SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 1999
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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)
The aggregate market value of the voting stock held by non-affiliates
of the Issuer as of February 29, 2000, was $ 11,798,102. The number of shares of
the Issuer's Common Stock, no par value, outstanding as of February 29, 2000 was
1,430,073.
For the fiscal year ended December 31, 1999, the Issuer had total
revenues of $10,004,000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
10-KSB Item Document Incorporated
Item 9. Directors and Executive Proxy Statement for 2000
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. 2000.
Item 10. Executive Compensation Proxy Statement for 2000
Annual Meeting of
Shareholders to be
filed not later
than April 29,
2000.
Item 11. Security Ownership of Proxy Statement for 2000
Certain Beneficial Annual Meeting of
Owners and Management Shareholders to be filed
no later than April 29,
2000.
Item 12. Certain Relationships Proxy Statement for 2000
and Related Annual Meeting of
Transactions Shareholders to be filed
no later than April 29,
2000.
<PAGE>
PART I
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ITEM 1: Description of Business
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General
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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 seven 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; 100 Route 206, Augusta, New Jersey and 165 Route 206,
Andover, New Jersey. In addition, the Bank maintains an office for its trust and
investment division in Augusta, 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 loans are sold servicing released, although
the Company, through the Bank, may seek to service the loans it originates in
the future.
<PAGE>
Service Area
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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 seven branch
offices in Vernon, Montague, Sparta, Wantage, Newton, Andover and Augusta, 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
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<PAGE>
Company. Many large financial institutions in New York City and other parts of
New Jersey compete for the business of New Jersey residents located in he
Company's service area. Certain of theses institutions have significantly higher
lending limits than the Company and provide services to their customers which
the Company does not offer.
Management believes the Company is able to compete on a substantially
equal basis with its competitors because it provides responsive personalized
services through management's knowledge and awareness of the Company's service
area, customers and business.
Employees
- ---------
At December 31, 1999, the Company employed 71 full-time employees and
16 part-time employees. None of these employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
SUPERVISION AND REGULATION
--------------------------
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
BANK HOLDING COMPANY REGULATION
-------------------------------
General
- -------
As a bank holding company registered under the Bank Holding Company Act
of 1956, as amended, (the "BHCA"), the Company is subject to the regulation and
supervision of the FRB. The Company is required to file with the FRB annual
reports and other information regarding its business operations and those of its
subsidiaries. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the FRB determines to be so closely related to banking or
managing or controlling banks as to be properly incident thereto.
The BHCA was substantially amended in late 1999. These amendments will
start to become effective in March, 2000. See "Recent Regulatory Enactments and
Proposals." Prior to these revisions. The BHCA required, 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.
<PAGE>
Additionally, the BHCA prohibited 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.
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
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<PAGE>
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.
Recent Regulatory Enactments and Proposals. On November 12, 1999, the President
signed the Gramm-Leach- Bliley Financial Modernization Act of 1999 into law. The
Modernization Act will, among other things:
o allow bank holding companies meeting management,
capital and Community Reinvestment Act standards to
engage in a substantially broader range of nonbanking
activities than currently is permissible, including
insurance underwriting and making merchant banking
investments in commercial and financial companies;
o allow insurers and other financial services companies
to acquire banks or bank holding companies;
o remove various restrictions that currently apply to
bank holding company ownership of securities firms and
mutual fund advisory companies; and
o establish the overall regulatory structure applicable
to bank holding companies that also engage in insurance
and securities operations.
This part of the Modernization Act will become effective on March 11,
2000. The Modernization Act also modifies other current financial laws,
including laws related to financial privacy and community reinvestment. The new
financial privacy provisions will generally prohibit financial institutions,
including us, from disclosing nonpublic personal financial information to third
parties unless customers have the opportunity to "opt out" of the disclosure.
Capital Adequacy Guidelines for Bank Holding Companies
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The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk- weighted assets and off-balance sheet items.
The risk-based guidelines apply on a 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
<PAGE>
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
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<PAGE>
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-weighting.
Short term commercial letters of credit have a 20% risk-weighting and certain
short-term unconditionally cancelable commitments have a 0% risk-weighting.
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
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As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
Insurance of Deposits
- ---------------------
The Bank's deposits are insured up to a maximum of $100,000 per
depositor under the BIF. The FDIC has established a risk-based insurance premium
assessment system under which the FDIC has developed a matrix that sets the
assessment premium for a particular institution in accordance with its capital
level and overall regulatory rating by the institutions' primary federal
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 2.12 basis points of
assessed deposits.
Dividend Rights
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Under the Banking Act, a bank may declare and pay dividends only if,
after payment of the dividend, the capital stock of the bank will be unimpaired
and either the bank will have a surplus of not less than 50% of its capital
stock or the payment of the dividend will not reduce the bank's surplus.
<PAGE>
ITEM 2. Description of Property
-----------------------
The Company conducts its business through its main office located at 399 Route
23, Franklin, New Jersey, and its six branch offices. The following table set
forth certain information regarding the Company's properties as of December 31,
1999.
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<PAGE>
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, 2000
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
100 Route 206 Owned N/A
Augusta, New Jersey
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(1) The Company owns the building housing its Wantage branch. The land on which
the building is located is leased pursuant to a ground lease which runs until
December 31, 2020, and contains an option for the Company to extend the lease
for an additional 25 year term.
ITEM 3. Legal Proceedings
-----------------
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank's business. Management
does not believe that there is any pending or threatened proceeding against the
Company of the Bank which, if determined adversely, would have a material effect
on the business, financial position or results of operation of the Company or
the Bank.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted for a vote of the registrant's shareholders
during the Fourth Quarter of fiscal 1999.
PART II
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ITEM 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Commencing February 20, 1998, the Common Stock began trading on the
American Stock Exchange, under the symbol "SBB". As of December 31, 1999, the
Company had approximately 691 holders of record of the Common Stock.
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<PAGE>
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:
<TABLE>
<CAPTION>
DIVIDENDS
1999 HIGH LOW DECLARED
---- ---- --- --------
<S> <C> <C> <C>
4TH Quarter 10 3/4 8 3/4 $0.03
3rd Quarter 10 1/2 9 1/2 $0.03
2nd Quarter 12 1/4 10 1/2 $0.03
1st Quarter 12 1/4 9 7/8 $0.03
<CAPTION>
DIVIDENDS
1998 HIGH LOW DECLARED
---- ---- --- --------
<S> <C> <C> <C>
4th Quarter 10 3/4 8 11/16 $ 0.03
3rd Quarter 11 1/2 9 7/8 $ 0.07
2nd Quarter 11 1/8 9 3/4 $ 0.13
1st Quarter 12 1/2 8 3/4 $ 0.13
</TABLE>
During 1998 the Company also declared a two for one stock split.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
This section presents management's discussion and analysis of 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 eight 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. During 1999, the
Company established relationships with commercial borrowers to attain a greater
market share of commercial loans. For 2000, 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 provide customers with one-stop financial
services to retain and gain market share. The Company also intends to offer
Internet-based banking services by the close of the second quarter. 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 enhanced
trust department activity.
<PAGE>
Results of Operations
For the year ended December 31, 1999, the Company's net income was $759,000,
representing an increase of $49,000, or 7%, over the $710,000 earned in 1998.
The basic net income per share for 1999 was $0.53, compared to basic net income
per share of $0.50 in 1998. The diluted net income per share for 1999 was $0.53,
compared to diluted net income per share of $0.50 in 1998. The change in per
share earnings reflects an increase in net income offset by an increased number
of average shares outstanding during 1999, as the Company's average basic shares
outstanding increased to 1,422,130 from 1,410,535. The increase was
8
<PAGE>
attributable to issuance of new shares through the Company's dividend
reinvestment plan and exercises of stock options.
