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, 1998
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
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 827-2914
- - --------------------------------------------------------------------------------
(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)
<PAGE>
The aggregate market value of the voting stock held by non-affiliates
of the Issuer as of March 3, 1999, was $12,637,420.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of March 3, 1999, was 1,423,634.
For the fiscal year ended December 31, 1998, the Issuer had total
revenues of $9,164,000.
<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 1999
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. 1999.
Item 10. Executive Compensation Proxy Statement for 1999
Annual Meeting of
Shareholders to be filed
not later than April 29,
1999.
Item 11. Security Ownership of Proxy Statement for 1999
Certain Beneficial Annual Meeting of
Owners and Management Shareholders to be filed
no later than April 29,
1999.
Item 12. Certain Relationships Proxy Statement for 1999
and Related Annual Meeting of
Transactions Shareholders to be filed
no later than April 29,
1999.
<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. In addition, during 1998, the Bank
formed the Sussex Bancorp Mortgage Company (the "Mortgage Company"). The
Mortgage Company originates one to four family mortgage loans for resale into
the secondary market. Currently, all loan are sold servicing released, although
the Company, through the Bank, may seek to service the loans it originates in
the future.
<PAGE>
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
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 these 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, 1998, the Company employed 67 full-time employees and
15 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.
<PAGE>
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
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.
<PAGE>
The risk-based guidelines apply on a consolidated 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",
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.
<PAGE>
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
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.
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,
1998.
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
Route 206 Owned N/A
Frankford, 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.
<PAGE>
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 1998.
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, under the symbol "SBB". As of
December 31, 1998, the Company had approximately 711 holders of record of the
Common Stock.
The following table shows the high and low closing price, by quarter,
for the common stock, as well as dividends declared, since the common stock
began trading on the American Stock Exchange:
DIVIDENDS
1998 HIGH LOW DECLARED
---- ---- ----- --------
4th Quarter 11 3/8 8 1/2 $ 0.03
3rd Quarter 11 5/8 9 3/8 $ 0.07
2nd Quarter 11 5/16 9 3/4 $ 0.13
1st Quarter 13 10 15/16 $ 0.13
During 1998 the Company also declared a two for one stock split.
During 1997, the Company paid quarterly cash dividends of $0.06, $0.10,
$0.12 and $0.13 and declared a 2% stock dividend.
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".
<PAGE>
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Upon completion of the 1997 audit, the Registrant replaced Arthur
Andersen LLP ("Andersen") as its independent auditor with Radics & Co., LLP, who
conducted the audit of the Company's financial statements for 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, 1997 and 1996, there have been no disagreements with Andersen on
any matter of accounting principles or practices, 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 1999 Annual Meeting under the
caption "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,
1999.
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> <C>
Candace A. Leatham, 44 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 1999
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, 1999.
<PAGE>
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, 1999.
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 1999 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, 1999.
<PAGE>
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)
10(iv) Employment Agreement with Donald Kovach
13 Annual Report to Shareholders for the year ended
December 31, 1998.
21 Subsidiaries of the Registrant
23(a) Consent of ARTHUR ANDERSEN LLP
23(b) Consent of RADICS & CO., L.L.C.
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.
NAME TITLE DATE
---- ----- ----
/s/Donald L. Kovach Chairman of the Board and
- - ------------------- Chief Executive Officer
Donald L. Kovach
/s/Candace A. Leatham Treasurer (Principal Financial
- - --------------------- Officer and Principal
Candace A. Leatham Accounting Officer)
/s/Irvin Ackerson Director
- - -----------------
Irvin Ackerson
/s/William E. Kulsar Secretary and Director
- - --------------------
William E. Kulsar
/s/Joel D. Marvil Director
- - -----------------
Joel D. Marvil
/s/Richard Scott Director
- - ----------------
Richard Scott
/s/Joseph Zitone Director
- - ----------------
Joseph Zitone
Table of
Contents
Message To Our Stockholders 1
Management Discussion and Analysis 2
Independent Auditors' Report 14
Consolidated Statements of Condition 15
Consolidated Statements of Income 16
Consolidated Statements of Changes
in Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
Office Locations 36
Board of Directors and Officers 36
Five Year Summary 38
<PAGE>
Message
To Our
Stockholders
Managing remarkable growth while effecting market penetration through new
products and services as well as satisfying regulatory requirements for the Year
2000 were the major achievements of Sussex Bancorp in 1998.
Throughout 1998 interest margins were compressed due to economic conditions
which favored lower interest rates on the asset side while interest on deposits
increased, resulting in a higher cost of funds. This presented an interesting
paradox: How to stabilize net interest spread and continue to maintain the
Bank's growth history. The key is and remains innovation. Strategies designed to
generate more profits in the loan and investment portfolio and increasing fee
income can produce both growth and increase Return On Assets. For example, in
1998 the composition of our loan portfolio changed showing an increase in small
to medium size business loans of over $2M, both secured and lines of credit,
producing higher yields. Fee income through non-deposit products and trust
services increased $100,000 over last year. The investment portfolio reflects a
changing composition, balancing liquidity with investments in less volatile
municipal tax free bonds. By establishing the Sussex Bancorp Mortgage Company, a
subsidiary of the Bank, another profit center was added that will generate fees
from mortgage brokerage services and sales of first mortgages in the secondary
market. Sussex Bancorp Mortgage Company, organized in the last quarter of 1998,
has received Freddie Mac approval as a seller/servicer for one-to-four family
mortgage loans and is on-line for internet sales.
On the deposit side, the creation of the "Senior Select" account
illustrates a novel approach to overall asset growth combined with
cross-selling. Total assets grew by over $20M, or 20%, over 1997. A substantial
portion of deposit growth was attributable to the Senior Select program,
specifically designed for our senior clientele. The cornerstone of the "Senior
Select" account is a savings account paying money market account rates with
unlimited withdrawal authority without penalty. Through a menu of services our
senior customers can find answers to financial questions through free investment
and tax seminars. This provides the ability to cross-sell non-deposit investment
products and loans tailored to the needs of the customer and their families.
Bringing our in-house computer systems into Y2K compliance and establishing
contingency plans were a priority of management last year. Through prudent
planning, the central computer system and corresponding software was scheduled
for upgrade. Fortuitously, the timing was commensurate with the banking
regulators examination of our Y2K compliance. Hence, testing the new system
corresponded with our Y2K preparedness requirements. By tackling the problem
head-on with a confident and dedicated staff we can now look forward with
optimism and excitement to the new millennium. Indeed, deposits may increase as
the new year approaches and the public and our customers become more aware of
the safety in keeping their money in the Sussex County State Bank, where it
remains insured by the FDIC.
Improving our existing branch sites and expanding through new locations
occurred in 1998 and will continue in the future. The improvement of the Andover
site was completed. The purchase of the Tanis homestead on Route 206 inAugusta
will provide the headquarters for our trust and investments division, as well as
a full-service branch in a campus-like atmosphere. Improvement of the Vernon
branch is scheduled in 1999, while efforts to upgrade the Sussex/Wantage site
continue to be investigated. Architectural and site plans will be developed for
an alternative site in Sparta. Potential de novo and branch acquisitions in
Morris County will be considered as well. We continue to review joint venture
possibilities to expand our product offerings and potential for non-interest
income.
<PAGE>
Sussex Bancorp is in a unique position, we are located in northwest New
Jersey, which enjoys a vibrant and growing economy. Consolidations and mergers
continue to underpin and enhance the concept of a community bank. The mega banks
shoulder the marketing cost of expanded banking services for all banks,
including the movement into fee income, such as non-deposit investment products
and mortgage brokerage, making it easier for community banks to do the same.
With a complete product menu and the ability to provide personal services,
community banks are here to stay. Eleven new banks opened their doors in New
Jersey during 1997 and 1998. Eight others are in the organization stage.
Nationwide, 144 new community banks were launched in 1996 and 188 new banks
started in 1997.
This year's business plan contemplates a secondary stock issue to address
the capital needs necessary to continue our product and geographic growth. The
last year of the 20th century will be another exciting year for Sussex Bancorp.
Sincerely,
/s/Donald L. Kovach
- - -------------------
Donald L. Kovach
President/CEO
1
<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 conditions and
should be 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, 1998, management sought to change the mix of the
Company's loan portfolio and enhance non-interest income. During 1998, the
Company established relationships with commercial borrowers to attain a greater
market share of commercial loans. In addition, the Company established the
Sussex Bancorp Mortgage Company, Inc. to offer 30-year fixed mortgages to our
customers. These loans will be sold in the secondary market, producing
non-interest income. For 1999, management's goals for the Company include (1)
further enhancing non-interest income by focusing on fee income, (2) promoting
the Sussex Bancorp Mortgage Company, and (3) 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 the Company's relationship with Independent Bankers Financial
Services, a registered broker-dealer which will sell non-deposit products, by
offering 30-year fixed mortgages to be sold in the secondary market by Sussex
Bancorp Mortgage Company, and through growing the Bank's trust department.
Results of Operations
For the year ended December 31, 1998, the Company's net income was $710,000
, representing an increase of $2,000, or 0.3 %, over the $708,000 earned in
1997. The basic net income per share for 1998 was $.50, compared to basic net
income per share of $.51 in 1997. The diluted net income per share for 1998 was
$.50, compared to diluted net income per share of $.51 in 1997. The change in
per share earnings reflects an increase in net income offset by an increased
number of average shares outstanding during 1998, as the Company's average basic
shares outstanding increased to 1,410,535 from 1,377,934. The increase was
attributable to issuance of new shares through the Company's dividend
reinvestment plan and exercises of stock options.
<PAGE>
The Company's results for 1998 were affected by increases of $157,000 in
net interest income and $125,000 in non-interest income and decreases of
$191,000 in provision for loan losses and $63,000 in income taxes, partially
offset by an increase of $534,000 in total other expenses.
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 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 $198,000 in 1998 to $4.5 million compared to $4.3 million in 1997. The
increase in net interest income occurred as total interest income increased by
$953,000, or 12.9%, to $8.4 million, while interest expense increased $755,000,
or 24.6%, to $3.8 million. Interest income increased primarily as a result of an
increase in average earning assets of $17.5 million. The increase in volume was
partially offset by a decrease in rate as the Company's average yield on
interest earning assets declined to 7.16% for the year ended December 31, 1998,
compared to 7.46% for the year ended December 31, 1997. The decrease in rate
reflects the Company's offering of lower priced loan products to gain new
originations, particularly in commercial
2
<PAGE>
Management
Discussion
and Analysis
(continued)
and non-residential real estate loans, and the repricing of the Company's
investment portfolio as securities mature, reprice and are called and the
proceeds are reinvested at lower current market rates.
