end 1997, a 12.9% increase. All categories of deposits
contributed to the overall increase. Demand deposits increased to $18.0 million,
an increase of $4.2 million, or 30.6% from demand deposits of $13.8 million at
year-end 1996. Savings deposits increased to $47.9 million, an increase of $5.6
million or 13.3% from savings deposits of $42.3 million at year-end 1996. Time
deposits increased to $39.0 million, an increase of $2.2 million or 5.8% from
time deposits of $36.8 million at year-end 1996. The increase in the overall
portfolio reflects management's strategy of gaining market share in the
Company's trade areas, and growing the Company's balance sheet through the
growth of the Company's security portfolio and the origination of additional
loans. Management believes the Company will have sufficient liquidity to fund
its operating needs, though 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, should a portion of deposits erode.
The following tables provide information concerning the Company's deposits.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Amount % Amount %
===========================================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average Balance Deposits:
NOW deposits $12,593 12.85% $ 11,96213.55% 13.55%
Savings deposits 28,109 28.67% 26,78930.36% 30.36%
Money market deposits 3,580 3.65% 3,8184.33% 4.33%
Time deposits 37,874 38.63% 32,51536.84% 36.84%
Demand deposits 15,886 16.20% 13,16514.92% 14.92%
------- ------ ------------- ------
Total interest-bearing liabilities $98,042 100.00% $88,249100.00% 100.00%
(InThousands)
Time Deposits ($100,000 and over)
Three months or less $1,126
Over three months through six months 1,544
Over six months through twelve months 840
Over twelve months 411
------
Total $3,921
</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
and sales of securities. 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
$5.5 million. The Bank did not borrow against this line of credit during 1997.
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, 1997, the interest rate sensitivity position
evident for the periodic intervals reflects an asset sensitive position.
8
<PAGE>
<TABLE>
<CAPTION>
RATE SENSITIVITY ANALYSIS
December 31, 1997
(Dollars in Thousands)
ASSETS
===========================================================================================================================
0-3 Mos. 3-12 Mos. 1-5 Years 5+ Years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities $ 6,773 $ 9,698 $10,367 $ 2,468
Fed Funds 7,875 0 0 0
Commercial Loans 795 1,398 1,430 67
Home Equity (Variable) 4,202 0 0 0
Consumer Loans 265 165 7,204 10,082
SBA Loans (Variable) 0 0 0 0
Lease Receivables 42 132 0 0
Mortgages 0 0 17,774 24,507
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Assets $19,952 $11,393 $36,775 $37,124
===========================================================================================================================
<CAPTION>
LIABILITIES
===========================================================================================================================
0-3 Mos. 3-12 Mos. 1-5 Years 5+ Years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificate of Deposits $10,216 $24,170 $ 4,506 $ 79
Money Market Deposit Accounts 5,180 0 0 0
Savings Accounts 2,927 26,348 0 0
Now Accounts 1,342 12,087 0 0
Money Market Savings Accounts 0 0 0 0
Subordinated Debt 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $19,665 $62,605 $ 4,506 $ 79
===========================================================================================================================
Cumulative Sensitivity Gap $ 287 ($51,212) $32,269 $37,006
===========================================================================================================================
</TABLE>
Capital Resources
Stockholders' equity inclusive of unrealized Gain (Loss) on Securities
Available for Sale, net of income taxes was $8,586,000 at December 31, 1997. The
growth in stockholders' equity is generated primarily through earnings
retention.
<PAGE>
The Company and the Bank's regulators have classified and defined bank
holding company capital into the following components - (1) Tier 1 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 1 capital.
The Company and the Bank's regulators have implemented risk-based
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 1 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, 1997,
the Company's Tier I and combined Tier I and Tier II capital ratios were 12.96%
and 14.10%, respectively. The Bank's Tier I and combined Tier I and Tier II
capital ratios were 12.53% and 13.67%, respectively.
In addition to the risk-based guidelines discussed above, the Company's and
the Bank's regulators require that banks and bank holding companies which meet
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, 1997, the Company has a leverage ratio
of 7.00% and the Bank has a leverage ratio of 6.70%.
9
<PAGE>
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.