The Company's results for 1999 were affected by increases of $316,000 in net
interest income and $20,000 in non interest income and a decrease of $142,000 in
income taxes, partially offset by an increase of $271,000 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% federal tax rate),
increased by $396,000 in 1999 to $4.9 million compared to $4.5 million in 1998.
The increase in net interest income occurred as total interest income increased
by $900,000, or 10.8%, to $9.3 million, while interest expense increased
$504,000, or 13.2%, to $4.3 million. Interest income increased primarily as a
result of an increase in average earning assets of $18.4 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 6.85% for the year ended December
31, 1999, compared to 7.16% for the year ended December 31, 1998. The decrease
in rate reflects the Company's offering of lower priced loan products to gain
new originations, particularly in commercial and non-residential real estate
loans, and the repricing of the Company's investment portfolio as higher rate
securities mature, reprice and are called and the proceeds are reinvested at
lower current market rates.
Interest income on total loans increased from $5.6 million in 1998 to $6 million
in 1999, an increase of $359,000. 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 17 basis points from 8.14% in 1998 to 7.97% in 1999, while the average
balance of the loan portfolio increased by $5.9 million.
Total interest income on securities increased to $2.6 million in 1999 from $1.9
million in 1998, an increase of $777,000, or 42.0%. Average securities increased
to $47.4 million in 1999 from $31.7 million in 1998, an increase of $15.7
million, reflecting investment of new deposits in excess of loan demand,
primarily in state and local government securities and corporate bonds. The
average rate earned on securities declined to 5.59% in 1999 from 5.84% in 1998
due to lower current market rates early in 1999.
Interest income on other interest-earning assets decreased by $236, 000 in 1999
to $650,000 compared to $886,000 in 1998. The average balance of other interest
earning assets decreased to $13 million in 1999 from $16.2 million in 1998. The
average rate on other interest-earning assets decreased to 5.01% in 1999 from
5.46% in 1998. Other interest earning assets consisted primarily of FHLB stock,
federal funds sold and interest- bearing deposits.
Total interest expense increased from $3.8 million in 1998 to $4.3 million for
the year ended December 31, 1999, an increase of $504,000, or 13.2%. The
<PAGE>
increase in interest expense was attributable to increases in both the Company's
average interest-bearing deposits and the average rate paid for certain
deposits. During 1999, the Company's average interest-bearing liabilities
increased by $16.5 million, to $112.6 million for the year ended December 31,
1999 compared to $96.1 million for the year ended December 31, 1998. The
increase in
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<PAGE>
deposits occurred primarily in the Company's savings deposits. Average saving
deposits increased to $42.2 million, an increase of $11.5 million, or 37.5% from
1999 to 1998. Although the Company's average cost of interest-bearing
liabilities declined to 3.84% for the year ended December 31, 1999 from 3.97%
for the prior year, the average rate paid on savings deposits increased 42 basis
points to 3.25% in 1999 from 2.83% in 1998. This was due to the Company's
offering of a Senior Select account at a higher interest rate with a minimum
deposit of $10,000. The overall decline in the Company's cost of
interest-bearing liabilities reflects a decrease in the rate paid on time
deposits from 5.42% in 1998 to 5.13% in 1999.
The net interest margin was 3.01% in 1999, a decline from the net interest
margin of 3.19% in 1998 and reflects 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's net interest income increased through an increase in average
interest-earning assets of $18.4 million, or 15.7%.
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.
<TABLE>
<CAPTION>
Comparative Average
Balance Sheets
Twelve Months Ended December 31,
1999 1998
Interest Average Rates Interest Average 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) $ 74,786 $5,960 7.97% $ 68,842 $5,601 8.14%
Tax exempt securities 10,321 538 5.21% 3,046 182 5.98%
Taxable investment securities 37,071 2,109 5.69% 28,658 1,688 5.89%
Other (1) 12,980 650 5.01% 16,235 886 5.46%
----------------------------------------------------------------------------------
Total earning assets 135,158 9,257 6.85% 116,781 8,357 7.16%
----- ------
Non-interest earning assets 9,260 8,319
Allowance for possible
loan losses (745) (706)
--------- --------
Total Assets $ 143,673 $124,394
========= ========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Shareholders'
Equity
Interest bearing liabilities:
NOW deposits $ 14,561 $190 1.30% $ 13,496 $260 1.93%
Savings deposits 42,159 1370 3.25% 30,646 867 2.83%
Money market deposits 5,196 159 3.06% 4,590 120 2.61%
Time deposits 50,387 2,584 5.13% 47,498 2,571 5.42%
Borrowed Funds 334 19 5.69% 0 0 0.00%
----------------------------------------------------------------------------------
Total interest bearing liabilities 112,637 4,322 3.84% 96,130 3,818 3.97%
------- ----- ------ -----
Non-interest bearing liabilities:
Demand Deposits 21,239 18,912
Other liabilities 721 826
--------- ---------
Total non-interest bearing
liabilities 21,960 19,738
Shareholders' equity 9,076 8,526
Total liabilities and shareholders'
--------- ---------
equity $143,673 $124,394
========= =========
Net interest differential $4,935 $4,539
====== ======
Net Interest Margin 3.01% 3.19%
Net yield on interest-earning
assets 3.65% 3.89%
</TABLE>
(1) Includes FHLB stock, federal funds sold and interest-bearing deposits
Provision for Possible Loan Losses
The provision for possible loan losses in 1999 was $177,000 compared to a
provision of $19,000 in 1998. The increase reflects a growth in the Company's
loan portfolio of $14.7 million for the year ended December 31, 1999. The
increase reflects changes in the Company's loan portfolio, as loans secured by
residential properties have declined to 59.35% of the total loan portfolio from
70.22% of the total portfolio at December 31, 1998. During 1999, the Company
increased its commercial mortgage and construction lending. Commercial mortgages
and construction loans are generally considered to involve more risk than loans
secured by residential properties.
Other income
The Company's other income is primarily generated through service charges on
deposit accounts. Other income increased $20,000 in 1999 to $889,000 compared to
$869,000 in 1998. The Company recognized a gain of $16,000 on the sale of loans
held for sale through the Company's Sussex Bancorp Mortgage Company subsidiary.
The Company also experienced a gain of $99,000 in other income, representing
primarily an increase in fees from the sale of non-deposit products. 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 Company's 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.
<PAGE>
Other Expense
Total other expense increased from $4.3 million in 1998 to $4.6 million in 1999,
an increase of $271,000 or 6.3%. Salaries and employee benefits expense, the
largest element of other expenses, increased $239,000, or 10.8%, and furniture
and equipment expense increased $37,000 or 7%. The increase in salaries and
employee benefits reflects the customary salary increases for existing employees
and the cost of additions to staff the Company's non-interest income
initiatives, including the cost of staff for the Company's mortgage company
subsidiary and non-deposit products sales efforts, as well as increased staff to
administer the Company's growing
-11-
<PAGE>
loan portfolio.
Income Tax Expense
The Company's income tax provisions, which includes provisions for both federal
and state taxes, were $188,000, and $330,000 for the years ended December 31,
1999 and 1998, respectively. The decreased provision for income tax reflects a
decrease in income before income taxes and increased income from tax- exempt
securities.
FINANCIAL CONDITION
At December 31, 1999, the Company had total assets of $150.1 million compared to
total assets of $137.5 million at December 31, 1998. Net loans increased to
$84.0 million at December 31, 1999 from $69.3 million at December 31, 1998.
Total deposits increased to $138.5 million at December 31, 1999 from $127.7
million at December 31, 1998.