Interest income on total loans increased from $5.5 million in 1997 to $5.6
million 1998, an increase of $84,000. 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 one basis point from 8.15% in 1997 to 8.14% in 1998.
Total interest income on securities increased to $1.9 million in 1998 from
$1.5 million in 1997, an increase of $349,000, or 22.9%. Average securities
increased to $31.7 million in 1998 from $24.6 million in 1997, an increase of
$7.1 million, reflecting investment of new deposits in excess of loan demand,
primarily in state and local government securities. The average rate earned on
securities declined to 5.90% in 1998 from 6.20% in 1997 due to lower current
market rates.
Interest income on other interest-earning assets increased by $520,000 in
1998 to $886,000 from $366,000 for 1997. The average balance of other
interest-earning assets increased to $16.2 million in 1998 from $7.1 million in
1997. In 1998, the Company was required to keep certain municipal deposits in
short term liquid investments such as term Federal funds. The average rate on
other interest-earning assets increased to 5.46% in 1998 from 5.18% in 1997.
Total interest expense increased from $3.1 million in 1997 to $3.8 million
for the year ended December 31, 1998, an increase of $755,000, or 24.6%. The
increase in interest expense was attributable to increases in both the Company's
average interest-bearing deposits and the average rate paid thereon. During
1998, the Company's average interest-bearing liabilities outstanding increased
by $14 million , to $96.1 million for the year ended December 31, 1998 compared
to the $82.2 million for the year ended December 31, 1997. The increase in
deposits occurred primarily in the Company's time deposits. Average time
deposits increased to $47.4 million, an increase of $9.5 million, or 25.1%, from
1997 to 1998, and the average rate paid on time deposits increased marginally to
5.42% in 1998 from 5.39% in 1997. The average rate paid on all the Company's
liabilities increased to 3.97% in 1998 from 3.73% in 1997, due primarily to
increased rates paid on savings deposits and the increase of average time
deposits to 49.3% of average interest-bearing liabilities in 1998 from 46.1% in
1997.
The net interest margin was 3.19% in 1998, a decline from the net interest
margin of 3.73% in 1997 reflecting the Company's decreased yield on interest
earning assets as management continues its strategy of attempting to retain and
increase its market share. Despite the declining net interest margin, the
Company managed to increase net interest income by increasing average
interest-earning assets by $17.5 million, or 17.6%, in 1998, which more than
offset the effects of the $14.0 million increase in average interest-bearing
liabilities and the decreased net interest margin.
<PAGE>
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 the 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 tax
equivalent-basis.
3
<PAGE>
Management
Discussion
and Analysis
(continued)
<TABLE>
<CAPTION>
Comparative Average Balance Sheets
Year ended December 31,
---------------------------------------------------------------------------------
1998 1997
Average Average
Interest Rates 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) .............................. $ 68,842 $ 5,601 8.14% $ 67,694 $ 5,517 8.15%
Tax exempt securities ................... 3,046 182 5.97% 952 61 6.41%
Taxable investment securities ........... 28,658 1,688 5.89% 23,599 1,460 6.19%
Other (1) ............................... 16,235 886 5.46% 7,059 366 5.18%
--------- --------- --------- ---------
Total earning assets .................... 116,781 8,357 7.16% 99,304 7,404 7.46%
Non-interest earning assets ................ 8,319 8,245
Allowance for possible loan losses ......... (706) (670)
--------- ---------
Total Assets ...................... $ 124,394 $ 106,879
========= =========
Liabilities and Shareholders' Equity
Interest bearing liabilities:
NOW deposits ............................ $ 13,496 $ 260 1.93% $ 12,593 $ 239 1.90%
Savings deposits ........................ 30,646 867 2.83% 28,109 705 2.51%
Money market deposits ................... 4,590 120 2.61% 3,580 78 2.18%
Time Deposits ........................... 47,398 2,571 5.42% 37,874 2,041 5.39%
--------- --------- --------- ---------
Total interest bearing
Liabilities ..................... 96,130 3,818 3.97% 82,156 3,063 3.73%
--------- --------- --------- ---------
Non-interest bearing liabilities:
Demand Deposits ......................... 18,912 15,886
Other liabilities ....................... 826 824
--------- ---------
Total non-interest bearing liabilities ..... 19,738 16,710
--------- ---------
Shareholders' equity ....................... 8,526 8,013
--------- ---------
Total liabilities and shareholders'
equity ................................ $ 124,394 $ 106,879
========= =========
Net interest differential/
net interest margin ................... $ 4,539 3.19% $ 4,341 3.73%
========= =========
Net yield on interest-earning
assets ................................
3.89% 4.37%
</TABLE>
(1) Includes federal funds sold and interest-bearing deposits.
4
<PAGE>
Management
Discussion
and Analysis
(continued)
The following table presents by category the major factors that contributed to
the changes in net interest income between the years ended December 31, 1998 and
1997. Amounts have been computed on a fully tax equivalent basis, assuming a
federal tax rate of 34%.
<TABLE>
<CAPTION>
Year Ended December 31,
- - ----------------------------------------------------------------------------------------
1998 versus 1997
Increase (Decrease) Due to Change In
- - ----------------------------------------------------------------------------------------
Average Average
Volume Rate Net
- - ----------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest Income:
<S> <C> <C> <C>
Loans (net of unearned income) $ 91 $ (7) $ 84
Tax exempt securities 125 (4) 121
Taxable investment securities 301 (73) 228
Other 499 21 520
- - ----------------------------------------------------------------------------------------
Total interest Income 1016 (63) 953
- - ----------------------------------------------------------------------------------------
Interest expense:
NOW deposits 17 4 21
Savings deposits 67 95 162
Money market deposits 25 17 42
Time deposits 519 11 530
- - ----------------------------------------------------------------------------------------
Total interest expense 628 127 755
- - ----------------------------------------------------------------------------------------
Net interest income $ 388 $ (190) $ 198
========================================================================================
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses in 1998 was $19,000 compared to a
provision of $210,000 in 1997. The decrease for 1998 reflects both relatively
mild growth in the loan portfolio and a reduction in non-accrual and
restructured loans of $666,000, or 62.6% from 1997 to 1998. In addition, the
decrease reflects management's view of the continued strong economic conditions
in the Company's Sussex County market area and New Jersey generally. During
1998, the Company had $40,000 in loans charged off.
Other Income
The Company's other income is primarily generated through service charges
on deposit accounts. Other income increased $125,000 in 1998 to $869,000
compared to $744,000 in 1997. The Company recognized a gain of $65,000 on the
sale of securities available for sale in 1998. The Company also experienced a
gain of $122,000 in other income, representing primarily an increase in fees
<PAGE>
from the sale of non-deposit products. The Company plans to focus on developing
additional non-interest income in 1999. 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 the Banks'
mortgage subsidiary selling loans, the expansion of the Bank's trust powers and
enhanced marketing of the Company's annuities, mutual funds and discount
brokerage services.
5
<PAGE>
Management
Discussion
and Analysis
(continued)
Other Expense
Total other expense increased from $3,753,000 in 1997 to $4,287,000 for
1998, an increase of $534,000 or 14.2%. Salaries and employee benefits expense,
the largest element of other expenses, increased $363,000 or 19.6%, and
furniture and equipment expense increased $154,000 or 41.5%. During 1998, the
Bank upgraded it's in-house computer system, formed and staffed its mortgage
banking subsidiary, and paid customary compensation increases. The increase of
$363,000 in salaries and employee benefits reflects the addition of staff for
the mortgage banking subsidiary as well as customary salary increases.
Income Tax Expense
The Company's income tax provisions, which includes both federal and state
taxes, were $330,000, and $393,000 for the years ended December 31, 1998 and
1997, respectively. The decreased provision for income tax reflects a decrease
in income before income taxes and the increased income from tax-exempt
securities.
FINANCIAL CONDITION
At December 31, 1998, the Company had total assets of $137.5 million
compared to total assets of $114.3 million at December 31, 1997. Net loans
increased to $69.3 million at December 31, 1998 from $67.4 million at December
31, 1997. Total deposits increased to $127.7 million at December 31, 1998 from
$104.9 million at December 31, 1997.
Loans
Net loans increased from $67.4 million at December 31, 1997 to $69.3
million at December 31, 1998, an increase of $2 million, or 3%. The increase in
the Company's loan portfolio during 1998 occurred in commercial and construction
loans. Commercial loans increased by $1.2 million, or 49.7%, to $3.7 million at
December 31, 1998 from $2.5 million at December 31, 1997. Construction and
development loans increased by $1.5 million, or 168.2%, to $2.4 million at
December 31, 1998 from $877,000 at December 31, 1997. The Company's loans
secured by non-residential properties increased by $947,000 to $11.6 million
from $10.7 million. These increases were partially offset by decreases in loans
to individuals of $108,000, and of $2.1 million on the Company's 1-4 family
mortgage loans. The Company's strategy during 1998 was to continue to diversify
its loan portfolio away from residential loans, with emphasis on commercial
lending. Management anticipates continuing its efforts to diversify the loan
portfolio, and in particular to continue focusing on commercial customers.
The increase in loans was funded during 1998 by an increase in the
Company's demand, savings and time deposits.
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 in Sussex County. The majority of approved loans are secured by real
estate and the borrower's primary residence. The end of year loan to deposit
ratios for 1998 and 1997 were 54.3% and 64.2%, respectively.
The following tables set forth certain information concerning the
distribution of the Company's loan portfolio.
6
<PAGE>
Management
Discussion
and Analysis
(continued)
<TABLE>
<CAPTION>
December 31,
- - ----------------------------------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------------------------------
Amount Percent Amount Percent
- - ----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $ 3,742 5.35% $ 2,499 3.67%
Real Estate:
Non-residential 11,612 16.60% 10,665 15.67%
Residential 49,128 70.22% 51,257 75.30%
Construction 2,352 3.36% 877 1.30%
Other loans 712 1.02% 241 0.35%
Consumer 2,416 3.45% 2,524 3.71%
- - ----------------------------------------------------------------------------------------
Total Loans $69,962 100.00% $68,063 100.00%
========================================================================================
</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.
The Company experienced a significant decline in non-performing assets
during 1998. Non-accrual loans declined by $332,000 to $398,000 at December 31,
1998 from $730,000 at December 31, 1997. In addition, as of December 31, 1998,
the Company had no restructured loans compared to restructured loans of $334,000
at December 31, 1997. 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 increased to $36,000 at December 31, 1998, consisting of one
property. The Company had no OREO properties at year end 1997. In addition to
active monitoring and collecting on delinquent loans Management has an active
loan review process for commercial customers with aggregate unsecured loan
amounts of $100,000 or more and real estate of $250,000 or more.
