-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HBl0ytxH7dEhrTKyUjGCWoAZkGxYFL3Vi57NaMKvRDo26ghxhjkFvMBTtoccYntv Pq8NtoskOIbHz9YM91G7NQ== 0000914317-01-000228.txt : 20010329 0000914317-01-000228.hdr.sgml : 20010329 ACCESSION NUMBER: 0000914317-01-000228 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSSEX BANCORP CENTRAL INDEX KEY: 0001028954 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223475473 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-12569 FILM NUMBER: 1581285 BUSINESS ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 BUSINESS PHONE: 9738272914 MAIL ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 10KSB 1 0001.txt 10KSB FOR SUSSEX BANCORP SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------- FORM 10-KSB (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2000 ----------------- OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission file number 0-29030 ------- SUSSEX BANCORP ----------------------------------------------------------- (Name of small business issuer as specified in its charter) New Jersey 22-3475473 --------------------------------- ----------------------- (State of other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 399 Route 23, Franklin, New Jersey 07416 (973) 827-2914 - ---------------------------------------- ---------- -------------------------- (Address of principal executive offices) (Zip Code) (Issuer's Telephone Number Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, no par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Issuer: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ( ) The aggregate market value of the voting stock held by non-affiliates of the Issuer as of February28, 2001, was $ 12,708,460. The number of shares of the Issuer's Common Stock, no par value, outstanding as of February 28, 2001 was 1,643,925. For the fiscal year ended December 31, 2000, the Issuer had total revenues of $ 11,228,000. DOCUMENTS INCORPORATED BY REFERENCE 10-KSB Item Document Incorporated ----------- --------------------- Item 9. Directors and Executive Proxy Statement for 2001 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. 2001. Item 10. Executive Compensation Proxy Statement for 2001 Annual Meeting of Shareholders to be filed not later than April 29, 2001. Item 11. Security Ownership of Proxy Statement for 2001 Certain Beneficial Annual Meeting of Owners and Management Shareholders to be filed no later than April 29, 2001. Item 12. Certain Relationships Proxy Statement for 2001 and Related Annual Meeting of Transactions Shareholders to be filed no later than April 29, 2001. 2 PART I ------ ITEM 1: Description of Business ----------------------- General - ------- Sussex Bancorp (the "Company" or "Registrant") is a one-bank holding company incorporated under the laws of the State of New Jersey in January, 1996 to serve as a holding company for the Sussex County State Bank (the "Bank"). The company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank (the "Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as amended, (the "Banking Act"), and pursuant to approval of the shareholders of the Bank, the Company acquired the Bank and became its holding company on November 20, 1996. As part of the Acquisition, shareholders of the Bank received one share of common stock, no par value ("Common Stock") of the Company for each outstanding share of the common stock of the Bank, $2.50 per share par value ("Bank Common Stock"). The only significant asset of the Company is its investment in the Bank. The Company's main office is located at 399 Route 23, Franklin, Sussex County, New Jersey 07416. The Bank is a commercial bank formed under the laws of the State of New Jersey in 1975. The Bank operates from its main office at 399 Route 23, Franklin, New Jersey 07416, and its 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. The Bank anticipates relocating its Sparta location to more spacious and modern facilities, located at 33 Main Street, Sparta, New Jersey, during the first quarter of 2001. 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. Service Area - ------------ The Company's service area primarily consists of the Sussex County, New Jersey market, although the Company makes loans throughout New Jersey. The Company operates its main office in Franklin, New Jersey and 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 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. 3 Employees - --------- At December 31, 2000, the Company employed 74 full-time employees and 21 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), we are subject to the regulation and supervision of the Federal Reserve Bank (FRB). We are required to file with the FRB annual reports and other information regarding our business operations and those of our subsidiaries. The BHCA requires, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or control or more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such bank's voting shares) or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions or mergers. In addition, the BHCA was amended through the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "GLBA"). Under the terms of the GLBA, bank holding companies whose subsidiary banks meet certain capital, management and Community Reinvestment Act standards are permitted to engage in a substantially broader range of non-banking activities than is permissible for bank holding companies under the BHCA. These activities include certain insurance, securities and merchant banking activities. In addition, the GLBA amendments to the BHCA remove the requirement for advance regulatory approval for a variety of activities and acquisitions by financial holding companies. As our business is currently limited to banking activities, we have not elected to become a financial holding company. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default. Under a policy of the FRB with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. 4 Capital Adequacy Guidelines for Bank Holding Companies - ------------------------------------------------------ The FRB has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $150 million or more The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be "Tier 1", consisting of common stockholders' equity and certain preferred stock, less certain goodwill items and other intangible assets. The remainder, "Tier II Capital", may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations' capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FRB (determined on a case-by-case basis or as a matter of policy after formal rule-making). Bank holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property which carry a 50% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes including general guarantees and standby letters of credit backing financial obligations are given 100% risk-weighing. Transaction related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% risk-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 - --------------- 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 1.3 basis points of assessed deposits. During the early 1990's, the Bank acquired certain Savings Asssocition Insurance Fund ("SAIF") insured depostis from the Resolution Trust Corporation. The Bank pays FICO asessments on these deposits at the higher SAIF rate. In 2000, the assesment on these SAIF deposits totalled $ 27,590. 5 Dividend Rights - --------------- Under the Banking Act, a bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank's surplus. ITEM 2. Description of Property ----------------------- The Company conducts its business through its main office located at 399 Route 23, Franklin, New Jersey, and its six branch offices. The following table set forth certain information regarding the Company's properties as of December 31, 2000.
- --------------------------- ----------------------------- ---------------------------- DATE OF LOCATION LEASED OR OWNED LEASE EXPIRATION - --------------------------- ----------------------------- ---------------------------- 399 Route 23 Owned N/A Franklin, New Jersey - --------------------------- ----------------------------- ---------------------------- 7 Church Street Owned N/A Vernon, New Jersey - --------------------------- ----------------------------- ---------------------------- 266 Clove Road Leased April, 2002 Montague, New Jersey - --------------------------- ----------------------------- ---------------------------- 172 Woodport Road Leased March 31, 2001 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 - --------------------------- ----------------------------- ---------------------------- 33 Main Street Owned N/A Sparta, New Jersey - --------------------------- ----------------------------- ----------------------------
(1) The Company owns the building housing its Wantage branch. The land on which the building is located is leased pursuant to a ground lease which runs until December 31, 2020, and contains an option for the Company to extend the lease for an additional 25 year term. ITEM 3. Legal Proceedings ----------------- The Company and the Bank are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank's business. Management does not believe that there is any pending or threatened proceeding against the Company of the Bank which, if determined adversely, would have a material effect on the business, financial position or results of operation of the Company or the Bank. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matters were submitted for a vote of the registrant's shareholders during the Fourth Quarter of fiscal 2000. PART II ITEM 5. Market for Common Equity and Related Stockholder Matters -------------------------------------------------------- The Common Stock trades on the American Stock Exchange, under the symbol "SBB". As of December 31, 2000, the Company had approximately 692 holders of record of the Common Stock. The following table shows the high and low closing price, by quarter, for the common stock, as well as dividends declared, since the common stock began trading on the American Stock Exchange: 6