10
<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, 1997 and
1996, 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, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sussex Bancorp and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
----------------------
Arthur Andersen LLP
Roseland, New Jersey
January 15, 1998
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
===========================================================================================================================
<S> <C> <C>
CASH AND DUE FROM BANKS $ 5,793,000 $ 4,605,000
FEDERAL FUNDS SOLD 7,875,000 4,250,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 13,668,000 8,855,000
- ---------------------------------------------------------------------------------------------------------------------------
SECURITIES:
Available for sale, at market value 26,600,000 22,154,000
Held to maturity, at amortized cost (market value of
$2,713,000 in 1997 and $1,116,000 in 1996) 2,706,000 1,122,000
- ---------------------------------------------------------------------------------------------------------------------------
Total securities 29,306,000 23,276,000
- ---------------------------------------------------------------------------------------------------------------------------
LOANS 68,063,000 65,513,000
Less-
Unearned income 28,000 49,000
Allowance for possible loan losses 685,000 542,000
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 67,350,000 64,922,000
- ---------------------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, net 2,287,000 2,242,000
- ---------------------------------------------------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE 618,000 544,000
- ---------------------------------------------------------------------------------------------------------------------------
OTHER REAL ESTATE - 396,000
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Intangibles 787,000 870,000
Other 241,000 671,000
- ---------------------------------------------------------------------------------------------------------------------------
Total other assets 1,028,000 1,541,000
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $114,257,000 $101,776,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
===========================================================================================================================
<S> <C> <C>
LIABILITIES:
Deposits-
Demand-- noninterest bearing $ 18,027,000 $ 13,807,000
Savings-- interest bearing 47,884,000 42,253,000
Time-- interest bearing (includes deposits $100,000 and
over of $3,921,000 in 1997 and $3,373,000 in 1996) 38,971,000 36,829,000
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 104,882,000 92,889,000
Accrued interest payable and other liabilities 789,000 1,005,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 105,671,000 93,894,000
- ---------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock -- no par value, authorized 5,000,000 shares
in 1997 and 1996;
issued and outstanding 698,959 in 1997
and 688,496 in 1996 5,412,000 5,246,000
Retained earnings 3,162,000 2,729,000
Treasury stock (145 shares at cost) (2,000) -
Unrealized gain (loss) on securities available
for sale, net of income taxes 14,000 (93,000)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,586,000 7,882,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $114,257,000 $101,776,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
===========================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $5,517,000 $4,958,000 $4,567,000
Interest on Federal funds sold 366,000 195,000 264,000
Interest on securities-
Taxable 1,460,000 1,512,000 1,051,000
Exempt from Federal income tax 40,000 45,000 168,000
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 7,383,000 6,710,000 6,050,000
INTEREST EXPENSE 3,063,000 2,728,000 2,267,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,320,000 3,982,000 3,783,000
PROVISION FOR POSSIBLE LOAN LOSSES 210,000 130,000 64,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 4,110,000 3,852,000 3,719,000
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 500,000 512,000 509,000
Gain (loss) on sale of other real estate 44,000 (33,000) 3,000
Safe deposit rental income 33,000 32,000 31,000
Trust department income 10,000 9,000 12,000
Other income 157,000 146,000 125,000
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 744,000 666,000 680,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OTHER EXPENSES:
Salaries and employee benefits 1,855,000 1,692,000 1,755,000
Net occupancy expense 357,000 357,000 334,000
Furniture and equipment expense 371,000 319,000 328,000
Other operating expenses 1,170,000 1,306,000 1,227,000
- ---------------------------------------------------------------------------------------------------------------------------
Total other expenses 3,753,000 3,674,000 3,644,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,101,000 844,000 755,000
PROVISION FOR INCOME TAXES 393,000 322,000 254,000
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 708,000 $ 522,000 $ 501,000
===========================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 688,967 684,309 672,808
===========================================================================================================================
BASIC NET INCOME PER COMMON SHARE $1.03 $.76 $.74
===========================================================================================================================
DILUTED NET INCOME PER COMMON SHARE $1.02 $.75 $.74
===========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Unrealized Gain(Loss)
Common Stock Retained Treasury on Securities
===========================================================================================================================
Shares Amount Earnings Stock Available for Sale Total
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
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 (loss)
on securities available for sale,
net of income taxes - - - - 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 ($.35 per share) - - (242,000) - - (242,000)
Stock dividend (5%) 32,660 569,000 (574,000) - - (5,000)
Stock options exercised 500 5,000 - - - 5,000
Shares issued through dividend
reinvestment plan 8,100 140,000 - - - 140,000
Change in unrealized gain (loss)
on securities available for sale,
net of income taxes - - - - (147,000) (147,000)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 688,496 5,246,000 2,729,000 - (93,000) 7,882,000
Net income - - 708,000 - - 708,000
Cash dividends ($.40 per share) - - (275,000) - - (275,000)
Stock options exercised 2,000 23,000 - - - 23,000
Treasury stock purchased, net (145) - - (2,000) - (2,000)
Shares issued through dividend