<PAGE>
The following table provides information concerning risk elements in the
loan portfolio.
<TABLE>
<CAPTION>
December 31,
- - -------------------------------------------------------------------------
1998 1997
- - -------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $ 398 $ 730
Renegotiated loans 0 334
- - -------------------------------------------------------------------------
Non-performing loans $ 398 $ 1064
=========================================================================
Non-accrual loans to total loans 0.57% 1.07%
Non-performing loans to total loans 0.57% 1.56%
Non-performing assets to total assets 0.32% 0.93%
Allowance for possible loan losses
as a % of non-performing loans 167.09% 64.38%
</TABLE>
7
<PAGE>
Management
Discussion
and Analysis
(continued)
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
certain 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 amount.
The ALL at year-end of 1998 was $665,000 versus $685,000 in 1997.
Management recognizes the importance of adequate reserves and their proper
allocation. Due to the reduction in non-accrual loans, the relatively small
growth in the loan portfolio during 1998 and management's view of economic
conditions in the Company's primary trade area, the ALL was increased by a
provision for loan loss of $19,000 and recoveries of $1,000, offset by
charge-off's of $40,000.
The following table provides a three year analysis of the changes in the
allowance for possible loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
- - -----------------------------------------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Balance $685,000 $542,000 $476,000
Provision for Loan Losses 19,000 210,000 130,000
Loans charged-off (40,000) (68,000) (66,000)
Recoveries 1,000 1,000 2,000
- - -----------------------------------------------------------------------------------------
Ending Balance $665,000 $685,000 $542,000
=========================================================================================
</TABLE>
<PAGE>
The following table sets forth information concerning the allocation of the
Company's ALL.
<TABLE>
<CAPTION>
December 31,
- - -----------------------------------------------------------------------------------------
1998 1997
- - -----------------------------------------------------------------------------------------
% of % of
Amount All Loans Amount All Loans
=========================================================================================
<S> <C> <C> <C> <C>
Balance Applicable to:
Commercial and industrial $ 37,000 5.4% $ 25,000 3.7%
Real Estate:
Nonresidential properties 107,000 16.6% 107,000 15.7%
Residential properties 467,000 70.2% 516,000 75.3%
Construction 23,000 3.4% 9,000 1.3%
Consumer 23,000 3.4% 26,000 3.7%
Other Loans 8,000 1.0% 2,000 0.3%
- - -----------------------------------------------------------------------------------------
Total $665,000 100.00% $685,000 100.00%
=========================================================================================
</TABLE>
Net charge-offs were $39,000 for 1998 compared to $67,000 in 1997. Net
charge-offs as a percent of average loans were .06% in 1998, and .10% in 1997.
Securities Portfolio
The Company maintains an investment portfolio to fund increased loan demand
or decreased deposits and other liquidity needs and to provide an additional
source of interest income. The portfolio is composed primarily of U.S. Treasury
Securities and obligations of U.S. Government agencies and
8
<PAGE>
Management
Discussion
and Analysis
(continued)
government sponsored entities, including collateralized mortgage obligations
issued by such agencies and entities, and municipal obligations.
Securities are classified as securities held to maturity based on
management's intent and the Company's ability to hold them to maturity. Such
securities are stated at cost, adjusted for unamortized purchase premiums and
discounts. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities, which are
carried at market value. Realized gains and losses and gains and losses from
marking the portfolio to market value are included in trading revenue.
Securities not classified as securities held to maturity or trading securities
are classified as securities available for sale, and are stated at fair value.
Unrealized gains and losses on securities available for sale are excluded from
results of operations, and are reported as a separate component of stockholders'
equity, net of taxes. Securities classified as available for sale include
securities that may be sold in response to changes in interest rates, changes in
prepayment risks, the need to increase regulatory capital or other similar
requirement. Management determines the appropriate classification of securities
at the time of purchase.
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. At December 31,
1998 and 1997 the Company had no securities classified as trading securities.
<TABLE>
<CAPTION>
December 31,
- - --------------------------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies
available for sale $25,121 $26,600 $22,624
Mutual fund available for sale 831 --- ---
Obligations of state and political subdivisions
held to Maturity 5,939 2,082 652
- - --------------------------------------------------------------------------------------------------
Total Securities $31,891 $28,682 $23,276
==================================================================================================
</TABLE>
The Company's securities increased from $28.7 million at December 31, 1997
to $31.9 million at December 31, 1998. The $3.2 million increase in securities
at December 31, 1998 was due to the Company's investing excess funds as
management determined that the Company's liquidity was sufficient to meet
anticipated funding needs through the end of the year.
<PAGE>
The Company also holds $693,000 in Federal Home Loan Bank of New York stock
which it does not consider an investment security. Ownership of this stock is
required for membership in the Federal Home Loan Bank.
Cash and Cash Equivalents
The Company's cash and cash equivalents increased by $17.0 million for the
year ended December 31, 1998, to $30.7 million from $13.7 million at December
31, 1997. The increase was caused primarily by the Bank's increasing more
rapidly than loan demand. As discussed above, the Company focused on retaining
municipal deposits, which were primarily placed in short-term certificates of
deposit. To keep these funds liquid, the Company invested $9.1 million in term
federal Funds sold, classified as interest bearing deposits on the balance
sheet. In addition, the Company's overnight federal funds sold increased by $9.6
million as the Company invested excess cash in short-term, liquid assets to fund
future loan demand and to have available for investment in securities.
9
<PAGE>
Management
Discussion
and Analysis
(continued)
Deposits
Total deposits increased $22.8 million from $104.9 million at year end 1997
to $127.7 million at year-end 1998, a 21.8% increase. All categories of deposits
contributed to the overall increase. Demand deposits increased to $19.8 million,
an increase of $1.8 million, or 9.8%, from demand deposits of $18 million at
year-end 1997. Savings deposits increased to $54.4 million, an increase of $6.5
million, or 13.5%, from savings deposits of $47.9 million at year-end 1997. Time
deposits increased to $53.6 million, an increase of $14.6 million, or 37.4%,
from time deposits of $39 million at year-end 1997. Time deposits at December
31, 1998 include $9 million owned by a local municipality which mature within 30
days. The increase in the overall portfolio reflects management's continued
strategy of gaining market share in the Company's trade area, and growing the
Company's balance sheet through the growth of the Company's securities portfolio
and the origination of additional loans. Time deposits make up the largest
portion of the Company's loan portfolio. Reliance on time deposits could cause
liquidity concerns as time deposits may prove more volatile than other deposits.
Management believes the Company's time deposits have historically renewed,
although the need to maintain these time deposits could cause the Company's cost
of funds to increase. Even if a large portion of the Company's time deposits do
not renew, management believes the Company will have sufficient liquidity to
fund its operating needs, through the Company's available for sale securities
portfolio and secondary liquidity sources, such as lines of credit with the
Federal Home Loan Bank of New York. The increase in time deposits primary
reflects the Company's efforts to attract municipal deposits.
The following tables provide information concerning the Company's deposits.
<TABLE>
<CAPTION>
December 31,
- - -----------------------------------------------------------------------------------------
1998 1997
- - -----------------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- - -----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
NOW Deposits $ 13,496 11.73% $12,593 12.85%
Savings Deposits 30,646 26.64% 28,109 28.67%
Money Market Deposits 4,590 3.99% 3,580 3.65%
Time Deposits 47,398 41.20% 37,874 38.63%
Demand Deposits 18,912 16.44% 15,886 16.20%
- - -----------------------------------------------------------------------------------------
Total Deposits $115,042 100.00% $98,042 100.00%
=========================================================================================
</TABLE>
<PAGE>
As of December 31, 1998:
Time Deposits ($100,000 and over) maturity:
Three months or less $ 9,604
Over three months through six months 643
Over six months through twelve months 961
Over twelve months 2,532
- - --------------------------------------------------------------------------------
Total $ 13,740
================================================================================
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.
10
<PAGE>
Management
Discussion
and Analysis
(continued)
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
$6.3 million. The Bank did not borrow against this line of credit during 1998.
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 from a movement in market interest rates.
The Company has developed an Interest Rate Risk 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, 1998, the interest rate sensitivity position evident for the
periodic intervals reflects an asset sensitive position.
<TABLE>
<CAPTION>
Assets:
0-3 Mos. 3-12 Mos. 1-5 Years 5+ Years
- - -----------------------------------------------------------------------------------------
(Dollars in Thousands)
Securities(1) $ 3,200 $ 13,377 $ 10,111 $ 5,896
Interest bearing deposits
in other banks 9,000 150 0 0
Federal funds 17,450 0 0 0
Commercial loans 3,310 236 705 101
Home equity (variable) 3,748 0 0 0
Consumer loans 1,241 3,302 11,695 3,907
Lease receivables 42 100 0 0
Mortgages 6,532 2,881 16,023 16,542
- - -----------------------------------------------------------------------------------------
Total Interest Earning Assets $ 44,523 $ 20,046 $ 38,534 $ 26,446
=========================================================================================
<CAPTION>
Liabilities:
0-3 Mos. 3-12 Mos. 1-5 Years 5+ Years
- - ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Certificate of deposits $ 16,960 $ 19,352 $ 17,165 $ 87
Money market deposit accounts 3,654 0 0 0
Savings accounts 3,621 32,913 0 0
Now accounts 1,417 12,752 0 0
- - ----------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 25,652 $ 65,017 $ 17,165 $ 87
==============================================================================================
Sensitivity Gap $ 18,851 ($44,971) ($21,369) $26,359
Cumulative Sensitive Gap $ 18,851 ($26,120) ($47,489 ($21,130)
</TABLE>
<PAGE>
(1) Includes $693,000 in Federal Home Loan Bank of New York stock, included in
the 5+ years category.
Capital Resources
Stockholders' equity inclusive of accumulated other comprehensive income,
net of income taxes, was $9.2 million at December 31, 1998. The growth in
stockholders' equity is generated primarily through earnings retention.
11
<PAGE>
Management
Discussion
and Analysis
(continued)
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 preferred
stock, and (2) Tier II capital, which includes a portion of the allowance for
possible loan losses, certain qualifying long-term debt and preferred stock
which does not qualify for Tier I capital.
The Company's and 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 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, Tier I capital as a percent of
risk-adjusted assets of 4.0% and combined Tier I and Tier II capital as a
percent of risk-adjusted assets of 8.0%, at a minimum. At December 31, 1998, the
Company's Tier I and combined Tier I and Tier II capital ratios were 12.53% and
13.51%, respectively. The Bank's Tier I and combined Tier I and Tier II were
11.89% and 12.87%, 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 growth, the minimum 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, 1998, the Company has a leverage ratio of 6.24% and the Bank has
a leverage ratio of 5.92%.