Loans
Net loans increased from $69.3 million at December 31, 1998 to $84 million at
December 31, 1999, an increase of $14.7 million, or 21.1%. The increase in the
Company's loan portfolio during 1999 occurred primarily in loans secured by
non-residential properties and construction loans. Commercial loans increased by
$69,000 to $3.8 million at December 31, 1999 from $3.7 million at December 31,
1998. Loans secured by non-residential properties increased by $8.1 million, or
70.2%, to $19.8 million at December 31, 1999 from $11.6 million at December 31,
1998. At December 31, 1999, loans secured by non-residential properties
constituted 23.3% of the Company's total loan portfolio, an increase from 16.6%
of the total loan portfolio at December 31, 1998. Loans secured by residential
properties increased by $1.2 million, or 2.4% , to $50.3 million at December 31,
1999 from $49.1 million at December 31, 1998. Construction loans increased by
$4.7 million , or 200.8%, to $7.1 million at December 31, 1999 from $2.4 million
at December 31, 1998. At December 31, 1999, constructions loans accounted for
8.35% of the total loan portfolio, an increase from the 3.36% represented by
construction loans at December 31, 1998. These increases were partially offset
by decreases in consumer loans of $121 thousand. The Company's strategy during
1999 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 1999 by an increase in the Company's
demand and savings deposits and also by a decrease in federal funds sold.
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 1999 and 1998 were 60.6% and 54.3%, respectively.
The following tables set forth certain information concerning the distribution
of the Company's loan portfolio.
-12-
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1999 1998
------------------- ---------------------
Amount Percent Amount Percent
------------------- ---------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $3,811 4.50% $3,742 5.35%
Real Estate:
Non-Residential 19,759 23.31% 11,612 16.60%
Residential 50,305 59.35% 49,128 70.22%
Construction 7,074 8.35% 2,352 3.36%
Consumer 2,295 2.71% 2,416 3.45%
Other Loans 1,519 1.79% 712 1.02%
------ ------ ------ ----
Total Loans $84,763 100.00% $69,962 100.00%
===================== ====================
</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 slight decrease in non-performing assets during 1999.
Non-accrual loans declined by $66,000 to $332,000 at December 31, 1999 from
$398,000 at December 31, 1998. In addition, at December 31, 1999, the Company
had no restructured loans.
The Company seeks to actively manage its non-performing and questionable assets.
The Company had no OREO properties at year end 1999 compared to $36,000 at
December 31, 1998. 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.
-13-
<PAGE>
The following table provides information concerning risk elements in the loan
portfolio.
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------------------
<S> <C> <C>
Non-accrual Loans $332 $398
Renegotiated loans 0 0
---- ----
Non-performing Loans $332 $398
=====================
Non-accrual loans to total loans 0.39% 0.57%
Non-performing loans to total loans 0.39% 0.57%
Non-performing assets to total assets 0.22% 0.32%
Allowance for possible loan losses
as a % of non-performing loans 252.11% 167.09%
</TABLE>
Allowance for Loan Losses
Management has established a model for calculating the adequacy of the Company's
Allowance for Loan Losses ("ALL"). Restructured loans, as well as 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 1999 was $837,000 or .99% of outstanding loans and
252.11% of nonperforming assets versus $665,000 in 1998, or .95% of outstanding
loans and 153.23% of nonperforming assets. Management recognizes the importance
of adequate reserves and their proper allocation. Due to the increase in
non-residential real estate lending and management's view of increased added
risks in the Company's loan portfolio, the ALL was increased by a provision for
loan loss of $177,000 and recoveries of $10,000, offset by charge-off's of
$15,000.
The following table provides a three year analysis of the changes in the
allowance for possible loan losses.
-14-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Beginning Balance $665,000 $685,000 $542,000
Provision for Loan Losses 177,000 19,000 210,000
Loans charged-off -15,000 -40,000 -68,000
Recoveries 10,000 1,000 1,000
-------------------------------------
Ending balance $837,000 $665,000 $685,000
====================================
</TABLE>
The following table sets forth information concerning the allocation of the
Company's ALL.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1999 1998
----------------------------- ---------------------------
% of % of
Amount All Loans Amount All Loans
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Commercial and $38,000 4.50% $37,000 5.35%
industrial
Real Estate:
Non-Residential 195,000 23.31% 107,000 16.60%
Residential 496,000 59.35% 467,000 70.22%
Construction 70,000 8.35% 23,000 3.36%
Consumer 23,000 2.71% 23,000 3.45%
Other Loans 15,000 1.79% 8,000 1.02%
------------------------------------------------------------------
Total $837,000 100.00% $665,000 100.00%
==================================================================
</TABLE>
Net charge-offs were $5,000 for 1999 compared to $39,000 in 1998. Net
charge-offs as a percent of average loans were .01% in 1999 and .06% in 1998.
Securities Portfolio
The Company maintains an investment portfolio to fund increased loan demand or
deposit withdrawals 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 government sponsored
entities, including collateralized mortgage obligations issued by such agencies
and entities, and municipal obligations.
<PAGE>
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
-15-
<PAGE>
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 risk, the need
to increase regulatory capital or other similar requirements. Management
determines the appropriate classification of securities at the time of purchase.
The following table shows the carrying value of the Company's securities
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,
1999 and 1998 the Company had no securities classified as trading securities.
-16-
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
US Treasury securities and obligations of
US Government corporations and agencies
available for sale $ 30,926 $ 25,121 $ 26,600
Corporate bonds available for sale 6,907 -- --
Mutual fund available for sale 762 831 -
Obligations of state and political subdivisions
held to Maturity 7,929 5,939 2,082
-----------------------------------------
Total Securities $ 46,524 $ 31,891 $ 28,682
========================================
</TABLE>
The Company's securities increased from $31.9 million at December 31, 1998 to
$46.5 million at December 31, 1999. The $14.6 million increase in securities at
December 31, 1999 was due to purchases of state and local government securities
and corporate bonds as cash equivalents were used to purchase investment
securities.
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 decreased by $20.9 million at December
31, 1999, to $12.0 million from $9.8 million at December 31, 1998. The decrease
was due primarily to an increase in loan demand and the Company's decision to
seek higher yields through purchasing additional investment securities.
Deposits
Total deposits increased $10.8 million from $127.7 million at year end 1998 to
$138.5 million at year- end 1999, an 8.5% increase. Demand deposits increased to
$24.4 million, an increase of $4.6 million, or 23.1%, from demand deposits of
$19.8 million at year-end 1998. Savings and interest-bearing demand deposits
increased to $68.2 million, an increase of $13.8 million, or 25.4%, from savings
and interest-bearing demand deposits of $54.4 million at year-end 1998. Time
deposits under $100,000 decreased to $36.4 million from $39.8 million for
year-end 1998, a decrease of $3.4 million. Time deposits over $100,000 decreased
to $9.6 million from $13.7 million at year-end 1998, a decrease of $4.1 million.
The increase in the overall portfolio reflects the success of the Company's
Senior Select product, a savings product targeting senior citizens within the
Company's trade area. The decrease in the Company's time deposits under a
$100,000 reflects a competitive market on time deposits. The decrease reflected
in time deposits over $100,000 is due primarily to the local municipalities'
reduction
-17-
<PAGE>
in their time deposits.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1999 1998
---------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
-------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW Deposits $ 14,561 10.90% $ 13,496 11.73%
Savings Deposits 42,159 31.57% 30,646 26.64%
Money Market Deposits 5,196 3.89% 4,590 3.99%
Time Deposits 50,387 37.73% 47,398 41.20%
Demand Deposits 21,239 15.90% 18,912 16.44%
----------------------- --------------------------
Total Deposits $133,542 100.00% $115,042 100.00%
======================= ==========================
<CAPTION>
As of December 31, 1999:
Time Deposits ($100,000 and over ) maturity:
Three months or less $7,051
Over three months through six months 961
Over six months through twelve months 1285
Over twelve months 300
------
Total $9,597
======
</TABLE>
Liquidity
Liquidity is a measure of the Company's ability to provide sufficient cash flow
for current and future financial obligations and commitments on a timely basis.
Sources of liquidity include deposits, liquidation or maturity of loans and
investments and short-term borrowings.
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 currently has available an overnight line of credit in the
amount $7.4 million. The Bank borrowed against this line of credit during the
month of December. The borrowings at year-end 1999 were $2 million.