reinvestment plan 8,608 143,000 - - - 143,000
Change in unrealized gain (loss)
on securities available for sale,
net of income taxes - - - - 107,000 107,000
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 698,959 $5,412,000 $3,162,000 ($2,000) $ 14,000 $8,586,000
===========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
===========================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 708,000 $ 522,000 $ 501,000
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 370,000 343,000 343,000
Provision for possible loan losses 210,000 130,000 64,000
Premium amortization on securities, net 56,000 39,000 127,000
Accretion of loan origination and
commitment fees and expenses, net (110,000) (74,000) (40,000)
Loss (gain) on sale of other real estate (44,000) 33,000 (3,000)
Deferred Federal income tax provision (benefit) (25,000) 54,000 (6,000)
(Increase) decrease in accrued interest receivable (74,000) 38,000 3,000
Decrease (increase) in other assets 430,000 (39,000) (380,000)
(Decrease) increase in accrued interest
payable and other liabilities (216,000) (331,000) 834,000
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 597,000 193,000 942,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,305,000 715,000 1,443,000
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities-
Available for sale 4,606,000 10,232,000 11,280,000
Held to maturity 952,000 2,239,000 5,366,000
Purchases of securities-
Available for sale (8,931,000) (11,105,000) (16,627,000)
Held to maturity (2,537,000) (1,220,000) (2,171,000)
Proceeds from sale of other real estate 439,000 366,000 698,000
Net increase in loans (2,577,000) (13,235,000) (1,177,000)
Capital expenditures (332,000) (201,000) (304,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,380,000) (12,924,000) (2,935,000)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (increase) decrease in demand
deposits and savings accounts 9,851,000 848,000 (1,778,000)
Net increase in time deposits 2,142,000 6,116,000 12,616,000
Purchase of treasury stock (2,000) - -
Exercise of stock options 23,000 5,000 -
Stock dividend, net of fractional shares paid - (5,000) -
Payment of dividends, net of reinvestment (126,000) (102,000) (169,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,888,000 6,862,000 10,669,000
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 4,813,000 (5,347,000) 9,177,000
CASH AND CASH EQUIVALENTS, beginning of year 8,855,000 14,202,000 5,025,000
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $13,668,000 $ 8,855,000 $14,202,000
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 3,134,000 $ 2,968,000 $ 1,715,000
Income taxes 192,000 182,000 201,000
Loans transferred to other real estate - 473,000 417,000
===========================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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 for 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 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.
<PAGE>
The Company has no securities held for trading purposes as of December 31,
1997 and 1996.
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.
16
<PAGE>
Impaired Loans
Accounting standards require 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 loans 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. Large groups of smaller-homogeneous
loans, such as residential mortgage loans, credit card loans and consumer loans,
are collectively evaluated for impairment and are not covered by this accounting
standard.
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 1997 and 1996, 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 $6,000 and $17,000 in 1997 and 1996, respectively, 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
gain on sales of other real estate amounting to $44,000 in 1997 and $3,000 in
1995 and a loss of $33,000 in 1996.
Intangibles
Core deposit intangibles relating to premiums paid on the acquisition of
deposits are amortized on a straight-line basis over 15 years.
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.
Net Income Per Common Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," in 1997. Basic net income per common share is computed by
dividing net income by the weighted-average number of common shares outstanding
for the year. Diluted net income per common share reflects the potential
dilution that could occur from the exercise of stock options. All prior-year
income per share data has been restated (see Note 17).
<PAGE>
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.
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. 130,
"Reporting Comprehensive Income, " in June 1997. This statement is effective for
years beginning after December 15, 1997. Statement No. 130 requires entities
that present a complete set of financial statements to include the components of
comprehensive income. Comprehensive income consists of certain revenues,
17
<PAGE>
expenses, gains, and losses that previously were not reported on the income
statement but rather as a component of shareholders' equity. The effect of
adopting Statement No. 130 is not expected to be material to the Company's
results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 and 1995
consolidated financial statements to conform them to the December 31, 1997
presentation.
(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
- ---------------------------------------------------------------------------------------------------------------------------
1997
Available for Sale
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 8,049,000 $30,000 ($30,000) $ 8,049,000
U. S. Government mortgage-backed securities 18,529,000 60,000 (38,000) 18,551,000
- ---------------------------------------------------------------------------------------------------------------------------
Total $26,578,000 $90,000 ($68,000) $26,600,000
===========================================================================================================================
Held to Maturity
Obligations of state and
political subdivisions $ 2,082,000 $ 7,000 $ - $ 2,089,000
Other debt securities 624,000 - - 624,000
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 2,706,000 $ 7,000 $ - $ 2,713,000
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
- ---------------------------------------------------------------------------------------------------------------------------
Cost Gains Losses Value
1996
Available for Sale
<S> <C> <C> <C> <C>
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
===========================================================================================================================
</TABLE>
The amortized cost and estimated market value of securities at December 31,
1997, 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.