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 price of goods and services 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 gap, thus seeking to
minimize the potential effects of inflation.
Year 2000 Compliance
The Company's data processing capabilities are critical to its business and
its ability to service customers. The Year 2000 problem is caused by many
computer programs that were written to identify only the last two digits of a
year (a common programming practice on the past to save computer memory). The
expectation is that programs may read the year 2000 as 00 or 1900, and to
compute interest, payments and other data incorrectly. The Company has put
together a team of senior management to evaluate both its data processing
systems (software and computers) and other systems (i.e., vault timers, alarms,
<PAGE>
heating and cooling systems) that are essential to its operations. The Company
has examined all of its non-data processing systems and has either received Year
2000 compliant certification from third-party vendors or determined that the
systems should not be affected by the Year 2000 problem. The Company does not
expect any material costs to address non-data processing systems and has not
expended any material costs to date. The Company's present data processing
systems have more potential for Year 2000 risk in three areas: (1) its own
computers, (2) computers and systems used by borrowers, and (3) vendors who
provide the Company with software systems.
12
<PAGE>
Management
Discussion
and Analysis
(continued)
Our Computers: The Company has made capital expenditures of approximately
$200,000 during 1998 to upgrade its computer hardware and software systems,
primarily the application software. These upgrades were anticipated in 1994 and
planned and budgeted for in 1998, and they were planned to permit the Company
continued growth and expansion of products and services. The Company contracted
to have its primary application software tested. The test was completed November
1998 and the Company has evaluated the results by year-end 1998.
Computers of Others Used by Borrowers: The Company evaluated most of its
borrowers and does not believe that the Year 2000 problem should, on an
aggregate basis, impact their ability to repay their loans to the Bank. The
Company believes that the majority of its individual borrower are not dependent
on home computers for income and none of its commercial borrowers are so large
that a Year 2000 problem would render them unable to continue their businesses
and subsequently be unable to repay their obligations. The Company does not
anticipate any material costs to address this risk area.
Vendors Who Provide The Company With Software Systems: As stated
previously, the Company's primary application software system has been upgraded
and modified to be Year 2000 compliant. The Company is in the process of having
the critical systems tested to confirm Year 2000 compliance. Other peripheral
software systems, which are not considered critical systems, have been reviewed
and tested for Year 2000 compliance.
Contingency Plan: The Company has developed a remediation contingency plan
and is developing business resumption contingency plans specific to the Year
2000 project. Remediation contingency plans were developed and budgeted to
address the actions to be taken if the testing of our mission critical systems
fell behind schedule. The testing of our mission critical systems has been on
schedule and satisfactory to date.
Business resumption contingency plans are to address the actions that will
be taken if critical business functions can't be handled in the normal manner
due to system or third-party failures. These plans are additional to our normal
disaster recovery plans.
13
<PAGE>
[GRAPHIC-LOGO FOR RADICS & CO., LLC]
RADICS & CO., LLC
Certified Public Accountants &Consultants
Established
1933
Independent
Auditors'
Report
To the Board of Directors and Stockholders
Sussex Bancorp
We have audited the accompanying consolidated statement of condition of
Sussex Bancorp (the "Corporation") and Subsidiaries as of December 31, 1998 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Sussex Bancorp and subsidiaries
as of December 31, 1997 and for each of the years in the two-year period then
ended were audited by other auditors whose report dated January 15, 1998,
expressed an unqualified opinion on those statements. The other auditors' report
does not cover, for the years ended December 31, 1997 and 1996, the restatement
of (a) net income per common share and the weighted average number of common
shares outstanding as a result of the two for one split, in 1998, of the
Corporation's common stock and (b) the consolidated statements of changes in
stockholders' equity for the years ended December 31, 1997 and 1996 for the
purpose of presenting comprehensive income upon the implementation in 1998 of
Statement of Financial Accounting Standards No. 130.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit provide
a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to in
the second preceding paragraph present fairly, in all material respects, the
financial position of Sussex Bancorp and Subsidiaries at December 31, 1998, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
<PAGE>
We also audited the adjustments applied to, for the years ended December
31, 1997 and 1996, restate net income per common share and the weighted average
number of common shares outstanding and to present comprehensive income for the
years ended December 31, 1997 and 1996. In our opinion, such adjustments are
appropriate and have been properly applied.
/s/Radics & Co., LLC
- - --------------------
Radics & Co., LLC
January 15, 1999
55 US Highway 46 East, Post Office Box 676, Pine Brook, NJ 07058-0676
973-575-9696 Fax:973-575-9695
Internet:www.radics.com
14
<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 the years then ended. 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 the years then ended in conformity with generally accepted
accounting principles.
/s/ARTHUR ANDERSEN LLP
----------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 15, 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Condition
December 31,
====================================================================================================================
ASSETS 1998 1997
====================================================================================================================
<S> <C> <C>
Cash and due from banks $ 4,060,000 $ 5,793,000
Interest bearing deposits in other banks 9,150,000 --
Federal funds sold 17,450,000 7,875,000
- - --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 30,660,000 13,668,000
Securities available for sale, at estimated fair value 25,952,000 26,600,000
Securities held to maturity; estimated fair value of
$5,949,000 in 1998 and $2,089,000 in 1997 5,939,000 2,082,000
Loans held for sale 354,000 --
Loans 69,346,000 67,350,000
Premises and equipment, net 2,956,000 2,287,000
Federal Home Loan Bank of New York stock, at cost 693,000 624,000
Accrued interest receivable 549,000 618,000
Other real estate owed 36,000 --
Intangible assets 703,000 787,000
Other assets 279,000 241,000
- - --------------------------------------------------------------------------------------------------------------------
Total assets $137,467,000 $114,257,000
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing demand $19,793,000 $18,027,000
Savings club and interest-bearing demand 54,357,000 47,884,000
Time 39,824,000 35,050,000
Time of $100,000 and over 13,740,000 3,921,000
- - --------------------------------------------------------------------------------------------------------------------
Total deposits 127,714,000 104,882,000
Other liabilities 509,000 789,000
- - --------------------------------------------------------------------------------------------------------------------
Total liabilities 128,223,000 105,671,000
====================================================================================================================
Commitments -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity
Common stock (no par value); authorized shares 5,000,000;
issued 1,422,260 in 1998 and 698,959 in 1997 5,635,000 5,412,000
Retained earnings 3,547,000 3,162,000
Accumulated other comprehensive income, net of income tax 64,000 14,000
Treasury stock, at cost; 242 shares in 1998 and 145 shares in 1997 (2,000) (2,000)
- - --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,244,000 8,586,000
- - --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $137,467,000 $114,257,000
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Year Ended December 31,
===========================================================================================================================
1998 1997 1996
===========================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME:
Loans and fees $5,601,000 $5,517,000 $4,958,000
Investments securities:
Taxable 1,688,000 1,460,000 1,512,000
Exempt from federal income tax 120,000 40,000 45,000
Federal funds sold 548,000 366,000 195,000
Interest bearing deposits 338,000 -- --
- - ---------------------------------------------------------------------------------------------------------------------------
Total interest income 8,295,000 7,383,000 6,710,000
INTEREST EXPENSE:
Deposits 3,818,000 3,063,000 2,728,000
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,477,000 4,320,000 3,982,000
PROVISION FOR POSSIBLE LOAN LOSSES 19,000 210,000 130,000
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 4,458,000 4,110,000 3,852,000
- - ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 490,000 500,000 512,000
Gains on sales of securities available for sale 65,000 -- --
Gain (loss) on sale of other real estate -- 44,000 (33,000)
Trust department income 2,000 10,000 9,000
Other 312,000 190,000 178,000
- - ---------------------------------------------------------------------------------------------------------------------------
Total other income 869,000 744,000 666,000
- - ---------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 2,218,000 1,855,000 1,692,000
Occupancy, net 362,000 357,000 357,000
Furniture and equipment 525,000 371,000 319,000
Stationary and supplies 100,000 88,000 83,000
Audit and exams 93,000 86,000 85,000
Other 989,000 996,000 1,138,000
- - ---------------------------------------------------------------------------------------------------------------------------
Total other expenses 4,287,000 3,753,000 3,674,000
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES 1,040,000 1,101,000 844,000
INCOME TAXES 330,000 393,000 322,000
- - ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 710,000 $ 708,000 $ 522,000
===========================================================================================================================
Net income per common share:
Basic $ .50 $ .51 $ .38
===========================================================================================================================
Diluted $ .50 $ .51 $ .38
===========================================================================================================================
Weighted average number of common shares outstanding:
Basic 1,410,535 1,377,934 1,368,618
===========================================================================================================================
Diluted 1,425,900 1,391,416 1,382,950
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes
in Stockholders' Equity
Accumulated
Number of Other Total
Shares Common Comprehensive Retained Treasury Comprehensive Stockholders'
Outstanding Stock Income Earnings Stock Income Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 647,236 $4,532,000 $3,023,000 $ -- $ 54,000 $7,609,000
Net income -- -- $ 522,000 522,000 -- -- 522,000
Other comprehensive income:
Unrealized loss on securities
available for sale, net of
income taxes of $98,000 -- -- (147,000) -- -- (147,000) (147,000)
- - ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 375,000
==================================================================================================================================
Stock dividend 32,660 569,000 (569,000) -- -- --
Stock options exercised 500 5,000 (5,000) -- -- --
Shares issued through dividend
reinvestment plan 8,100 140,000 -- -- -- 140,000
Cash dividend -- -- (242,000) -- -- (242,000)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 688,496 5,246,000 2,729,000 -- (93,000) 7,882,000
Net income -- -- $708,000 708,000 -- -- 708,000
Other comprehensive income:
Unrealized gain on securities
available for sale, net of
income taxes of $68,000 -- -- 107,000 -- -- 107,000 107,000
- - ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 815,000
==================================================================================================================================
Treasury stock purchased (145) -- -- (2,000) -- (2,000)
Stock options exercised 2,000 23,000 -- -- -- 23,000
Shares issued through dividend
reinvestment plan 8,608 143,000 -- -- -- 143,000
Cash dividend -- -- (275,000) -- -- (275,000)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 698,959 5,412,000 3,162,000 (2,000) 14,000 8,586,000
- - ----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- $ 710,000 710,000 -- -- 710,000
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Other comprehensive income:
Unrealized gain on securities
available for sale, net of
income taxes of $60,000 89,000
Reclassification adjustment for
gains included in income,
net of income taxes of $26,000 (39,000)
- - ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income -- -- 50,000 -- -- 50,000 50,000
- - ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 760,000
=================================================================================================================================
Stock options exercised 4,814 55,000 -- -- -- 55,000
Shares issued through dividend
reinvestment plan 12,112 168,000 -- -- -- 168,000