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, 1999, the interest rate sensitivity position evident for the
periodic intervals reflects an asset sensitive position.
-18-
<PAGE>
<TABLE>
<CAPTION>
Assets:
0-3 Mos 3-12 Mos 1-5 Years 5+ Years
------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Securities(1) $2,136 $17,041 $16,309 $11,731
Interest bearing deposits in other 130 2,180 100 0
banks
Federal Funds 4,000 - - -
Commercial Loans 978 3,059 1,876 419
Home Equity Loans (variable) 3,606 - - -
Consumer Loans 1,311 3,831 16,054 4,391
Lease Receivable 63 196 - -
Mortgages 4,935 3,579 15,361 25,875
----- ----- ------ ------
Total Interest Earning Assets $17,159 $29,886 $49,700 $42,416
==============================================================
Liabilities:
Certificate of Deposit $21,370 $19,590 $4,952 $92
MMDA 8,141 - - -
Savings accounts 4,519 40,669 - -
NOW Accounts 1,486 13,371 - -
Federal Funds Borrowed 1,990 - - -
----- ----- ------ ------
Total Interest Bearing Liabilities $37,506 $73,630 $4,952 $92
=============================================================
Sensitivity Gap ($20,347) ($43,744) $44,748 $42,324
Cumulative Sensitive Gap ($20,347) ($64,091) ($19,343) $22,981
</TABLE>
(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 $9.1 million at December 31, 1999, compared to stockholders
equity of $9.2 million at December 31, 1999. Exclusive of the effect of other
comprehensive income, which consists of the unrealized holding losses and gains
on the Company's available for sale portfolio, stockholders equity increased by
$572,000, primarily reflecting the Company's earnings in excess of dividends
paid. The growth in stockholders' equity is generated primarily through earnings
retention.
-19-
<PAGE>
The Company's 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, 1999, the
Company's Tier I and combined Tier I and Tier II capital ratios were 10.41% and
11.37%, respectively. The Bank's Tier I and Tier II were 9.98% and 10.94%,
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
regulator's highest performance and operational standards maintain a minimum
leverage ratio (Tier I capital as a percent of tangible assets) of 4.0%. 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, 1999, the Company has a leverage ratio of 6.16% and the Bank has
a leverage ratio of 5.89%.
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.
<PAGE>
ITEM 7. Financial Statements
--------------------
SUSSEX BANCORP
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(With Independent Auditors' Report Thereon)
December 31, 1999
--------------------------------------------------------
INDEX
Page
----
Management Responsibility Statement 1
Independent Auditors' Report 2
Report of Independent Public Accountants 3
Consolidated Statements of Condition
as of December 31, 1999 and 1998 4
Consolidated Statements of Income for Each of the Years
in the Three-Year Period Ended December 31, 1999 5
Consolidated Statements of Changes in
Stockholders' Equity for Each of the Years
in the Three-Year Period Ended December 31, 1999 6
Consolidated Statements of Cash Flows for Each of the
Years in the Three-Year Period Ended December 31, 1999 7 - 8
Notes to Consolidated Financial Statements 9 - 31
All schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or the
notes thereto.
<PAGE>
[letterhead SUSSEX BANCORP]
MANAGEMENT RESPONSIBILITY STATEMENT
-----------------------------------
Management of Sussex Bancorp and subsidiaries is responsible for the preparation
of the consolidated financial statements and all other financial information
included in this report. The consolidated financial statements were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis. All financial information included in the report agrees with the
financial statements. In preparing the consolidated financial statements,
management makes informed estimates and judgement with considration give to
materiality, about the expected results of various events and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities, and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of internal control and the benefits derived.
Management reviews and modifies its systems of accounting and internal control
in light of changes in conditions and operations as well as in response to
recommendations from the independent certified public accountants. Management
believes the accounting and internal control systems provide reasonable
assurances that assets are safeguarded and financial information is reliable.
The Board of Directors through its Audit Committee on non-management Directors,
is responsible for determining that management fulfills its responsibilities in
the preparation of financial statements and the control of operations. The Board
appoints the independent certified public accountants. The Audit Committee meets
with management, the independent certified public accountants and internal
auditors, approves the overall scope of audit work and related fee arrangements,
and reviews audit reports and findings.
/s/Donald L. Kovach
- --------------------
Donald L. Kovach
President and Chief Executive Officer
/s/Terry H. Thompson
- ---------------------
Terry H. Thompson
Executive Vice President and Chief Operation Officer
Sussex County State Bank
/s/Candace Leatham
- -------------------
Senior Vice President and Treasurer
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
Sussex Bancorp
We have audited the accompanying consolidated statements of condition of Sussex
Bancorp (the "Corporation") and Subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years 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 audits. The consolidated financial statements of Sussex
Bancorp and subsidiaries as of December 31, 1997 and for the year 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 year ended December 31, 1997, the restatements 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
year ended December 31, 1997 for the purpose of presenting comprehensive income
upon the implementation in 1998 of Statement of Financial Accounting Standards
No. 130.
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 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 audits
provide a reasonable basis for our opinion.
In our opinion, the 1999 and 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, 1999 and
1998, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
We also audited the adjustments applied, for the year ended December 31, 1997,
to restate net income per common share and the weighted average number of common
shares outstanding and to present comprehensive income for the year ended
December 31, 1997. In our opinion, such adjustments are appropriate and have
been properly applied.
/s/RADICS & CO., LLC
--------------------
RADICS & CO., LLC
Pine Brook, New Jersey
January 28, 2000
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Sussex Bancorp:
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of Sussex Bancorp (a New Jersey corporation)
and subsidiary for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Sussex
Bancorp and subsidiary for the year ended December 31, 1997, in conformity with
generally accepted accounting principles in the United States.