18
<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 $ 2,503,000 $ 2,510,000 $2,227,000 $2,227,000
Due in one to five years 14,702,000 14,707,000 479,000 486,000
Due in five to ten years 2,000,000 2,005,000 - -
Due after ten years 7,373,000 7,378,000 - -
- ---------------------------------------------------------------------------------------------------------------------------
$26,578,000 $26,600,000 $2,706,000 $2,713,000
===========================================================================================================================
</TABLE>
Securities available for sale as of December 31, 1997 have been recorded at
their fair value with the net unrealized gain (loss) of $14,000 and ($93,000)
(net of income tax effect of $8,000 and $60,000) reflected as an increase
(decrease) to stockholders' equity in 1997 and 1996, respectively.
At December 31, 1997, U. S. Treasury securities having a book value of
$200,000 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>
1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by one to four family
residential properties $51,257,000 $51,621,000
Loans secured by nonresidential properties 10,665,000 9,603,000
Loans to individuals 2,524,000 2,091,000
Commercial loans 2,499,000 1,817,000
Loans secured by construction and
land development 877,000 -
Other loans 241,000 381,000
- ------------------------------------------------------------------------------------------------------
Gross loans $68,063,000 $65,513,000
======================================================================================================
</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>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $542,000 $476,000 $478,000
Provision charged to expense 210,000 130,000 64,000
Loans charged off (68,000) (66,000) (68,000)
Recoveries of charged off loans 1,000 2,000 2,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $685,000 $542,000 $476,000
===========================================================================================================================
</TABLE>
19
<PAGE>
Nonperforming loans include nonaccrual loans 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 $730,000 and $935,000 at
December 31, 1997 and 1996, respectively, all of which were nonaccrual loans. If
interest had been accrued on these loans, the effect on net interest income
would have been approximately $32,000 and $68,000 in 1997 and 1996,
respectively.
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, 1997, the Company's recorded investment in
impaired loans and the related valuation allowance are as follows-
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
===========================================================================================================================
<S> <C> <C> <C> <C>
Impaired loans-
Valuation allowance required $1,272,000 $202,000 $1,418,000 $234,000
===========================================================================================================================
</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, 1997 and 1996 was $1,345,000
and $1,864,000, respectively.
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 $135,000 and $132,000
for the period ended December 31, 1997 and 1996, 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 $ 922,000
New loans 1,526,000
Repayments (516,000)
- --------------------------------------------------------------------------------
Balance, end of year $1,932,000
================================================================================
</TABLE>
<PAGE>
As of December 31, 1997, 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 $67,000, $82,000 and $99,000 during 1997, 1996 and 1995,
respectively for legal and tax services.
(7) PREMISES AND EQUIPMENT:
A summary of premises and equipment as of December 31 are as follows-
20
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 417,000 $ 417,000
Buildings 1,555,000 1,525,000
Furniture and equipment 2,595,000 2,339,000
Leasehold improvements 198,000 198,000
- ---------------------------------------------------------------------------------------------------------------------------
4,765,000 4,479,000
Less-Accumulated depreciation and amortization 2,478,000 2,237,000
- ---------------------------------------------------------------------------------------------------------------------------
$2,287,000 $2,242,000
===========================================================================================================================
</TABLE>
(8) DEPOSITS:
Scheduled maturities of certificates of deposit are as follows-
<TABLE>
<CAPTION>
Over Three Over One
Three Months Year Over
Months or Through Through Three
Less Twelve Months Three Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
$100,000 or more $1,126,000 $ 2,384,000 $ 411,000 $ - $ 3,921,000
Less than $100,000 7,167,000 23,116,000 4,463,000 304,000 35,050,000
1996
$100,000 or more $ 922,000 $ 1,348,000 $ 1,103,000 $ - $ 3,373,000
Less than $100,000 6,802,000 13,482,000 13,172,000 - 33,456,000
</TABLE>
(9) 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 1997 and
1996.
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 $22,000, $20,000 and
$16,000 in 1997, 1996 and 1995, respectively.