Stock split 706,133 -- -- -- -- --
Cash dividends -- -- (325,000) -- -- (325,000)
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance -
December 31, 1998 1,422,018 $5,635,000 $3,547,000 $(2,000) $ 64,000 $9,244,000
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31,
===========================================================================================================================
1998 1997 1996
===========================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 710,000 $ 708,000 $ 522,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization (accretion) of premiums,
discounts and loan origination fees
and expenses, net 93,000 (54,000) (35,000)
Depreciation and amortization 439,000 370,000 343,000
Provision for loan losses 19,000 210,000 130,000
(Gain) on sales of securities available for sale (65,000) -- --
(Gain) loss on sale of real estate -- (44,000) 33,000
Origination of loans held for sale (354,000) -- --
Deferred federal income tax (benefit) (25,000) (25,000) 54,000
Decrease (increase) in accrued
interest receivable 69,000 (74,000) 38,000
(Increase) decrease in other assets (47,000) 430,000 (39,000)
Decrease in other liabilities (280,000) (216,000) (331,000)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 559,000 1,305,000 715,000
- - ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from repayments on and maturities
of securities available for sale 16,296,000 4,606,000 10,232,000
Proceeds from sales of securities available for sale 8,490,000 -- --
Purchases of securities available for sale (24,084,000) (8,931,000) (11,105,000)
Proceeds from maturities of securities held to maturity 1,602,000 952,000 2,239,000
Purchases of securities held to maturity (5,464,000) (1,913,000) (1,220,000)
Net increase in loans (1,907,000) (2,577,000) (13,235,000)
Additions to premises and equipment (1,024,000) (332,000) (201,000)
Purchase of Federal Home Loan Bank of New York stock (69,000) (624,000) --
Capitalized costs on other real estate owned (3,000) -- --
Proceeds from sale of other real estate -- 439,000 366,000
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,163,000) (8,380,000) (12,924,000)
- - ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits $22,832,000 $11,993,000 $ 6,964,000
Exercise of stock options 55,000 23,000 5,000
Stock dividends, net of fractional shares paid -- -- (5,000)
Payment of dividends net of reinvestment (157,000) (126,000) (102,000)
Purchase of treasury stock -- (2,000) --
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,730,000 11,888,000 6,862,000
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents 16,992,000 4,813,000 (5,347,000)
Cash and cash equivalents - beginning 13,668,000 8,855,000 14,202,000
- - ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending $30,660,000 $13,668,000 $ 8,855,000
===========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes (federal and state) $ 630,000 $ 192,000 $ 182,000
Interest 3,816,000 3,134,000 2,968,000
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate $ 33,000 $-- $ 473,000
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Notes to
Consolidated
Financial
Statements
1. NATURE OF OPERATIONS
Sussex Bancorp (the "Corporation") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, Sussex County State Bank (the "Bank"), and the Bank's wholly-owned
subsidiaries, Sussex Bancorp Mortgage Company and SCB Investment Company. The
Corporation's business is conducted principally through the Bank. The Bank
generates commercial, mortgage and consumer loans and receives deposits from
customers at its seven branches located in Sussex County, New Jersey. The Bank
operates under a state bank charter and provides full banking services and,
accordingly, is subject to regulation by the New Jersey Department of Banking
and Insurance and the Federal Deposit Insurance Corporation.
2. ACCOUNTING PRINCIPLES
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation, the Bank and the Bank's wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Basis of consolidated financial statement presentation
The consolidated financial statements of the Corporation have been prepared
in conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of condition and revenues and expenses for the period then
ended. Actual results could differ significantly from those estimates.
A material estimate that is particularly susceptible to significant changes
relates to the determination of the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions in the market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require additions to the allowance based on their judgments
about information available to them at the time of their examination.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks, federal funds
sold and interest-bearing deposits in other banks having original maturities of
three months or less. Generally, federal funds sold are sold for one-day
periods.
<PAGE>
Securities
Investments in debt securities that the Corporation has the positive intent
and ability to hold to maturity are classified as held to maturity securities
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized holding gains
and losses included in earnings. Debt and equity securities not classified as
trading securities nor as held to maturity securities, are classified as
available for sale securities and reported at fair value, with unrealized
holding gains or losses, net of deferred income taxes, reported in a separate
component of stockholders' equity.
19
<PAGE>
Notes to
Consolidated
Financial
Statements
2. ACCOUNTING PRINCIPLES (continued)
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which includes
amortization of premiums and accretion of discounts, is recognized in the
consolidated financial statements when earned. The adjusted cost basis of an
identified security sold or called is used for determining security gains or
losses recognized in the consolidated statements of income.
Loans held for sale
Loans held for sale are carried at the lower of cost or market value.
Valuation computations are made in the aggregate by type of loan and rate of
interest. The market values used for comparison are those associated with the
Bank's normal investor outlets. Gain or loss on sales of loans is recognized
based on the specific identification method.
Loans
Loans are stated at the amount of unpaid principal less unearned interest,
net deferred loan origination costs/fees, and the allowance for loan losses.
Interest on commercial, mortgage and simple interest installment loans is
recognized as income based on the loan principal outstanding. Recognition of
interest on the accrual method is generally discontinued when factors indicate
that the collection of such amounts is doubtful. At the time a loan is placed on
non-accrual status, previously accrued and uncollected interest is reversed
against interest income in the current period. Interest on such loans, if
appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when factors indicating doubtful collectibility no
longer exist.
Loan origination costs/fees
Loan origination fees and certain direct loan origination costs are
deferred and subsequently amortized as an adjustment of yield over the
contractual lives of the related loans.
Allowance for possible loan losses
The allowance for possible loan losses is maintained at a level considered
adequate to absorb future losses. Management determines the adequacy of the
allowance based upon reviews of individual credits, recent loss experience,
current economic conditions, the risk characteristics of the various categories
of loans and other pertinent factors. Loans deemed uncollectible are charged to
the allowance. Provisions for loan losses and recoveries on loans previously
charged off are added to the allowance.
Loans are deemed to be impaired when, based on current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
<PAGE>
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measured value of an impaired loan is less than
the recorded investment in that loan, the impairment is recorded in the
allowance for possible loan losses. All loans identified as impaired are
evaluated independently. The Bank does not aggregate such loans for evaluation
purposes.
Payments received on impaired loans are applied to principal, accrued
interest receivable and interest income, in that order.
20
<PAGE>
Notes to
Consolidated
Financial
Statements
2. ACCOUNTING PRINCIPLES (continued)
Concentration of risk
Lending activity is concentrated in loans secured by real estate located
primarily in Sussex and adjacent counties in the State of New Jersey.
Premises and equipment
Land is carried at cost. Buildings, building improvements, furniture,
fixtures and equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization charges
are computed on the straight-line method over the shorter of the estimated lives
of the related assets or the lease term.
Significant renewals and betterments are charged to the premises and
equipment account. Maintenance and repairs are charged to expense in the years
incurred. Rental income is netted against occupancy expense in the consolidated
statements of income.
Other real estate owned ("OREO")
OREO consists of loan collateral repossessed and is carried at the lower of
cost or fair value less estimated cost to sell. When a property is acquired, the
excess of the carrying amount over fair value, if any, is charged to the
allowance for loan losses. An allowance for OREO has been established, through
charges to OREO expense, to maintain properties at the lower of cost or fair
value less estimated costs to sell. Operating results of OREO, including rental
income, operating expenses, and gains and losses realized from the sale of
properties owned, are included in other expenses.
Intangible assets
Core deposit intangibles relating to premiums paid on the acquisition of
deposits are amortized on a straight line basis over 15 years. Such amortization
totalled $84,000 in each of the years ended December 31, 1998, 1997 and 1996.
Trust operations
Trust income is recorded on a cash basis, which approximates the accrual
basis. Securities and other property held by the Corporation in fiduciary or
agency capacities for customers of the trust department are not assets of the
Corporation and, accordingly, are not included in the accompanying consolidated
financial statements.
Income taxes
The Corporation and its subsidiaries use the accrual basis of accounting
for financial and income tax reporting. Provisions for income taxes in the
consolidated financial statements differ from the amounts reflected in income
<PAGE>
tax returns due to temporary differences in the reporting of certain items for
financial reporting and income tax reporting purposes. The income tax provisions
shown in the consolidated financial statements relate to items of income and
expense in those statements irrespective of temporary differences for income tax
return purposes. The tax effect of these temporary differences is accounted for
as deferred income taxes applicable to future years.
The Corporation and its subsidiaries file separate state income tax returns
and a consolidated federal income tax return with the amount of income tax
expense or benefit computed and allocated on a separate return basis.
21
<PAGE>
Notes to
Consolidated
Financial
Statements
2. ACCOUNTING PRINCIPLES (continued)
Net income per common share
Basic net income per share of common stock is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted net income per share is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period plus the potential dilutive effect of outstanding stock
options. On June 18, 1998, the Corporation's Board of Directors authorized a two
for one stock split, which was distributed on August 3, 1998. Basic and diluted
net income per common share have been retroactively restated to give effect to
the stock split.
Comprehensive income
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. As
required, the provisions of SFAS No. 130 have been retroactively applied to
previously reported periods. The application of SFAS No. 130 had no material
effect on the Corporation's consolidated financial condition or operations.
Impact of new financial Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In addition, certain provisions of SFAS
No. 133 will permit, at the date of initial adoption of SFAS No. 133, the
transfer of any held-to-maturity security into either the available for sale or
trading category and the transfer of any available for sale security into the
trading category. Transfers from the held-to-maturity portfolio at the date of
initial adoption will not call into question the entity's intent to hold other
debt securities to maturity in the future. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 and is not
expected to have a material impact on the Corporation. The Corporation does not
intend to adopt SFAS No. 133 earlier than required.
Interest-rate risk
The Corporation, primarily through the Bank, is principally engaged in the
business of attracting deposits from the general public and using these
deposits, together with other funds, to make loans secured by real estate and,
to a lesser extent, commercial and consumer loans. Additionally, such funds are
utilized to purchase investment securities. The potential for interest-rate risk
exists as a result of the differences in the duration of the Corporation's
<PAGE>
interest-sensitive liabilities compared to its interest-sensitive assets. In a
changing interest rate environment, liabilities will reprice at different speeds
and to different degrees than assets, thereby impacting net interest income. For
this reason, management regularly monitors the maturity structure of the
Corporation's assets and liabilities in order to measure its level of
interest-rate risk and plan for future volatility.
Reclassification
Certain amounts for the years ended December 31, 1997 and 1996 have been
reclassified to conform to the current year's presentation.