- ------------------------ --------------------- ------------------------ ---------------- DIVIDENDS 2000 HIGH LOW DECLARED ---- ---- --- --------- 4th Quarter $9 1/2 $8 1/2 $ .07 - ------------------------ --------------------- ------------------------ ---------------- 3rd Quarter 8 1/2 7 3/4 .06 - ------------------------ --------------------- ------------------------ ---------------- 2nd Quarter 8 3/8 7 1/4 - - ------------------------ --------------------- ------------------------ ---------------- 1st Quarter 8 5/8 8 1/8 .06 - ------------------------ --------------------- ------------------------ ---------------- - ------------------------ --------------------- ------------------------ ---------------- DIVIDENDS 1999 HIGH LOW DECLARED ---- ---- --- --------- 4th Quarter $ 9 7/8 $9.00 $.03 - ------------------------ --------------------- ------------------------ ---------------- 3rd Quarter 9 3/4 9 1/4 .03 - ------------------------ --------------------- ------------------------ ---------------- 2nd Quarter 10 3/4 10 1/4 .03 - ------------------------ --------------------- ------------------------ ---------------- 1st Quarter 10 3/4 9 3/4 .03 - ------------------------ --------------------- ------------------------ ----------------
7 ITEM 6. Management's Discussion and Analysis or Plan of Operation --------------------------------------------------------- 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 markets surrounding the Company's branch locations. Although traditionally dependent on 1-4 family lending, during 2000, the Company continued to establish relationships with commercial borrowers to attain a greater market share of commercial loans and enhance the Company's asset yields. For 2001, management's goals for the Company include (1) further enhancing non-interest income by focusing on fee producing lines of business, such as the Sussex Bancorp Mortgage Company's by offering of fixed rate mortgages for resale into the secondary market, (2) continuing to emphasize the expansion of product base to provide customers with all their financial needs, (3) retaining and increasing market share. The Company also intends to offer Internet-based banking services by the close of the first quarter. The Company will seek to increase non-interest income through securities brokerage services offered on a joint venture basis, through enhanced trust department activity and by expanding product base by offering other financial service products (such as expanded insurance offerings). In order to augment the Company's capital base to support management's initiatives, the Company agreed on October 23, 2000 to sell 9.9% of the Company's outstanding stock to Lakeland Bancorp, a New Jersey based bank holding company, at a price of $8.50 per share. The transaction closed on January 17, 2001, with Lakeland Bancorp purchasing 139,906 shares for approximately $1.1 million. Results of Operations For the year ended December 31, 2000, the Company's net income was $767,000, compared to the $759,000 earned in 1999. The basic net income per share for 1999 and 2000 was $0.51. The diluted net income per share for 2000 was $0.51, compared to diluted net income per share of $0.50 in 1999. The Company's average basic shares outstanding increased to 1,494,671 for 2000 from 1,493,237 for 1999. The slight increase was attributable to the issuance of new shares through the Company's dividend reinvestment plan and exercises of stock options, offset by the purchases of Treasury stock. The Company's results for 2000 were largely affected by an increase of $759,000 in net interest income. Offsetting this increase were increases of $52,000 in the provision for possible loan losses, $595,000 in non interest expenses and $54,000 in income taxes and a $50,000 decrease in non interest income, which resulted in an $8,000 increase in net income for 2000. 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 $736,000 in 2000 to $5.6 million compared to $4.9 million in 1999. The increase in net interest income occurred as total interest income increased by $1,251,000, or 13.6%, to $10.5 million, while interest expense increased $515,000, or 11.9%, to $4.8 million. Interest income increased as a result of an increase in average earning assets of $7.7 million. The increase in volume was complimented by an increase in rate as the Company's average yield on interest earning assets increased to 7.33% for the year ended December 31, 2000, compared to 6.83% for the year ended December 31, 1999. The increase in rate reflects the Company's efforts to shift its interest earning assets from lower yielding securities and federal funds to higher yielding loans. The average balance of loans increased $18.7 million as securities and other investments decreased $11.0 million. Interest income on total loans increased from $6.0 million in 1999 to $7.6 million in 2000, an increase of $1.6 million. As discussed above, this increase was primarily the result of an increase in the volume of the loan portfolio and higher average market rates during 2000. The average yield on loans increased 11 basis points from 7.97% in 1999 to 8.08% in 2000, while the average balance of the loan portfolio increased by $18.7 million. Total interest income on securities decreased to $2.5 million in 2000 from $2.6 million in 1999. The average balance