<PAGE>
(10) INCOME TAXES:
The components of the provision for income taxes for 1997, 1996 and 1995,
are as follows-
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes (benefit)-
Current $377,000 $198,000 $190,000
Deferred (25,000) 54,000 (6,000)
State 41,000 70,000 70,000
- ---------------------------------------------------------------------------------------------------------------------------
===========================================================================================================================
Total $393,000 $322,000 $254,000
===========================================================================================================================
</TABLE>
21
<PAGE>
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, 1997 and 1996 are
as follows-
<TABLE>
<CAPTION>
Deferred Tax
Asset (Liability)
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for possible loan losses $ 262,000 $184,000
Loan fee income recognition 40,000 37,000
Depreciation and amortization (186,000) (134,000)
Unrealized (gain) loss on securities available for sale (9,000) 62,000
Other, net 3,000 (1,000)
- ---------------------------------------------------------------------------------------------------------------------------
$ 110,000 $148,000
===========================================================================================================================
</TABLE>
A comparison of income tax expense at the Federal statutory rate in 1997,
1996 and 1995 to the Company's provision for income taxes is as follows-
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At statutory rate $374,000 $287,000 $257,000
Increase (decrease) from statutory
rate resulting from-
Tax-exempt interest income (11,000) (12,000) (46,000)
State income taxes, net of Federal
tax benefit 27,000 46,000 46,000
Other 3,000 1,000 (3,000)
- ---------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $393,000 $322,000 $254,000
===========================================================================================================================
</TABLE>
(11) STOCKHOLDERS' EQUITY:
Stock Dividends
During 1996 and 1997 the Company declared stock dividends aggregating 5% of
the common stock outstanding. All share and per share amounts have been restated
to give effect for these stock dividends.
<PAGE>
Nonqualified Stock Option Plan
During 1988, the stockholders approved a nonqualified stock option plan
(the "1988 Plan"). As of December 31, 1997, there were 31,857 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, 1997, 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, 1997, there were 33,619
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 2,626 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 525 shares of the Company's common stock
with a maximum of 7,879 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, 1997, 16,300 options at $10.71 and 2,550
options at $17.40 and 2,500 options at 18.00 were outstanding, of which all were
exercisable and none have been forfeited.
22
<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, 1997 there
were 67,238 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. As of December 31, 1997, 2,346 options at $17.65 were
outstanding, of which all were exercisable and none have been forfeited.
Transactions under all stock option plans are summarized as follows-
<TABLE>
<CAPTION>
Number of Shares Exercise Price Per Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1994 -- $--
Options granted 18,911 10.71
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 18,911 10.71
Options granted 2,550 17.40
Options exercised (525) 10.71
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 20,936 10.71-17.40
Options granted 4,846 17.65-18.00
Options exercised (2,086) 10.71
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1997 23,696 $10.71-$18.00
===========================================================================================================================
</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 indicated below-
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income-
As reported $708,000 $522,000 $501,000
Pro forma 696,000 516,000 481,000
Diluted income per share-
As reported $ 1.02 $ .75 $ .74
Pro forma 1.00 .74 .71
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The average fair value of options granted during 1997, 1996 and 1995 was
$4.09, $3.95 and $1.84, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1997, 1996 and
1995, respectively: dividend yield of 2.0%, 2.0% and 4.1%; expected volatility
of 16.0%, 15.8% and 15.7%, risk-free interest rates of 6.6%, 6.3% and 6.7%; and
expected lives of five years for 1997, 1996 and 1995.
The following table summarizes information about fixed stock options
outstanding at December 31, 1997-
<TABLE>
<CAPTION>
Number Number
Exercise Outstanding at Remaining Exercisable at
Prices December 31, 1997 Contractual Life December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$10.71 16,300 7.5 years 16,300
17.40 2,550 8.5 years 2,550
17.65 2,346 9.0 years 2,346
18.00 2,500 9.5 years 2,500
- ---------------------------------------------------------------------------------------------------------------------------
23,696 23,696
===========================================================================================================================
</TABLE>
23
<PAGE>
(12) 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 $8,259,000 to its
borrowers as of December 31, 1997; 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 $49,000 as of
December 31, 1997, which generally expire within one year.
Required Cash Balances
Cash balances reserved to meet regulatory requirements amounted to
approximately $707,000 and $549,000 at December 31, 1997 and 1996, 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 $19,350.
The minimum annual rental commitments for all noncancellable leases for
bank premises subsequent to December 31, 1997, are as follows-
1998 $ 47,000
1999 29,000
2000 30,000
2001 30,000
2002 and thereafter 200,000
- --------------------------------------------------------------------------------
Total $336,000
================================================================================
Total rental expense amounted to $55,000, $53,000 and $53,000 in 1997, 1996
and 1995, respectively.