22
<PAGE>
Notes to
Consolidated
Financial
Statements
3. SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31, 1998
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Carrying
- - ---------------------------------------------------------------------------------------------------------------------------
Cost Gains Losses Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,589,000 $ 124,000 $ 3,000 $ 5,710,000
U.S. Government agencies including
mortgage-backed securities 19,407,000 75,000 71,000 19,411,000
Equity securities 850,000 -- 19,000 831,000
- - ---------------------------------------------------------------------------------------------------------------------------
$25,846,000 $ 199,000 $93,000 $25,952,000
===========================================================================================================================
<CAPTION>
December 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Carrying
- - ---------------------------------------------------------------------------------------------------------------------------
Cost Gains Losses Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 8,049,000 $ 30,000 $ 30,000 $ 8,049,000
U.S. Government agencies including
mortgage-backed securities 18,529,000 60,000 38,000 18,551,000
- - ---------------------------------------------------------------------------------------------------------------------------
$26,578,000 $ 90,000 $ 68,000 $26,600,000
===========================================================================================================================
December 31,
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 2,503,000 $ 2,510,000
Due after one year through five years 8,589,000 8,714,000 14,702,000 14,707,000
Due after five years through ten years 1,500,000 1,493,000 2,000,000 2,005,000
Due after ten years 14,907,000 14,914,000 7,373,000 7,378,000
Equity securities 850,000 831,000 -- --
- - ---------------------------------------------------------------------------------------------------------------------------
$25,846,000 $ 25,952,000 $26,578,000 $26,600,000
===========================================================================================================================
</TABLE>
<PAGE>
The amortized cost and carrying value of securities at December 31, 1998
and 1997 are shown above by contractual maturity. Actual maturities may differ
from contractual maturities as borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
The following presents details of sales of securities available for sale:
<TABLE>
<CAPTION>
Year Ended December 31,
- - -----------------------------------------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales proceeds $ 8,490,000 $-- $--
Gross gains 65,000 -- --
Gross losses -- -- --
</TABLE>
Securities with a carrying value of approximately $4,333,000 and $200,000
at December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and for other purposes required by applicable laws and regulations.
23
<PAGE>
Notes to
Consolidated
Financial
Statements
4. SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
December 31, 1998
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Estimated
- - ---------------------------------------------------------------------------------------------------------------------------
Cost Gains Losses Fair Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of state and political
subdivisions $ 5,939,000 $ 18,000 $ 8,000 $ 5,949,000
===========================================================================================================================
<CAPTION>
December 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Estimated
- - ---------------------------------------------------------------------------------------------------------------------------
Cost Gains Losses Fair Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of state and political
subdivisions $2,082,000 $ 7,000 $ -- $2,089,000
===========================================================================================================================
<CAPTION>
December 31,
- - ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,957,000 $ 3,963,000 $ 1,603,000 $ 1,603,000
Due after one year through five years 1,015,000 1,024,000 479,000 486,000
Due after five years through ten years 967,000 962,000 --
- - ---------------------------------------------------------------------------------------------------------------------------
$ 5,939,000 $ 5,949,000 $ 2,082,000 $ 2,089,000
===========================================================================================================================
</TABLE>
The amortized cost and carrying value of securities at December 31, 1998
and 1997 are shown above by contractual maturity. Actual maturities may differ
from contractual maturities as borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
There were no sales of securities held to maturity during the years ended
December 31, 1998, 1997 and 1996.
<PAGE>
Notes to
Consolidated
Financial
Statements
5. LOANS
<TABLE>
<CAPTION>
December 31,
- - -----------------------------------------------------------------------------------------------
1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by one to four family residential properties $ 49,128,000 $ 51,257,000
Loans secured by nonresidential properties 11,612,000 10,665,000
Loans to individuals 2,416,000 2,524,000
Commercial loans 3,742,000 2,499,000
Loans secured by construction and land development 2,352,000 877,000
Other loans 712,000 241,000
- - -----------------------------------------------------------------------------------------------
69,962,000 68,063,000
- - -----------------------------------------------------------------------------------------------
Less: Unearned income and net deferred loan costs, net (49,000) 28,000
Allowance for loan losses 665,000 685,000
- - -----------------------------------------------------------------------------------------------
616,000 713,000
- - -----------------------------------------------------------------------------------------------
$ 69,346,000 $ 67,350,000
</TABLE>
24
<PAGE>
Notes to
Consolidated
Financial
Statements
5. LOANS (continued)
Non-performing loans consist of nonaccrual and renegotiated loans. Nonaccrual
loans are those on which income under the accrual method has been discontinued
with subsequent interest payments credited to interest income when received, or
if ultimate collectibility of principal is in doubt, applied as principal
reductions. Renegotiated loans are loans whose contractual interest rates have
been reduced or where other significant modifications have been made due to
borrowers' financial difficulties. Interest on these loans is either accrued or
credited directly to interest income. If interest had been accrued on these
loans, the effect on net interest income would have been approximately $9,000,
$32,000 and $68,000 higher in 1998, 1997 and 1996, respectively. Non-performing
loans were as follows:
<TABLE>
<CAPTION>
================================================================================
December 31,
================================================================================
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Nonaccrual $ 398,000 $ 730,000 $ 935,000
Renegotiated -- 334,000 277,000
- - --------------------------------------------------------------------------------
$ 398,000 $1,064,000 $1,212,000
================================================================================
</TABLE>
The Bank has entered into lending transactions in the ordinary course of
business with directors, executive officers, principal stockholders and
affiliates of such persons on the same terms as those prevailing for comparable
transactions with other borrowers. These loans, at December 31, 1998, were
current as to principal and interest payments, and do not involve more than
normal risk of collectibility. A summary of lending activity with respect to
such persons who had borrowings of $60,000 or more, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998
================================================================================
<S> <C>
Balance - beginning $ 1,909,000
Loans originated 581,000
Repayments (415,000)
- - --------------------------------------------------------------------------------
Balance - ending $ 2,075,000
================================================================================
</TABLE>
<PAGE>
6. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Year Ended December 31,
================================================================================
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Balance - beginning $ 685,000 $ 542,000 $ 476,000
Provision for loan losses 19,000 210,000 130,000
Loans charged off (40,000) (68,000) (66,000)
Recoveries 1,000 1,000 2,000
- - --------------------------------------------------------------------------------
$ 665,000 $ 685,000 $ 542,000
================================================================================
</TABLE>
Impaired loans and related amounts recorded in the allowance for loan
losses are summarized as follows:
25
<PAGE>
Notes to
Consolidated
Financial
Statements
<TABLE>
<CAPTION>
December 31,
- - ----------------------------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------------------------
<S> <C> <C>
Record investment in impaired loans:
With recorded allowances $ 407,000 $1,272,000
Without recorded allowances -- --
- - ----------------------------------------------------------------------------------
Total impaired loans 407,000 1,272,000
Related allowance for loan losses (121,000) (202,000)
- - ----------------------------------------------------------------------------------
Net impaired loans $ 286,000 $1,070,000
==================================================================================
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the average recorded
investment in impaired loans totalled $898,000, $1,345,000 and $1,864,000,
respectively. Interest income recognized on such loans during the time each was
impaired totalled $79,000, $135,000 and $132,000, respectively.
7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 417,000 $ 417,000
Buildings and building improvements 1,592,000 1,555,000
Leasehold improvements 136,000 145,000
Furniture, fixtures and equipment 2,912,000 2,648,000
Assets in progress 629,000 --
- - --------------------------------------------------------------------------------
5,686,000 4,765,000
Less accumulated depreciation and amortization 2,730,000 2,478,000
- - --------------------------------------------------------------------------------
$2,956,000 $2,287,000
================================================================================
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, depreciation and
amortization expense totalled $355,000, $286,000 and $259,000, respectively.
Assets in progress consist primarily of property in Frankford Township, New
Jersey, which was purchased in 1998 and is being prepared for use in the Bank's
branch network.
<PAGE>
8. DEPOSITS
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31,
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
One year or less $ 36,312,000 $ 33,793,000
After one through three years 17,097,000 4,874,000
After three years 155,000 304,000
- - --------------------------------------------------------------------------------
$ 53,564,000 $ 38,971,000
================================================================================
</TABLE>
At December 31, 1998, certificates of deposit include $9,000,000 owned by a
local municipality which mature within 30 days.
26
<PAGE>
Notes to
Consolidated
Financial
Statements
9. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- - --------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 355,000 $ 418,000 $ 268,000
Deferred (25,000) (25,000) 54,000
- - --------------------------------------------------------------------------------
Total $ 330,000 $ 393,000 $ 322,000
================================================================================
</TABLE>
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
December 31,
- - ----------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $266,000 $262,000
Deferred loan fees 27,000 40,000
Other 19,000 3,000
- - ---------------------------------------------------------------------------------
312,000 305,000
- - ---------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization (168,000) (186,000)
Unrealized gain on securities available for sale (42,000) (9,000)
- - ---------------------------------------------------------------------------------
(210,000) (195,000)
- - ----------------------------------------------------------------------------------
Net deferred tax assets included in other assets $102,000 $110,000
=================================================================================
</TABLE>
The following table presents a reconciliation between the reported income
taxes and the income taxes that would have been computed by applying the normal
federal income tax rate of 34% to income before income taxes:
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- - ---------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax 354,000 34.0% 374,000 34.0% 287,000 34.0%
Add (deduct) effect of:
Non-taxable interest income (38,000) (3.7) (11,000) (1.0) (12,000) (1.4)
State income tax, net of
federal income tax effect 1,000 0.1 27,000 2.4 46,000 5.5
Other items, net 13,000 1.3 3,000 0.3 1,000 0.1
- - ---------------------------------------------------------------------------------------
$330,000 31.7 $393,000 35.7 $322,000 38.2
=======================================================================================
</TABLE>
10. BENEFIT PLANS
Stock Option Plans
During 1988, the stockholders approved a nonqualified stock option plan
(the "1988 Plan"). As of December 31, 1998, there were 63,714 authorized shares
of the Corporation's common stock to be
27
<PAGE>
Notes to
Consolidated
Financial
Statements
10. BENEFIT PLANS (continued)
granted. Options may be granted to any officer of the Corporation 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 Corporation's Board of
Directors, but not to exceed five years. As of December 31, 1998, no options
have been granted.
During 1995, the stockholders approved a stock option plan for nonemployee
directors (the "Director Plan"). As of December 31, 1998, there were 67,238
authorized shares of the Corporation's common stock to be granted. Upon approval
of the Director Plan, each director was granted an option to purchase 5,253
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 Corporation at such annual meeting
of stockholders, shall be granted an option to purchase 1,050 shares of the
Corporation's common stock with a maximum of 15,759 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 year. As of December 31, 1998, 28,034
options at $5.35, 3,060 options at $8.70, 3,000 options at $9.00 and 5,000
options at $10.69 were outstanding, of which all were exercisable and none which
have been forfeited.