of securities decreased to $42.8 million in 2000 from $46.6 million in 1999, a decrease of $3.8 million, while the average yield on securities increased to 5.89% in 2000 from 5.51% in 1999. Interest income on other interest-earning assets, which consist primarily of federal funds sold and interest-bearing deposits, decreased by $298,000 in 2000 to 8 $403,000 compared to $701,000 in 1999. The average balance of other interest earning assets decreased to $6.6 million in 2000 from $13.8 million in 1999, a decrease of $7.2 million, or 52.2%. The average rate on other interest-earning assets increased to 6.13% in 2000 from 5.08% in 1999, as a result of higher short-term market interest rates. These decreases in average balances reflect the Company's objective of focusing on loan origination and shifting its interest earning assets from investments to loans. Total interest expense increased from $4.3 million in 1999 to $4.8 million for the year ended December 31, 2000, an increase of $515,000, or 11.9%. The increase in interest expense was attributable to increases in both the Company's average interest-bearing liabilities and the average rate paid on those liabilities. During 2000, the Company's average interest-bearing liabilities increased by $6 million, to $118.7 million for the year ended December 31, 2000 compared to $112.6 million for the year ended December 31, 1999. The increase primarily occurred in the Company's savings deposits and borrowed funds. Average saving deposits increased to $45.9 million in 2000, an increase of $3.7 million from $42.2 million in 1999. Borrowed funds increased $3.9 million from $334,000 in 1999 to $4.3 million in 2000. The Company's average cost of interest-bearing deposits increased to 3.99% for the year ended December 31, 2000 from 3.83% for the prior year. The average rate paid on borrowed funds increased 82 basis points to 6.51% in 2000 from 5.69% in 1999. This was due to the Company's need to borrow funds to meet loan demand. Overall, the Company's cost of interest-bearing liabilities increased to 4.08% in 2000 from 3.84% in 1999. Despite the Company's need to borrow funds, its net interest margin was 3.25% in 2000, an increase from the net interest margin of 2.99% in 1999. The Company increased its net yield on interest earning assets to 3.95% in 2000 from 3.63% in 1999 as management continued its strategy of increasing its loan portfolio. 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. 9 Comparative Average Balance Sheets Twelve Months Ended December 31,
2000 1999 Interest Average Rates Interest Average Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ------- ------- ---- ------- ------- ---- (Dollars in Thousands) Assets Interest Earning assets: Taxable loans (net of unearned income) $ 93,516 $ 7,553 8.08% $ 74,786 $ 5,960 7.97% Tax exempt securities 7,698 398 5.17% 10,321 506 4.90% Taxable investment securities 35,101 2,122 6.05% 36,244 2,058 5.68% Other (1) 6,573 403 6.13% 13,807 701 5.08% --------- --------- ---- --------- --------- ---- Total earning assets 142,888 10,476 7.33% 135,158 9,225 6.83% --------- --------- Non-interest earning assets 10,650 9,280 Allowance for possible loan losses (915) (745) --------- --------- Total Assets $ 152,623 $ 143,693 ========= ========= Liabilities and Shareholders' Equity Interest bearing liabilities: NOW deposits $ 14,261 $ 181 1.27% $ 14,561 $ 190 1.30% Savings deposits 45,853 1,589 3.47% 42,159 1,370 3.25% Money market deposits 6,629 261 3.94% 5,196 159 3.06% Time deposits 47,656 2,529 5.31% 50,387 2,584 5.13% --------- --------- ---- --------- --------- ---- Total interest bearing deposits: 114,399 4,560 3.99% 112,303 4,303 3.83% Borrowed Funds 4,256 277 6.51% 334 19 5.69% --------- --------- ---- --------- --------- ---- Total interest bearing liabilities 118,655 4,837 4.08% 112,637 4,322 3.84% --------- --------- ---- --------- --------- ---- Non-interest bearing liabilities: Demand deposits 24,014 21,239 Other liabilities 628 721 --------- --------- Total non-interest bearing liabilities 24,642 21,960 --------- --------- Shareholders' equity 9,326 9,096 Total liabilities and shareholders' --------- --------- equity $ 152,623 $ 143,693 ========= ========= Net interest differential $ 5,637 $ 4,903 ========= ========= Net Interest Margin 3.25% 2.99% Net yield on interest-earning assets 3.95% 3.63%
(1) Includes federal funds sold, FHLB stock, time deposits and interest-bearing deposits. Provision for Possible Loan Losses The provision for possible loan losses in 2000 was $229,000 compared to a provision of $177,000 in 1999. The increase reflects a growth in the Company's loan portfolio of $16.3 million for the year ended December 31, 2000. The Company increased its commercial mortgage and construction lending in 2000. These loans are generally considered to involve more risk than loans secured by residential properties. 