/s/ARTHUR ANDERSEN LLP
----------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 15, 1998
3
<PAGE>
<TABLE>
<CAPTION>
SUSSEX BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
--------------------------------
ASSETS 1999 1998
- ------ ------------- -------------
<S> <C> <C>
Cash and due from banks ............................................ $ 5,623,000 $ 4,060,000
Interest bearing deposits in other banks ........................... 130,000 9,150,000
Federal funds sold ................................................. 4,000,000 17,450,000
------------- -------------
Cash and cash equivalents ......................... 9,753,000 30,660,000
Time deposits in other banks ....................................... 2,280,000 --
Securities available for sale, at estimated fair value ............. 38,595,000 25,952,000
Securities held to maturity; estimated fair value of
$7,737,000 in 1999 and $5,949,000 in 1998 ........................ 7,929,000 5,939,000
Loans held for sale ................................................ 772,000 354,000
Loans .............................................................. 83,997,000 69,346,000
Premises and equipment, net ........................................ 3,610,000 2,956,000
Federal Home Loan Bank of New York stock, at cost .................. 693,000 693,000
Accrued interest receivable ........................................ 937,000 549,000
Other real estate owed ............................................. -- 36,000
Intangible assets .................................................. 619,000 703,000
Other assets ....................................................... 941,000 279,000
------------- -------------
Total assets ...................................... $ 150,126,000 $ 137,467,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
- -----------
Deposits:
Non-interest-bearing demand .................................. $ 24,357,000 $ 19,793,000
Savings, club and interest-bearing demand .................... 68,187,000 54,357,000
Time ......................................................... 36,407,000 39,824,000
Time of $100,000 and over .................................... 9,597,000 13,740,000
------------- -------------
Total deposits .................................... 138,548,000 127,714,000
Federal funds purchased ............................................ 1,990,000 --
Other liabilities .................................................. 499,000 509,000
------------- -------------
Total liabilities ................................. 141,037,000 128,223,000
------------- -------------
Commitments ........................................................ -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity
- --------------------
Common stock (no par value); authorized shares 5,000,000;
issued 1,427,735 in 1999 and 1,422,260 in 1998 ............... 5,687,000 5,635,000
Retained earnings .................................................. 4,136,000 3,547,000
Accumulated other comprehensive income, net of income tax .......... (663,000) 64,000
Treasury stock, at cost; 6,836 shares in 1999 and 242 shares in 1998 (71,000) (2,000)
------------- -------------
Total stockholders' equity ........................ 9,089,000 9,244,000
------------- -------------
Total liabilities and stockholders' equity ........ $ 150,126,000 $ 137,467,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
SUSSEX BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans and fees ........................................................ $5,960,000 $5,601,000 $5,517,000
Investments securities:
Taxable ......................................................... 2,152,000 1,688,000 1,460,000
Exempt from federal income tax .................................. 353,000 120,000 40,000
Federal funds sold .................................................... 543,000 548,000 366,000
Interest bearing deposits ............................................. 107,000 338,000 --
---------- ---------- ----------
Total interest income ...................................... 9,115,000 8,295,000 7,383,000
---------- ---------- ----------
INTEREST EXPENSE:
Deposits .............................................................. 4,303,000 3,818,000 3,063,000
Federal funds purchased ............................................... 19,000 -- --
---------- ---------- ----------
Total interest expense ..................................... 4,322,000 3,818,000 3,063,000
---------- ---------- ----------
Net interest income ............................................. 4,793,000 4,477,000 4,320,000
PROVISION FOR POSSIBLE LOAN LOSSES .......................................... 177,000 19,000 210,000
---------- ---------- ----------
Net interest income after provision for possible loan losses .... 4,616,000 4,458,000 4,110,000
---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts ................................... 457,000 490,000 500,000
Gains on sales of securities available for sale ....................... 3,000 65,000 --
Gain on sale of loans held for sale ................................... 16,000 -- --
Other ................................................................. 413,000 314,000 244,000
---------- ---------- ----------
Total other income ......................................... 889,000 869,000 744,000
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits ........................................ 2,457,000 2,218,000 1,855,000
Occupancy, net ........................................................ 348,000 362,000 357,000
Furniture and equipment ............................................... 562,000 525,000 371,000
Stationary and supplies ............................................... 96,000 100,000 88,000
Advertising and promotion ............................................. 146,000 114,000 114,000
Audit and exams ....................................................... 53,000 93,000 86,000
Amortization of intangible assets ..................................... 84,000 84,000 84,000
Other ................................................................. 812,000 791,000 798,000
---------- ---------- ----------
Total other expenses ....................................... 4,558,000 4,287,000 3,753,000
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES .................................................. 947,000 1,040,000 1,101,000
INCOME TAXES ................................................................ 188,000 330,000 393,000
---------- ---------- ----------
NET INCOME .................................................................. $ 759,000 $ 710,000 $ 708,000
========== ========== ==========
Net income per common share:
Basic ................................................................. $ .53 $ .50 $ .51
========== ========== ==========
Diluted ............................................................... $ .53 $ .50 $ .51
========== ========== ==========
Weighted average number of common shares outstanding:
Basic ................................................................. 1,422,130 1,410,535 1,377,934
========== ========== ==========
Diluted ............................................................... 1,437,869 1,425,900 1,391,416
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
SUSSEX BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Number of Other
Shares Common Comprehensive Retained Comprehensive
Outstanding Stock Income Earnings Income
----------- ----- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 ...................... 688,496 $ 5,246,000 $ 2,729,000 $ (93,000)
Net income ............................... -- -- $ 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
-----------
Comprehensive income...................... $ 815,000
===========
Treasury stock purchased ................. (145) -- -- --
Stock options exercised .................. 2,000 23,000 -- --
Shares issued through dividend
reinvestment plan ..................... 8,608 143,000 -- --
Cash dividends ........................... -- -- (275,000) --
----------- ----------- ----------- -----------
Balance,
December 31, 1997 ...................... 698,959 5,412,000 3,162,000 14,000
Net income ............................... -- -- $ 710,000 710,000 --
-----------
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
-----------
Comprehensive income ..................... $ 760,000
===========
Stock options exercised .................. 4,814 55,000 -- --
Shares issued through dividend
reinvestment plan .................... 12,112 168,000 -- --
Stock split .............................. 706,133 -- -- --
Cash dividends ........................... -- -- (325,000) --
----------- ----------- ----------- -----------
Balance -
December 31, 1998 ...................... 1,422,018 5,635,000 3,547,000 64,000
Net income ............................... -- -- $ 759,000 759,000 --
-----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other comprehensive income:
Unrealized loss on
securities available
for sale, net of income taxes
of $484,000 ........................... (725,000)
Reclassification adjustment for
gains included in income, net
of income taxes of $1,000 ............. (2,000)
-----------
Other comprehensive income ............... -- -- (727,000) -- (727,000)
-----------
Comprehensive income ..................... $ 32,000
===========
Treasury stock purchased ................. (6,594) -- -- --
Stock options exercised .................. 1,000 11,000 -- --
Shares issued through dividend
reinvestment plan ..................... 4,475 41,000 -- --
Cash dividends ........................... -- -- (170,000) --
----------- ----------- ----------- -----------
Balance,
December 31, 1999 ...................... $ 1,420,899 $ 5,687,000 $ 4,136,000 $ (663,000)
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
----- ------
<S> <C> <C>
Balance,
December 31, 1996 ...................... $ -- $ 7,882,000
Net income ............................... -- 708,000
Other comprehensive income:
Unrealized gain on
securities available
for sale, net of income taxes
of $68,000 ............................ -- 107,000
Comprehensive income
Treasury stock purchased ................. (2,000) (2,000)
Stock options exercised .................. -- 23,000
Shares issued through dividend
reinvestment plan ..................... -- 143,000
Cash dividends ........................... -- (275,000)
----------- -----------
Balance,
December 31, 1997 ...................... (2,000) 8,586,000
Net income ............................... -- 710,000
Other comprehensive income:
Unrealized gain on
securities available
for sale, net of income taxes
of $60,000 ............................
Reclassification
adjustment for gains
included in income, net of
income taxes of $26,000 ..............
Other comprehensive income ............... -- 50,000
Comprehensive income .....................
Stock options exercised .................. -- 55,000
Shares issued through dividend
reinvestment plan .................... -- 168,000
Stock split .............................. -- --
Cash dividends ........................... -- (325,000)
----------- -----------
Balance -
December 31, 1998 ...................... (2,000) 9,244,000
Net income ............................... -- 759,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Other comprehensive income:
Unrealized loss on
securities available
for sale, net of income taxes
of $484,000 ...........................
Reclassification adjustment for
gains included in income, net
of income taxes of $1,000 .............
Other comprehensive income ............... -- (727,000)
Comprehensive income .....................