During 1995, the stockholders approved an incentive stock option plan for
executives of the Corporation (the "Executive Plan"). As of December 31, 1998
there were 134,477 authorized shares of the Corporation'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 Corporation 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, 1998, 4,692 options at $8.82
were outstanding, of which all were exercisable and none have been forfeited.
<PAGE>
Transactions under all stock option plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Range of Exercise
Number of Exercise Price Price
Shares Per Share Per Share
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 37,822 $ 5.35 $ 5.35
Options granted 5,100 8.70 8.70
Options exercised (1,020) 5.35 5.35
- - ---------------------------------------------------------------------------------------
Outstanding, December 31, 1996 41,902 5.35 - 8.70 5.76
Options granted 9,692 8.82 - 9.00 8.91
Options exercised (5,200) 5.35 5.35
- - ---------------------------------------------------------------------------------------
Outstanding, December 31, 1997 46,394 5.35 - 9.00 6.47
Options granted 5,000 10.69 10.69
Options exercised (7,608) 5.35 - 9.00 7.27
- - ---------------------------------------------------------------------------------------
Outstanding, December 31, 1998 43,786 $5.35 - $10.69 $ 6.82
=======================================================================================
</TABLE>
28
<PAGE>
Notes to
Consolidated
Financial
Statements
The Corporation 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 Corporation'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 SFAS No. 123, the
Corporation's net income and income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
- - ---------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 710,000 $ 708,000 $ 522,000
Pro forma 700,000 696,000 516,000
Diluted income per share
As reported $ 0.50 $ 0.51$ 0.38
Pro forma 0.49 0.500.37
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Exercise Number Remaining Number
Price Outstanding Contractual Life Exerciseable
- - ---------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5.35 28,034 6.5 years 28,034
8.70 3,060 7.5 years 3,060
8.82 4,692 8.0 years 4,692
9.00 3,000 8.5 years 3,000
10.69 5,000 9.5 years 5,000
- - ---------------------------------------------------------------------------------
43,786 43,786
=================================================================================
</TABLE>
11. RELATED PARTY TRANSACTIONS
Certain directors of the Corporation are associated with legal, accounting
and construction businesses that rendered various services to the Corporation.
The Corporation paid these companies $168,000, $67,000 and $82,000 during 1988,
1997 and 1996, respectively.
<PAGE>
12. COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated financial statements. The contract or notional amounts of those
instruments reflect the extent of involvement in particular classes of financial
instruments. The exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as they do for on-balance-sheet instruments. The
commitments to extend credit are as follows:
29
<PAGE>
12. COMMITMENTS (continued)
<TABLE>
<CAPTION>
December 31,
- - --------------------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Commitments to extend credit $ 11,543 $ 8,259
Standby letters of credit and financial guarantees 8 49
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant, and equipment, residential real estate
and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral supporting those commitments for which collateral is
deemed necessary.
Rentals under long-term operating leases amounted to approximately $52,000,
$55,000 and $53,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, the minimum commitments, which include
rental, real estate tax and other related amounts, under all noncancellable
leases with remaining terms of more than one year and expiring through 2020 are
as follows:
December 31, Amount
- - --------------------------------------------------------------------------------
(In Thousands)
1999 $ 52,000
2000 47,000
2001 30,000
2002 15,000
2003 10,000
Thereafter 165,000
- - --------------------------------------------------------------------------------
$319,000
================================================================================
The Corporation and its subsidiaries are also subject to litigation which
arises primarily in the ordinary course of business. In the opinion of
management, the ultimate disposition of such litigation should not have a
material adverse effect on the consolidated financial position or results of
operations of the Corporation.
30
<PAGE>
Notes to
Consolidated
Financial
Statements
13. DIVIDEND LIMITATION
A limitation exists on the ability of the Bank to pay dividends to the
Corporation. State of New Jersey Banking laws specify that no dividend shall be
paid by the Bank on its capital stock unless, following the payment of each such
dividend, the capital stock of the Bank will be unimpaired and the Bank will
have a surplus of not less than 50% of its capital stock, or, if not, the
payment of such dividend will not reduce the surplus of the Bank.
14. REGULATORY CAPITAL REQUIREMENTS
The Corporation 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 Corporation's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation's and the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory account practices. The Corporation's and the Bank's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total Tier 1 capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of March 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation, the Bank was categorized as well-capitalized under the
regulatory framework for prompt corrective action. The Corporation 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 1
risk based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since the aforementioned notification that management
believes have changed the institution's category.
The Corporation's and the Bank's actual capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Actions Provisions
- - --------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- - --------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total Capital (to risk-weighted assets):
Corporation $ 9,123 13.51% $ 5,401 8.00% $ 6,751 10.00%
Bank 8,687 12.87% 5,399 8.00% 6,749 10.00%
Tier 1 Capital (to risk-weighted assets):
Corporation 8,458 12.53% 2,701 4.00% 4,051 6.00%
Bank 8,022 11.89% 2,700 4.00% 4,050 6.00%
Tier 1 Capital (to average total assets):
Corporation 8,458 6.24% 5,422 4.00% 6,778 5.00%
Bank 8,022 5.92% 5,422 4.00% 6,777 5.00%
</TABLE>
31
<PAGE>
14. REGULATORY CAPITAL REQUIREMENTS (continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Actions Provisions
---------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
- - ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total Capital (to risk-weighted assets):
Corporation $ 8,470 14.10% $ 4,806 8.00% $ 6,008 10.00%
Bank 8,215 13.67% 4,806 8.00% 6,008 10.00%
Tier 1 Capital (to risk-weighted assets):
Corporation 7,785 12.96% 2,403 4.00% 3,605 6.00%
Bank 7,530 12.53% 2,403 4.00% 3,605 6.00%
Tier 1 Capital (to average total assets):
Corporation 7,785 7.00% 4,477 4.00% 5,597 5.00%
Bank 7,530 6.70% 4,477 4.00% 5,597 5.00%
</TABLE>
15. SUSSEX BANCORP, INC. (PARENT COMPANY ONLY)
Condensed financial statements of the Corporation (Parent Company only) follow:
<TABLE>
<CAPTION>
STATEMENTS OF CONDITION
December 31,
- - ---------------------------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 457,000 $ 266,000
Investment in subsidiaries 8,808,000 8,367,000
Other assets 22,000 44,000
- - ---------------------------------------------------------------------------------------
Total assets $ 9,287,000 $ 8,677,000
=======================================================================================
Liabilities:
Dividends payable 43,000 91,000
- - ---------------------------------------------------------------------------------------
Stockholders' equity 9,244,000 8,586,000
- - ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,287,000 $ 8,677,000
=======================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year Ended December 31,
- - ---------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary bank $ 361,000 387,000 102,000
Other expenses 42,000 37,000 --
- - ---------------------------------------------------------------------------------------
Income before income tax expense 319,000 350,000 102,000
Income tax expense -- --
- - ---------------------------------------------------------------------------------------
Income before undistributed
earnings of subsidiaries 319,000 350,000 102,000
Equity in undistributed
earnings of subsidiaries 391,000 358,000 420,000
- - ---------------------------------------------------------------------------------------
Net income $ 710,000 $ 708,000 $ 522,000
=======================================================================================
</TABLE>
32
<PAGE>
Notes to
Consolidated
Financial
Statements
15. SUSSEX BANCORP, INC. (PARENT COMPANY ONLY) (continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
- - -------------------------------------------------------------------------------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 710,000 $ 708,000 $ 522,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in other assets 22,000 21,000 --
Equity in undistributed earnings of subsidiaries (391,000) (358,000) (420,000)
- - -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 341,000 371,000 102,000
- - -------------------------------------------------------------------------------------------------------
Cash dividends paid net of reinvestments (205,000) (126,000) (102,000)
Stock dividend, net of fractional shares -- -- (5,000)
Purchase of treasury stock -- (2,000) --
Exercise of stock options 55,000 23,000 5,000
- - -------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (150,000) (105,000) (102,000)
- - -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 191,000 266,000 --
Cash and cash equivalents - beginning 266,000 -- --
- - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending $ 457,000 $ 266,000 $ --
=======================================================================================================
</TABLE>
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. Significant estimations were
used for the purposes of this disclosure. Estimated fair values have been
determined using the best available data and estimation methodology suitable for
each category of financial instruments. For those loans and deposits with
floating interest rates, it is presumed that estimated fair values generally
approximate their recorded book balances. The estimation methodologies used and
the estimated fair values and carrying values of the financial instruments are
set forth below:
Cash and cash equivalents and accrued interest receivable
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
<PAGE>
Securities
The fair values for securities are based on quoted market prices or dealer
prices, if available. If quoted market prices or dealer prices are not
available, fair value is estimated using quoted market prices or dealer prices
for similar securities.
Loans held for sale
The fair value of loans held for sale is based on prices associated with
the Bank's normal investor outlets.
Loans
The fair value of loans is estimated by discounting the future cash flows,
using the current rates at which similar loans with similar remaining maturities
would be made to borrowers with similar credit ratings.
33
<PAGE>
Notes to
Consolidated
Financial
Statements
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Deposits
For demand, savings and club accounts, fair value is the carrying amount
reported in the consolidated financial statements. For fixed-maturity
certificates of deposit, fair value is estimated using the rates currently
offered for deposits of similar remaining maturities.
Commitments
The fair values of commitments to extend credit and standby letters of
credit are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of guarantees and letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
The carrying values and estimated fair values of the Corporation's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
- - ----------------------------------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Financial assets Value Fair Value Value Fair Value
- - ----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $30,660 $30,660 $13,668 $13,668
Securities available for sale 25,952 25,952 26,600 26,600
Securities held to maturity 5,939 5,949 2,082 2,089
Loans held for sale 354 354 -- --
Loans 69,346 68,545 67,350 67,326
Accrued interest receivable 549 549 618 618
Financial liabilities
Deposits 127,714 128,005 104,882 112,783
Commitments
To extend credit 11,543 11,543 8,259 8,259
Standby letters of credit 8 8 49 49
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument.