<PAGE>
(13) REGULATORY CAPITAL REQUIREMENTS:
The 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 Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The 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.
24
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of 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,
1997, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1997, 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 Company has not been
notified by the Federal Reserve Bank of its capital category. To be categorized
as well-capitalized, 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.
<PAGE>
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table. For both 1997 and 1996, the Company's and the Bank's
actual capital amounts and ratios are the same.
<TABLE>
<CAPTION>
To Be Well-Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to risk
weighted assets)-
Sussex Bancorp. $8,470,000 14.10% $4,806,000 8.00% $6,008,000 10.00%
Sussex County
State Bank 8,215,000 13.67% 4,806,000 8.00% 6,008,000 10.00%
Tier I capital (to risk-
weighted assets)-
Sussex Bancorp 7,785,000 12.96% 2,403,000 4.00% 3,605,000 6.00%
Sussex County
State Bank 7,530,000 12.53% 2,403,000 4.00% 3,605,000 6.00%
Tier I Capital (to
average assets)-
Sussex Bancorp 7,785,000 7.00% 4,477,000 4.00% 5,597,000 5.00%
Sussex County
State Bank 7,530,000 6.70% 4,477,000 4.00% 5,597,000 5.00%
As of December 31, 1996
Total capital (to risk
weighted assets)
Sussex Bancorp 7,553,000 15.40% 3,924,000 8.00% 4,906,000 10.00%
Sussex County
State Bank 7,553,000 15.40% 3,924,000 8.00% 4,906,000 10.00%
Tier I capital (to risk-
weighted assets)-
Sussex Bancorp 7,011,000 14.29% 1,962,000 4.00% 2,943,000 6.00%
Sussex County
State Bank 7,011,000 14.29% 1,962,000 4.00% 2,943,000 6.00%
Tier I capital (to average
assets)-
Sussex Bancorp 7,011,000 7.00% 3,996,000 4.00% 4,995,000 5.00%
Sussex County
State Bank 7,011,000 7.00% 3,996,000 4.00% 4,995,000 5.00%
</TABLE>
25
<PAGE>
(14) 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
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
===========================================================================================================================
<S> <C> <C> <C> <C>
Cash and cash equivalents $13,668,000 $13,668,000 $ 8,855,000 $ 8,855,000
Securities available for sale (Note 3) 26,600,000 26,600,000 22,154,000 22,154,000
Securities held to maturity (Note 3) 2,706,000 2,713,000 1,122,000 1,116,000
</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.
<TABLE>
<CAPTION>
December 31
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
===========================================================================================================================
<S> <C> <C> <C> <C>
Loans, including accrued interest $ 67,968,000 $ 67,944,000 $65,466,000 $65,057,000
Deposits, including accrued interest 105,252,000 113,153,000 93,329,000 94,573,000
</TABLE>
<PAGE>
There is no material difference between the notional amount and the
estimated fair value of off-balance sheet unfunded loan commitments which
totaled $8,259,000 at December 31, 1997. Standby letters of credit totaling
$49,000 as of December 31, 1997 are based on fees charged for similar
agreements; accordingly, the estimated fair value of standby letters of credit
is nominal. See also Note 12 for additional discussion relating to these off
balance-sheet activities.
(15) OTHER OPERATING EXPENSES:
The major components of other operating expenses are as follows-
<TABLE>
<CAPTION>
December 31
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Legal and professional fees $130,000 $123,000 $167,000
Stationary and supplies 88,000 83,000 69,000
Audit and examination fees 86,000 85,000 48,000
Courier service 86,000 85,000 78,000
Core deposit amortization 84,000 84,000 84,000
Advertising 80,000 76,000 70,000
Postage and freight 75,000 74,000 74,000
Data processing fees 66,000 57,000 59,000
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone $ 57,000 $ 54,000 $ 56,000
Bonding and insurance 48,000 45,000 62,000
Directors' fees 34,000 40,000 39,000
FDIC and other assessments 11,000 150,000 108,000
Other 325,000 350,000 313,000
- ---------------------------------------------------------------------------------------------------------------------------
$1,170,000 $1,306,000 $1,227,000
===========================================================================================================================
</TABLE>
(16) CONDENSED FINANCIAL STATEMENTS OF
SUSSEX BANCORP (PARENT COMPANY ONLY):
<TABLE>
<CAPTION>
December 31
Balance sheet 1997 1996
===========================================================================================================================
<S> <C> <C>
Assets:
Cash and due from banks $ 266,000 $ -
Investment in Bank subsidiary (equity method) 8,367,000 7,882,000
Other assets 44,000 -
- ---------------------------------------------------------------------------------------------------------------------------
$8,677,000 $7,882,000
===========================================================================================================================
Liabilities and Stockholders' Equity-
Liabilities-- Other liabilities $91,000 $ -
Stockholders' equity:
Common stock 5,412,000 5,246,000
Retained earnings 3,162,000 2,729,000
Treasury stock (2,000) -
Net unrealized holding gains (losses) on securities
available for sale, net of tax 14,000 (93,000)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,586,000 7,882,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $8,677,000 $7,882,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Statement of Income
===========================================================================================================================
Operating Income-
Dividends from Bank subsidiary $ 387,000 $ 102,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiary 387,000 102,000
(Benefit) Provision for Income Taxes (a) - -
- ---------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary 387,000 102,000
Equity in Undistributed Income of Subsidiary 358,000 420,000
Other operating expenses 37,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 708,000 $ 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.