Treasury stock purchased ................. (69,000) (69,000)
Stock options exercised .................. -- 11,000
Shares issued through dividend
reinvestment plan ..................... -- 41,000
Cash dividends ........................... -- (170,000)
----------- -----------
Balance,
December 31, 1999 ...................... $ (71,000) $ 9,089,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SUSSEX BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 759,000 $ 710,000 $ 708,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Net amortization (accretion) of premiums, discounts and
loan origination and commitment fees and
expenses, net ....................................... 132,000 93,000 (54,000)
Depreciation and amortization ......................... 482,000 439,000 370,000
Provision for loan losses ............................. 177,000 19,000 210,000
(Gain) on sales of securities available for sale ...... (3,000) (65,000) --
Gain on trade-in of automobile ........................ (13,000) -- --
Loss (gain) on sale of real estate .................... 10,000 -- (44,000)
Gain on sale of loans held for sale ................... (16,000) -- --
Origination of loans held for sale .................... (1,278,000) (354,000) --
Proceeds of sales of loans held for sale .............. 876,000 -- --
Deferred federal income tax (benefit) ................. (91,000) (25,000) (25,000)
(Increase) decrease in accrued interest receivable .... (388,000) 69,000 (74,000)
(Increase) decrease in other assets ................... (86,000) (47,000) 430,000
(Decrease) in other liabilities ....................... (10,000) (280,000) (216,000)
------------ ------------ ------------
Net cash provided by operating activities .. 551,000 559,000 1,305,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of time deposits in other banks .................. (2,280,000) -- --
Proceeds from repayments on and maturities of
securities available for sale ............................ 4,936,000 16,296,000 4,606,000
Proceeds from sales of securities available for sale ....... 507,000 8,490,000 --
Purchases of securities available for sale ................. (19,422,000) (24,084,000) (8,931,000)
Proceeds from maturities of securities held to maturity .... 3,955,000 1,602,000 952,000
Purchases of securities held to maturity ................... (5,977,000) (5,464,000) (1,913,000)
Net increase in loans ...................................... (14,801,000) (2,041,000) (2,577,000)
Additions to premises and equipment ........................ (1,039,000) (1,024,000) (332,000)
Purchase of Federal Home Loan Bank of New York stock ....... -- (69,000) (624,000)
Capitalized costs on other real estate owned ............... (3,000) (3,000) --
Proceeds from sale of other real estate .................... 29,000 -- 439,000
------------ ------------ ------------
Net cash used in investing activities ...... (34,095,000) (6,297,000) (8,380,000)
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
SUSSEX BANCORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits .................................... $ 10,834,000 $ 22,832,000 $ 11,993,000
Net increase in federal funds purchased ..................... 1,990,000 -- --
Exercise of stock options ................................... 11,000 55,000 23,000
Payment of dividends net of reinvestment .................... (129,000) (157,000) (126,000)
Purchase of treasury stock .................................. (69,000) -- (2,000)
------------ ------------ ------------
Net cash provided by financing activities ....... 12,637,000 22,730,000 11,888,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............... (20,907,000) 16,992,000 4,813,000
Cash and cash equivalents - beginning .............................. 30,660,000 13,668,000 8,855,000
------------ ------------ ------------
Cash and cash equivalents - ending ................................. $ 9,753,000 $ 30,660,000 $ 13,668,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes (federal and state) ...................... $ 249,000 $ 630,000 $ 192,000
Interest .............................................. 4,383,000 3,816,000 3,134,000
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate ...................... $ -- $ 33,000 $ --
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
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 POLICIES
- ------------------------
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.
<PAGE>
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.
9
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------
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.
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 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
income, 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.
<PAGE>
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.
10
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Cont'd.)
- ------------------------------------
Allowance for possible loan losses
----------------------------------
The allowance for 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 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 interest income,
accrued interest receivable and principal, in that order.
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.
11
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Cont'd.)
- ----------------------------------
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.
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 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.
<PAGE>
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.
12
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Cont'd.)
- ----------------------------------
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, 2000 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 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, 1998 and 1997 have
been reclassified to conform to the current year's presentation.
13
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES AVAILABLE FOR SALE
- ----------------------------------
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------
Amortized Gross Unrealized Carrying
--------- ------------------------ --------
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,567,000 $ -- $ 117,000 $ 5,450,000
U.S. Government agencies including
mortgage-backed securities 26,288,000 -- 812,000 25,476,000
Corporate bonds 6,996,000 1,000 90,000 6,907,000
Equity securities 850,000 -- 88,000 762,000
----------- ---------- ---------- -----------
$39,701,000 $ 1,000 $1,107,000 $38,595,000
=========== ========== ========== ===========
<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
=========== ========= ========= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1999 1998
-------------------------- --------------------------
Amortized Carrying Amortized Carrying
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,508,000 $ 4,494,000 $ -- $ --
Due after one year through five years 14,845,000 14,430,000 8,589,000 8,714,000
Due after five years through ten years 4,334,000 4,059,000 1,500,000 1,493,000
Due after ten years 15,164,000 14,907,000 14,907,000 14,914,000
Equity securities 850,000 762,000 850,000 831,000
----------- ----------- ----------- -----------
$39,701,000 $38,595,000 $25,846,000 $25,952,000
=========== =========== =========== ===========
</TABLE>
The amortized cost and carrying value of securities at December 31, 1999 and
1998 are shown above by contractual maturity. Actual maturities may differ from
contractual maturities as issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
14
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES AVAILABLE FOR SALE (Cont'd)
- -------------------------------------------
The following presents details of sales of securities available for sale:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Sales proceeds $ 507,000 $8,490,000 $ --
Gross gains 3,000 65,000 --
Gross losses -- -- --
</TABLE>
Securities with a carrying value of approximately $4,134,000 and $4,333,000 at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes required by applicable laws and regulations.
4. SECURITIES HELD TO MATURITY
- --------------------------------
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------
Gross Unrealized
Amortized --------------------- Estimated
Cost Gains Losses Fair Value
----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of state and political
subdivisions $ 7,929,000 $ 1,000 $ 193,000 $7,737,000
=========== ======= ========== ==========
<CAPTION>
December 31, 1998
-------------------------------------------------
Gross Unrealized
Amortized --------------------- 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
=========== ======== ======== ==========
</TABLE>
15
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SECURITIES HELD TO MATURITY (Cont'd.)
- -------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998
----------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $2,114,000 $2,114,000 $3,957,000 $3,963,000
Due after one year through five years 3,071,000 3,000,000 1,015,000 1,024,000
Due after five years through ten years 2,744,000 2,623,000 967,000 962,000
--------- --------- ------- -------
$7,929,000 $7,737,000 $5,939,000 $5,949,000
========== ========== ========== ==========
</TABLE>
The amortized cost and carrying value of securities at December 31, 1999 and
1998 are shown above by contractual maturity. Actual maturities may differ from
contractual maturities as issuers 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, 1999, 1998 and 1997.
5. LOANS
- ----------
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Loans secured by one to four family residential properties $ 50,305,000 $ 49,128,000
Loans secured by nonresidential properties 19,759,000 11,612,000
Loans to individuals 2,295,000 2,416,000
Commercial loans 3,811,000 3,742,000
Loans secured by construction and land development 7,074,000 2,352,000
Other loans 1,519,000 712,000
------------ ------------
84,763,000 69,962,000
Less: Unearned income and net deferred loan costs, net (71,000) (49,000)
Allowance for loan losses 837,000 665,000
------------ ------------
766,000 616,000
------------ ------------
$ 83,997,000 $ 69,346,000
============ ============
</TABLE>
16
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS (Cont'd.)
- ---------------------
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, net interest income would have been approximately $13,000, $9,000 and
$32,000 higher in 1999, 1998 and 1997, respectively. Non-performing loans were
as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Nonaccrual $ 332,000 $ 398,000 $ 730,000
Renegotiated -- -- 334,000
---------- ---------- ----------
$ 332,000 $ 398,000 $1,064,000
========== ========== ==========
</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, 1999, 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,
1999
-----------
<S> <C>
Balance - beginning $ 2,075,000
Loans originated 1,240,000
Repayments (865,000)
-----------
Balance - ending $ 2,450,000
===========
</TABLE>
17
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ALLOWANCE FOR LOAN LOSSES
- ------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance - beginning $ 665,000 $ 685,000 $ 542,000
Provision for loan losses 177,000 19,000 210,000
Loans charged off (15,000) (40,000) (68,000)
Recoveries 10,000 1,000 1,000
--------- --------- ---------
Balance - ending $ 837,000 $ 665,000 $ 685,000
========= ========= =========
</TABLE>
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $ 337,000 $ 407,000
Without recorded allowances -- --
--------- ---------
Total impaired loans 337,000 407,000
Related allowance for loan losses (189,000) (121,000)
--------- ---------
Net impaired loans $ 148,000 $ 286,000
========= =========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the average recorded
investment in impaired loans totalled $449,000, $898,000 and $1,345,000,
respectively. Interest income recognized on such loans during the time each was
impaired totalled $38,000, $79,000 and $135,000, respectively.