Because no established secondary market exists for a significant portion of the
<PAGE>
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of the financial instruments, and other factors. These estimates
are subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, fair value estimates are based on existing on-and-off balance
sheet financial instruments without attempting to estimate the value of
anticipated future business, and exclude the value of assets and liabilities
that are not considered financial instruments. Other significant assets and
34
<PAGE>
Notes to
Consolidated
Financial
Statements
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
liabilities that are not considered financial assets and liabilities include
premises and equipment, other assets and other liabilities. In addition, the
income tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform evaluation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
- - --------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
- - --------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total interest income $ 1,951 $ 2,049 $ 2,098 $ 2,197
Total interest expense 831 932 989 1,066
- - --------------------------------------------------------------------------------------
Net interest income 1,120 1,117 1,109 1,131
- - --------------------------------------------------------------------------------------
Provision for loan losses 21 21 21 (44)
Other income 183 205 231 250
Other expenses 999 1,065 1,062 1,161
Income taxes 101 77 79 73
- - --------------------------------------------------------------------------------------
Net income $ 182 $ 159 $ 178 $ 191
======================================================================================
Net income per common share -
basic and diluted $ 0.13 $ 0.11 $ 0.13 $ 0.13
======================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
- - --------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
- - --------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total interest income $ 1,755 $ 1,810 $ 1,892 $ 1,926
Total interest expense 731 754 777 801
- - --------------------------------------------------------------------------------------
Net interest income 1,024 1,056 1,115 1,125
- - --------------------------------------------------------------------------------------
Provision for loan losses 75 75 45 15
Other income 165 205 167 207
Other expenses 927 938 971 917
Income taxes 63 88 93 149
- - --------------------------------------------------------------------------------------
Net income $ 124 $ 160 $ 173 $ 251
======================================================================================
Net income common per share -
basic and diluted $ 0.09 $0.12 $0.12 $0.18
======================================================================================
</TABLE>
Net income per common share for the quarters ended June 30, 1998 and prior
have been restated to give retroactive effect to the subsequent 2 for 1 stock
split.
35
<PAGE>
Sussex
Bancorp,
Inc.
OFFICE LOCATIONS
Main Office:
FRANKLIN
399 Route 23, Franklin Bank - 827-2404
Administrative Offices - 827-2914 Loan
Department - 827-3726
Branch Offices:
ANDOVER
165 Route 206, Andover
786-5150
NEWTON
15 Trinity Street,
Newton 383-2211
MONTAGUE
266 Clove Road, Montague
293-3488
SPARTA
172 Woodport Road,
Sparta 729-7223
VERNON
7 Church Street, Vernon
754-6175
WANTAGE
455 Route 23, Wantage
875-9957
Transfer and Dividend Paying
Agent/Registrar
American Stock Transfer & Trust Company
40 WallStreet
New York, NY 10005
800-937-5449
Common Stock Data
Common stock is traded on the American
Stock Exchange under the Symbol SBB.
<PAGE>
SUSSEX BANCORP, INC.
Board of Directors and Executive Officers
Donald L. Kovach Chairman of the Board,
President and Chief Executive Officer
Irvin Ackerson Excavator, Ackerson Excavating
William Kulsar CPA, Caristia, Kulsar and Wade, P.A.
Joel D. Marvil President and Chief Executive Officer,
Ames Rubber Corporation
Richard W. Scott Dentist, Richard W. Scott, D.D.S.
Joseph Zitone General Contractor, Zitone Construction Co.
SUSSEX COUNTY STATE BANK
Board of Directors
Donald L. Kovach Chairman of the Board,
President and Chief Executive Officer
Terry H. Thompson Secretary, Senior Vice President/COO
Irvin Ackerson Excavator, Ackerson Excavating
Mark J. Hontz Attorney, Dolan & Dolan, P.A.
William E. 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 W. 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 H. Thompson Senior Vice President/COO
Mary Cannistra Vice President/Personnel Officer
Gary Chuisano Vice President/Trust Officer/Non-deposit Products
James Ciaravolo Vice President/Branch Administration/Security
Elizabeth Martin Vice President/Operations
<PAGE>
Valerie Seufert Vice President/Senior Loan Officer
Samuel Tolley Vice President/Loans &Compliance Officer
Janice Mandeville Asst. Vice President/Loan Administration
Maryann Parker Asst. Vice President/Branch Manager-Franklin
Mardella Venable Asst. Vice President/Branch Manager-Newton
Diana Whitehead Asst. Vice President/Asst. Operations Officer
Laurie Grafeld Asst. Secretary/Branch Manager-Montague
Colleen Herman Asst. Secretary/Branch Manager-Wantage
Lori Hotchkiss Asst. Secretary/Data Processing
Margaret Sisco Asst. Secretary/Deposit Operations
Patricia Backman Asst. Treasurer/Controllers Office
SUSSEX BANCORP MORTGAGE CO., INC.
Officers
Gerald R. Lake President
David K. VerHage Vice President
36
<PAGE>
Sussex
Bancorp,
Inc.
[GRAPHIC-PHOTO OF INDIVIDUALS LISTED BELOW]
Trust/Estate Advisory Committee:
- - --------------------------------
LEFT to RIGHT (sitting):
Candace Leatham, DonaldL. Kovach
and Pat Bauernfeind
LEFT to RIGHT (standing):
Gary Chiusano and William E. Kulsar
[GRAPHIC-PHOTO OF INDIVIDUALS LISTED BELOW AT AMEX]
OPENING DAY ON THE AMEX:
- - ------------------------
LEFT: FRONT - William E. Kulsar, Donald L. Kovach,
Candace Leatham:
BACK - Joel D. Marvil, Richard W. Scott
and Terry H. Thompson
- - ------------------------
Below:
Donald L. Kovach with a Senior Amex Representative
37
<PAGE>
Five Year
Summary
(Not covered by Report
of Independent Public
Accountants)
<TABLE>
<CAPTION>
Year Ended December 31
===========================================================================================================================
1998 1997 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income $ 8,295,000 $ 7,383,000 $ 6,710,000 $ 6,050,000 $ 5,516,000
Interest expense 3,818,000 3,063,000 2,728,000 2,267,000 1,656,000
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,477,000 4,320,000 3,982,000 3,783,000 3,860,000
Provision for possible loan losses 19,000 210,000 130,000 64,000 187,000
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible
loan losses 4,458,000 4,110,000 3,852,000 3,719,000 3,673,000
Other income 869,000 744,000 666,000 677,000 592,000
Other expense 4,287,000 3,753,000 3,764,000 3,641,000 3,431,000
- - ---------------------------------------------------------------------------------------------------------------------------
Income before provision
for income taxes 1,040,000 1,101,000 844,000 755,000 834,000
Provision for income taxes 330,000 393,000 322,000 254,000 234,000
- - ---------------------------------------------------------------------------------------------------------------------------
Net income $ 710,000 $ 708,000 $ 522,000 $ 501,000 $ 600,000
===========================================================================================================================
BASIC AVERAGE NUMBER OF
SHARES OUTSTANDING (a) 1,410,535 1,377,934 1,368,618 1,345,616 1,334,418
DILUTED AVERAGE NUMBER OF
SHARES OUTSTANDING (a) 1,425,900 1,391,416 1,382,950 1,349,658 1,334,418
PER SHARE INFORMATION:
Basic net income $.50 $.51 $.38 $.37 $.45
Diluted net income $.50 $.51 $.38 $.37 $.45
Cash dividends (b) $.23 $.20 $.18 $.22 $.16
Stock dividends (b) 100% 0% 5% 0% 0%
Dividend payout ratio 46% 39% 46% 59% 36%
PERFORMANCE YIELDS:
Return on average assets .57% .66% .54% .57% .73%
Return on average stockholders' equity 8.33% 8.84% 6.84% 6.98% 8.84%
Average equity/average costs 6.85% 7.50% 7.87% 8.11% 8.24%
END OF PERIOD DATA:
Total assets $137,467,000 $114,257,000 $101,776,000 $94,870,000 $82,243,000
Total deposits 127,714,000 104,882,000 92,889,000 85,925,000 75,087,000
Total stockholders' equity 9,244,000 8,586,000 7,882,000 7,609,000 6,646,000
Average assets 124,394,000 106,879,000 96,996,000 88,535,000 82,344,000
Average stockholders' equity 8,526,000 8,013,000 7,630,000 7,178,000 6,785,000
- - ---------------------------------------------------------------------------------------------------------------------------
</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 subsequent
stock dividends.
(b) Cash and stock dividends per common share are based on the actual number of
common shares outstanding on the dates of record as adjusted for subsequent
stock dividends.
38
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Sussex Bancorp has a single subsidiary, Sussex County State Bank.
Sussex County State Bank has a single subsidiary, Sussex Bancorp Mortgage Corp.
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Sussex Bancorp:
We hereby consent to the incorporation by reference, into the previously filed
Registration Statements No. 333-20643 on Form S-3 and No. 333-20603 on Form S-8
of Sussex Bancorp (the "Company"), of our report dated January 15, 1999,
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1998.
/s/RADICS & CO., L.L.C.
------------------------
RADICS & CO., L.L.C.
Pine Brook, New Jersey
March 30, 1999
<PAGE>
EXHIBIT 23(b)
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
included in this Form 10-KSB 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. It should be noted that we have not audited any financial statements
of Sussex Bancorp subsequent to December 31, 1997 or performed any audit
procedures subsequent to the date of our report.
/s/ARTHUR ANDERSEN L.L.P.
--------------------------
ARTHUR ANDERSEN L.L.P.
Roseland, New Jersey
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 4,060 5,693
<INT-BEARING-DEPOSITS> 150 100
<FED-FUNDS-SOLD> 26,450 7,875
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 26,645 26,600
<INVESTMENTS-CARRYING> 5,939 2,706
<INVESTMENTS-MARKET> 0 0
<LOANS> 69,346 67,351
<ALLOWANCE> 665 685
<TOTAL-ASSETS> 137,467 114,257
<DEPOSITS> 127,714 104,882
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 509 789
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 5,635 5,412
<OTHER-SE> 3,609 3,174
<TOTAL-LIABILITIES-AND-EQUITY> 137,467 114,257
<INTEREST-LOAN> 5,601 5,517
<INTEREST-INVEST> 2,694 1,866
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 8,295 7,383
<INTEREST-DEPOSIT> 3,818 3,063
<INTEREST-EXPENSE> 3,818 3,063
<INTEREST-INCOME-NET> 4,477 4,320
<LOAN-LOSSES> 19 210
<SECURITIES-GAINS> 65 0
<EXPENSE-OTHER> 4,287 3,753
<INCOME-PRETAX> 1,040 1,040
<INCOME-PRE-EXTRAORDINARY> 1,040 1,040
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 710 708
<EPS-PRIMARY> 0.50 1.03
<EPS-DILUTED> 0.50 1.02
<YIELD-ACTUAL> 0 0
<LOANS-NON> 389 730
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 344
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 685 542
<CHARGE-OFFS> 40 68
<RECOVERIES> 1 1
<ALLOWANCE-CLOSE> 665 685
<ALLOWANCE-DOMESTIC> 665 685
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