27
<PAGE>
<TABLE>
<CAPTION>
December 31
Statement of Cash Flows 1997 1996
===========================================================================================================================
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 708,000 $ 522,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Equity in undistributed income of subsidiary (358,000) (420,000)
Amortization of other assets 21,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 371,000 102,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash dividends paid, net of reinvestment (126,000) (102,000)
Stock dividend, net of fractional shares paid - (5,000)
Purchase of treasury stock (2,000) -
Exercise of stock options 23,000 5,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (105,000) (102,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 266,000 -
Cash and Cash Equivalents, beginning of year - -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 266,000 $ -
===========================================================================================================================
</TABLE>
(17) BASIC AND DILUTED EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Weighted
Average Income
Income Shares Per Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
Basic Earnings per Share
Income available to common stockholders $708,000 688,967 $1.03
===========================================================================================================================
Effect of dilutive securities-
Stock options - 6,741
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
Income available to common stockholders
plus assumed conversions $708,000 695,708 $1.02
===========================================================================================================================
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Income
Income Shares Per Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Basic Earnings per Share
Income available to common stockholders $522,000 684,309 $0.76
===========================================================================================================================
Effect of dilutive securities-
Stock options - 7,166
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
Income available to common stockholders plus
assumed conversions $522,000 691,475 $0.75
===========================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1995
Basic Earnings per Share
Income available to common stockholders $501,000 672,808 $0.74
===========================================================================================================================
Effect of dilutive securities-
Stock options - 2,021
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share
Income available to common stockholders plus
assumed conversions $501,000 674,829 $0.74
===========================================================================================================================
</TABLE>
Options to purchase 2,500 shares of common stock at $18 per share were
outstanding during 1997. They were not included in the 1997 computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares for the year.
29
<PAGE>
FIVE YEAR SUMMARY
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS)
<TABLE>
<CAPTION>
December 31
1997 1996 1995 1994 1993
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income $ 7,383,000 $ 6,710,000 $ 6,050,000 $ 5,516,000 $ 5,382,000
Interest expense 3,063,000 2,728,000 2,267,000 1,656,000 1,903,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,320,000 3,982,000 3,783,000 3,860,000 3,479,000
Provision for possible loan losses 210,000 130,000 64,000 187,000 101,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible
loan losses 4,110,000 3,852,000 3,719,000 3,673,000 3,378,000
Other income 700,000 699,000 677,000 592,000 636,000
Other expense 3,709,000 3,707,000 3,641,000 3,431,000 3,535,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision
for income taxes 1,101,000 844,000 755,000 834,000 479,000
Provision for income taxes 393,000 322,000 254,000 234,000 129,000
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 708,000 $ 522,000 $ 501,000 $ 600,000 $ 350,000
===========================================================================================================================
BASIC AVERAGE NUMBER OF
SHARES OUTSTANDING (a) 688,967 684,309 672,808 667,209 667,209
DILUTED AVERAGE NUMBER OF
SHARES OUTSTANDING (a) 695,769 691,475 674,829 667,209 667,209
PER SHARE INFORMATION (c):
Basic net income $1.03 $.76 $.74 $.90 $.52
Diluted net income $1.02 $.75 $.74 $.90 $.52
Cash dividends (b) $ .40 $.35 $.44 $.32 $.19
Stock dividends (b) 0% 5% 0% 0% 0%
Dividend payout ratio 39% 45% 58% 35% 35%
PERFORMANCE YIELDS:
Return on average assets .66% .54% .57% .73% .43%
Return on average stockholders' equity 8.84% 6.84% 6.98% 8.84% 5.20%
Average equity/average costs 7.50% 7.87% 8.11% 8.24% 8.20%
END OF PERIOD DATA:
Total assets $114,257,000 $101,776,000 $94,870,000 $82,243,000 $82,444,000
Total deposits 104,882,000 92,889,000 85,925,000 75,087,000 75,107,000
Total stockholders' equity 8,586,000 7,882,000 7,609,000 6,646,000 6,923,000
Average assets 106,879,000 96,996,000 88,535,000 82,344,000 82,122,000
Average stockholders' equity 8,013,000 7,630,000 7,178,000 6,785,000 6,735,000
===========================================================================================================================
</TABLE>
<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.