18
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREMISES AND EQUIPMENT
- ---------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Land $ 417,000 $ 417,000
Buildings and building improvements 1,696,000 1,592,000
Leasehold improvements 139,000 136,000
Furniture, fixtures and equipment 3,049,000 2,912,000
Assets in progress 1,393,000 629,000
---------- ----------
6,694,000 5,686,000
Less accumulated depreciation and amortization 3,084,000 2,730,000
---------- ----------
$3,610,000 $2,956,000
========== ==========
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, depreciation and
amortization expenses totalled $398,000, $355,000 and $286,000, respectively.
Assets in progress primarily includes property in Frankford Township, New
Jersey, which was purchased in 1998 and is being prepared for use in the Bank's
branch network, having a carrying value of $1,196,000 and $544,000 at December
31, 1999 and 1998, respectively.
8. DEPOSITS
- -------------
Scheduled maturities of time deposits are as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
One year or less $40,960,000 $36,312,000
After one through three years 4,805,000 17,097,000
After three years 239,000 155,000
----------- -----------
$46,004,000 $53,564,000
=========== ===========
</TABLE>
At December 31, 1999 and 1998, time deposits include $4,000,000 and $9,000,000,
respectively, owned by a local municipality which mature within 30 days.
19
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
- -----------------
The components of income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current $ 279,000 $ 355,000 $ 418,000
Deferred (91,000) (25,000) (25,000)
--------- --------- ---------
Total $ 188,000 $ 330,000 $ 393,000
========= ========= =========
</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,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 334,000 $ 266,000
Deferred loan fees 20,000 27,000
Other 52,000 19,000
Unrealized loss on securities
available for sale 443,000 --
--------- ---------
849,000 312,000
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (168,000) (168,000)
Other (3,000) --
Unrealized gain on securities available for sale -- (42,000)
--------- ---------
(171,000) (210,000)
--------- ---------
Net deferred tax assets included in other assets $ 678,000 $ 102,000
========= =========
</TABLE>
20
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (Cont'd.)
- ---------------------------
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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
------------------- ------------------ ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax $ 322,000 34.0% $ 354,000 34.0% $ 374,000 34.0%
Add (deduct) effect of:
Non-taxable interest income (114,000) (12.0) (38,000) (3.7) (11,000) (1.0)
State income tax, net of
federal income tax effect (24,000) (2.5) 1,000 0.1 27,000 2.4
Other items, net 4,000 0.4 13,000 1.3 3,000 0.3
--------- ---- --------- ---- --------- ----
$ 188,000 19.9% $ 330,000 31.7% $ 393,000 35.7%
========= ==== ========= ==== ======= ====
</TABLE>
10. STOCK OPTION PLANS
- ------------------------
During 1988, the stockholders approved a nonqualified stock option plan (the
"1988 Plan"). As of December 31, 1999, there were 63,714 authorized shares of
the Corporation's common stock to be 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, 1999, no options have been granted.
During 1995, the stockholders approved a stock option plan for nonemployee
directors (the "Director Plan"). As of December 31, 1999, 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
<PAGE>
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, 1999, 28,036
options at $5.35, 3,060 options at $8.70, 3,000 options at $9.00, 4,000 options
at $10.69 and 2,500 options at $11.75 were outstanding, of which all were
exercisable and none of which have been forfeited.
21
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (Cont'd.)
- -----------------------------------
During 1995, the stockholders approved an incentive stock option plan for
executives of the Corporation (the "Executive Plan"). As of December 31, 1999,
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. The options may have a term not
longer than 10 years from the date of grant. As of December 31, 1999, 4,692
options at $8.82, 6,970 options at $9.88 and 3,560 options at $10.38 were
outstanding, of which all were exercisable and none of which have been
forfeited.
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, 1996 41,904 $ 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 46,396 5.35 - 9.00 6.47
Options granted 11,970 9.88 - 10.69 10.21
Options exercised (7,608) 5.35 - 9.00 7.27
------
Outstanding, December 31, 1998 50,758 5.35 - 10.69 7.24
Options granted 6,060 10.38 - 11.75 10.95
Options exercised (1,000) 10.69 10.69
------
Outstanding, December 31, 1999 55,818 $ 5.35 - $ 11.75 $ 7.58
======
</TABLE>
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:
22
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION PLANS (Cont'd.)
- -----------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income
As reported $ 759,000 $ 710,000 $ 708,000
Pro forma 746,000 690,000 696,000
Diluted income per share
As reported $ 0.53 $ 0.50 $ 0.51
Pro forma 0.52 0.48 0.50
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
----- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 5.35 28,036 5.5 years 28,036
8.70 3,060 6.5 years 3,060
8.82 4,692 7.0 years 4,692
9.00 3,000 7.5 years 3,000
9.88 6,970 8.0 years 6,970
10.38 3,560 9.0 years 3,560
10.69 4,000 8.5 years 4,000
11.75 2,500 9.5 years 2,500
------ ------
55,818 55,818
====== ======
</TABLE>
11. RELATED PARTY TRANSACTIONS
- --------------------------------
Certain directors of the Corporation are associated with legal, accounting, real
estate and construction businesses that rendered various services to the
Corporation. The Corporation paid these businesses $179,000, $168,000 and
$67,000 during 1999, 1998 and 1997, respectively.
23
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Commitments to extend credit $16,358 $11,453
Stanby letters of credit 6 8
</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.
24
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS (Cont'd.)
- ----------------------------
Rentals under long-term operating leases amounted to approximately $52,000,
$52,000 and $55,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, 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
------------ ------
2000 $ 47,000
2001 29,000
2002 15,000
2003 10,000
2004 10,000
Thereafter 156,000
---------
$ 267,000
=========
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.
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.
<PAGE>
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 accounting 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.
25
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. REGULATORY CAPITAL REQUIREMENTS (Cont'd.)
- -----------------------------------------------
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 and 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,
1999, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of September 30, 1998, the most recent notification from the New Jersey
Department of Banking and Insurance, 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.
<PAGE>
The Corporation's and the Bank's actual capital amounts and ratios are presented
in the following table:
<TABLE>
<CAPTION>
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Actions Provisions
--------------------- -------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
- -----------------
Total Capital
(to risk-weighted assets):
Corporation $ 9,918 11.37% $ 6,979 8.00% $ 8,724 10.00%
Bank 9,536 10.94% 6,974 8.00% 8,718 10.00%
Tier 1 Capital
(to risk-weighted assets):
Corporation 9,081 10.41% 3,490 4.00% 5,234 6.00%
Bank 8,699 9.98% 3,487 4.00% 5,231 6.00%
Tier 1 Capital
(to average total assets):
Corporation 9,081 6.16% 5,896 4.00% 7,370 5.00%
Bank 8,699 5.89% 5,906 4.00% 7,383 5.00%
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>
26
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUSSEX BANCORP (PARENT COMPANY ONLY)
- ------------------------------------------
Condensed financial statements of the Corporation (Parent Company only) follow:
<TABLE>
<CAPTION>
STATEMENTS OF CONDITION
-----------------------
December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets:
Cash and interest-bearing deposits $ 346,000 $ 457,000
Investment in subsidiaries 8,708,000 8,808,000
Other assets 82,000 22,000
---------- ----------
Total assets $9,136,000 $9,287,000
========== ==========
Liabilities:
Other liabilities 47,000 43,000
---------- ----------
Stockholders' equity 9,089,000 9,244,000
---------- ----------
Total liabilities and stockholders' equity $9,136,000 $9,287,000
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
--------------------
Year Ended December 31,
------------------------------------
1999 1998 1997
--------- --------- -------
<S> <C> <C> <C>
Dividends from subsidiary bank $ 177,000 $ 361,000 387,000
Interest income 4,000 -- --
--------- --------- -------
Total income 181,000 361,000 387,000
Other expenses 77,000 42,000 37,000
--------- --------- -------
Income before income tax expense 104,000 319,000 350,000
Income tax expense (benefit) (29,000) -- --
--------- --------- -------
Income before undistributed
earnings of subsidiaries 133,000 319,000 350,000
Equity in undistributed
earnings of subsidiaries 626,000 391,000 358,000
--------- --------- -------
Net income $ 759,000 $ 710,000 $ 708,000
========= ========= =========
</TABLE>
27
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUSSEX BANCORP (PARENT COMPANY ONLY) (Cont'd.)
- ------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
------------------------
Year Ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 759,000 $ 710,000 $ 708,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Net change in other assets and liabilities (57,000) 22,000 21,000
Equity in undistributed earnings of subsidiaries (626,000) (391,000) (358,000)
--------- --------- ---------
Net cash provided by operating activities 76,000 341,000 371,000
--------- --------- ---------
Cash flows from financing activities:
Cash dividends paid net of reinvestments (129,000) (205,000) (126,000)
Purchase of treasury stock (69,000) -- (2,000)
Exercise of stock options 11,000 55,000 23,000
--------- --------- ---------
Net cash (used in) financing activities (187,000) (150,000) (105,000)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (111,000) 191,000 266,000
Cash and cash equivalents - beginning 457,000 266,000 --
--------- --------- ---------
Cash and cash equivalents - ending $ 346,000 $ 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
<PAGE>
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, accrued interest receivable and
federal funds purchased
-----------------------------------------------------------
The carrying amounts for cash and cash equivalents, accrued interest
receivable and federal funds purchased approximate fair value.
28
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- -------------------------------------------------------------
Time deposits in other banks
----------------------------
The fair value of time deposits in other banks is estimated by
discounting future cash flows, using the current rates available for
time deposits with similar remaining maturities.
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 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.
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.
29
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- ------------------------------------------------------------
The carrying values and estimated fair values of financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1999 1998
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Financial assets Value Fair Value Value Fair Value
---------------- ----- ---------- ----- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,753 $ 9,753 $ 30,660 $ 30,660
Time deposits in other banks 2,280 2,298 - -
Securities available for sale 38,595 38,595 25,952 25,952
Securities held to maturity 7,929 7,737 5,939 5,949
Loans held for sale 772 772 354 354
Loans 83,997 79,339 69,346 68,545
Accrued interest receivable 937 937 549 549
Financial liabilities
---------------------
Deposits 138,548 138,716 127,714 128,005
Federal funds purchased 1,990 1,990 - -
Commitments
-----------
To extend credit 16,358 16,358 11,543 11,543
Standby letters of credit 6 6 8 8
</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
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.
<PAGE>
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 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.
30
<PAGE>
SUSSEX BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30 December 31,
1999 1999 1999 1999
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Total interest income $2,131 $2,264 $2,335 $2,385
Total interest expense 1,047 1,082 1,096 1,097
----- ----- ----- -----
Net interest income 1,084 1,182 1,239 1,288
----- ----- ----- -----
Provision for loan losses 33 48 48 48
Other income 296 210 184 199
Other expenses 1,107 1,186 1,153 1,112
Income taxes 48 4 33 103
----- ----- ----- -----
Net income $ 192 $ 154 $ 189 $ 224
====== ====== ====== ======
Net income per common share -
basic and diluted $ 0.13 $ 0.11 $ 0.13 $ 0.16
====== ====== ====== ======
<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>
31
The financial statements required by this item are filed herewith.
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., LLC,
<PAGE>
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
-20-
<PAGE>
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
captions "ELECTION OF DIRECTORS" and information concerning compliance with
Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE WITH
SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy Statement will
be filed with the Securities and Exchange commission no later than April 29,
2000.
The following table sets forth certain information about each executive
officer of the Company who is not also a director.
<TABLE>
<CAPTION>
Principal Occupation
Name, Age and Position Officer Since (1) During Past Five Years
---------------------- ---------------- ----------------------
<S> <C> <C>
Candace A. Leatham, 45 1984 Senior Vice President and
Senior Vice President Treasurer of the Bank
and Treasurer
</TABLE>
- -----------------------------
(1) Includes prior service as an officer of the Bank.
ITEM 10. Executive Compensation
----------------------
Information concerning executive compensation is incorporated by
reference from the Registrant definitive Proxy Statement for the Company's 1998
Annual Meeting under the captions "ANNUAL EXECUTIVE COMPENSATION AND ALL OTHER
COMPENSATION" and "COMPENSATION OF DIRECTORS". It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 29, 2000.
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, 2000.
<PAGE>
ITEM 12. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and related transactions
is included in the definitive Proxy Statement for the Company's 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, 2000.
-21-
<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
21 Subsidiaries of the Registrant
23(a) Consent of Radics & Co., LLC
23(b) Consent of Arthur Andersen LLP
27 Financial Data Schedule
- --------------
(1) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27) from the
Company's Registration Statement on form 8- B, Registration No. 1-12569.
(b) Reports on form 8-K
None.
-22-
<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 March 27, 2000
---------------- Chief Executive Officer
Donald L. Kovach
/s/Candace A. Leatham Treasurer (Principal Financial March 27, 2000
------------------ Officer and Principal
Candace A. Leatham Accounting Officer)
/s/ Irvin Ackerson Director March 27, 2000
---------------
Irvin Ackerson
/s/ William E. Kulsar Secretary and Director March 27, 2000
William E. Kulsar
/s/Joel D. Marvil Director March 27, 2000
-----------------
Joel D. Marvil
/s/Richard Scott Director March 27, 2000
----------------
Richard Scott
/s/Joseph Zitone Director March 27, 2000
---------------
Joseph Zitone
-23-
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
We hereby consent to the incorporation by reference, into the previously filed
Registration Statements No. 333-20645 on Form S-3 and No. 333-20603 on Form S-8
of Sussex Bancorp (the "Company"), of our report dated January 28, 2000,
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
/s/RADICS & CO., LLC
--------------------
RADICS & CO., LLC
Pine Brook, New Jersey
March 28, 2000
<PAGE>
Exhibit 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sussex Bancorp:
As independent public accountants, we hereby consent to the incorporation 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.
333-20645 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 LLP
----------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 5,623 4,060
<INT-BEARING-DEPOSITS> 2,410 150
<FED-FUNDS-SOLD> 4,000 26,450
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 38,595 25,952
<INVESTMENTS-CARRYING> 7,929 5,939
<INVESTMENTS-MARKET> 0 0
<LOANS> 85,606 70,362
<ALLOWANCE> 837 665
<TOTAL-ASSETS> 150,126 137,467
<DEPOSITS> 138,548 127,714
<SHORT-TERM> 1,990 0
<LIABILITIES-OTHER> 499 509
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 5,687 5,635
<OTHER-SE> 3,402 3,609
<TOTAL-LIABILITIES-AND-EQUITY> 150,126 137,467
<INTEREST-LOAN> 5,960 5,601
<INTEREST-INVEST> 2,505 1,808
<INTEREST-OTHER> 650 886
<INTEREST-TOTAL> 9,115 8,295
<INTEREST-DEPOSIT> 4,303 3,818
<INTEREST-EXPENSE> 4,322 3,818
<INTEREST-INCOME-NET> 4,793 4,477
<LOAN-LOSSES> 177 19
<SECURITIES-GAINS> 3 65
<EXPENSE-OTHER> 4,558 4,287
<INCOME-PRETAX> 947 1,040
<INCOME-PRE-EXTRAORDINARY> 947 1,040
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 759 710
<EPS-BASIC> 0.53 0.50
<EPS-DILUTED> 0.53 0.50
<YIELD-ACTUAL> 3.65 3.89
<LOANS-NON> 332 398
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 665 685
<CHARGE-OFFS> 15 40
<RECOVERIES> 10 1
<ALLOWANCE-CLOSE> 837 665
<ALLOWANCE-DOMESTIC> 837 665
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