All periods presented have been restated for the effects of adopting Financial
Accounting Standards Statement No. 128 "Earnings Per Share" in December, 1997.
(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.
(c) All amounts have been restated for the effects of adopting Financial
Accounting Standards Statement No. 128 "Earnings Per Share" in December, 1997.
30
<PAGE>
OFFICE LOCATIONS
Main Office:
FRANKLIN
Rt. 23 Franklin
Bank - 827-2404
Administrative Offices - 827-2914
Loan Department - 827-3726
Branch Offices:
ANDOVER
Route 206, Andover
786-5150
NEWTON
15 Trinity Street, Newton
383-2211
MONTAGUE
Clove Road, Montague
293-3488
SPARTA
Woodport Road, Sparta
729-7223
VERNON
Church Street, Vernon
764-6175
WANTAGE
Route 23, Wantage
875-9957
Transfer and Dividend Paying Agent/Registrar
American StockTransfer &Trust Company
40 WallStreet
New York, NY 10005
800-937-5449
CommonStock Data
Common stock is traded on the American StockExchange under the Symbol SBB.
<PAGE>
SUSSEX BANCORP, INC.
Board Of Directors andExecutive Officers
Donald L. Kovach Chairman of the Board,
President and Chief 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 Contractor, Zitone Construction Co.
SUSSEX COUNTY STATE BANK
Board of Directors
Donald L. Kovach Chairman of the Board,
President and Chief Executive Officer
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
of Ames Rubber Corp.
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
Gary Chuisano Vice President/Non-deposit Products
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
Janice Mandeville Assistant Vice President/
Loan Administrations
Maryann Parker Assistant Vice President/
Branch Manager-Franklin
Mardella Venable Assistant Vice President/
Branch Manager-Newton
Diana Whitehead Assistant Vice President/
Asst. Operations Officer
Laurie Grafeld Assistant Secretary/
Branch Manager-Montague
Colleen Herman Assistant Secretary/
Branch Manager-Wantage
Margaret Sisco Assistant Secretary/Deposit Operations
Patricia Backman Assistant Treasurer/Controllers Office
31
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant has a single subsidiary, the Sussex County State Bank. The
Sussex County State Bank has one subsidiary, SCB Investment Company.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sussex Bancorp:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 15, 1998 and to all references to our Firm
into this Form 10-KSB and into Sussex Bancorp's previously filed Registration
Statement No. 333-20643 on Form S-3 and Registration Statement No. 333-20603 on
Form S-8.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 5,793 4,605
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 7,875 4,250
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 26,600 22,154
<INVESTMENTS-CARRYING> 2,706 1,122
<INVESTMENTS-MARKET> 0 0
<LOANS> 67,350 64,922
<ALLOWANCE> 685 542
<TOTAL-ASSETS> 114,257 101,776
<DEPOSITS> 104,882 92,889
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 5,412 5,246
<OTHER-SE> 3,174 2,636
<TOTAL-LIABILITIES-AND-EQUITY> 114,257 101,776
<INTEREST-LOAN> 5,517 4,958
<INTEREST-INVEST> 1,866 1,752
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 7,383 6,710
<INTEREST-DEPOSIT> 3,063 2,728
<INTEREST-EXPENSE> 3,063 2,728
<INTEREST-INCOME-NET> 4,320 3,982
<LOAN-LOSSES> 210 130
<SECURITIES-GAINS> 0 (9)
<EXPENSE-OTHER> 3,753 3,674
<INCOME-PRETAX> 1,101 844
<INCOME-PRE-EXTRAORDINARY> 1,101 844
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 708 522
<EPS-PRIMARY> 1.03 0.76
<EPS-DILUTED> 1.02 0.75
<YIELD-ACTUAL> 0 0
<LOANS-NON> 730 935
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 334 483
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 542 476
<CHARGE-OFFS> 68 66
<RECOVERIES> 1 2
<ALLOWANCE-CLOSE> 685 542
<ALLOWANCE-DOMESTIC> 685 542
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