10 Other income The Company's other income is primarily generated through service charges on deposit accounts, with gain on sales of loans, loan commission income and securities sales also contributing to other income. Other income decreased $50,000 in 2000 to $839,000 compared to $889,000 in 1999. While service charges on deposit accounts remained relatively unchanged from 1999 to 2000, all other income declined. The Company recognized a gain of $3,000 on the sale of loans held for sale through the Company's Sussex Mortgage Company subsidiary compared to a $16,000 gain on the sale of loans in 1999. The Company also experienced a loss of $14,000 in the sale of securities available for sale in 2000 as compared to a $3,000 gain in 1999. Other income also decreased $10,000 from 1999 to 2000 due to a decrease in commission income earned by the Company's Sussex Mortgage Company. Other Expense Total other expense increased from $4.6 million in 1999 to $5.2 million in 2000, an increase of $595,000 or 13.1%. Salaries and employee benefits expense, the largest element of other expenses, increased $268,000, or 10.9%, occupancy expense increased $104 thousand or 29.9% and furniture and equipment expense increased $55,000 or 9.8%. The Company spent $72,000 more in advertising and promotion expense in 2000 over 1999. These increases in non-interest expense are due to the additional costs associated with operating and promoting the Company's new and renovated locations, plus the expansion of the Company's loan department. Income Tax Expense The Company's income tax provision, which includes provision for both federal and state taxes, were $242,000 and $188,000 for the years ended December 31, 2000 and 1999, respectively. The increased provision for income tax reflects an increase in income before income taxes and a decrease in income from tax-exempt securities. FINANCIAL CONDITION At December 31, 2000, the Company had total assets of $161.6 million compared to total assets of $150.1 million at December 31, 1999. Net loans increased to $100.2 million at December 31, 2000 from $84 million at December 31, 1999. Total deposits increased to $140.9 million at December 31, 2000 from $138.5 million at December 31, 1999. Loans Net loans increased from $84 million at December 31, 1999 to $100.2 million at December 31, 2000, an increase of $16.2 million, or 19.3%. The increase in the Company's loan portfolio during 2000 occurred primarily in loans secured by real estate, both residential and non-residential properties. Residential loans increased by $4.8 million to $55.1 million at December 31, 2000 from $50.3 million at December 31, 1999. Loans secured by non-residential properties increased by $7.7 million, or 39.3%, to $27.5 million at December 31, 2000 from $19.8 million at December 31, 1999. At December 31, 2000, loans secured by non-residential properties constituted 27.23% of the Company's total loan portfolio, an increase from 23.31% of the total loan portfolio at December 31, 1999, while loans secured by residential properties declined to 54.54% of the portfolio at December 31, 2000 from 59.34% of the portfolio at December 31, 1999. Construction loans increased by $1.9 million, or 26.7%, to $9 million at December 31, 2000 from $7.1 million at December 31, 1999. Overall, real estate related loans accounted for 90.6% of the loan portfolio at December 31, 2000, as compared to 91.0% at December 31, 1999. Commercial and industrial loans increased by $1.2 million, or 30.4%, to $5 million at December 31, 2000 from $3.8 million at December 31, 1999. At December 31, 2000, consumer loans accounted for 2.75% of the total loan portfolio, an increase from the 2.71% represented by consumer loans at December 31, 1999. Other loans increased $199 thousand. The Company's strategy during 2000 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 2000 by a decrease in the Company's securities, an increase in demand and savings deposits and by long term FHLB advances. 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 2000 and 1999 were 71.1% and 60.6%, respectively. 11 The following tables set forth certain information concerning the distribution of the Company's loan portfolio.
December 31, --------------------------------------------------- 2000 1999 Amount Percent Amount Percent -------------------- ------------------- (Dollars In Thousands) Commercial and industrial $4,968 4.92% $3,811 4.50% Real Estate: Non-Residential 27,529 27.23% 19,759 23.31% Residential 55,138 54.54% 50,305 59.34% Construction 8,960 8.86% 7,074 8.35% Consumer 2,780 2.75% 2,295 2.71% Other Loans 1,718 1.70% 1,519 1.79% ------ ----- ------ ----- Total Loans $101,093 100.00% $84,763 100.00% ==================== ====================
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. 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. The Company experienced an increase in non-performing assets during 2000. Non-accrual loans increased by $220,000 to $552,000 at December 31, 2000 from $332,000 at December 31, 1999. In addition, at December 31, 2000, the Company had no restructured loans and no other real estate owned properties. The following table provides information concerning risk elements in the loan portfolio. December 31, ------------------------ 2000 1999 ------------------------ Non-accrual Loans $552 $332 Renegotiated loans 0 0 Non-performing Loans $552 $332 Non-accrual loans to total loans 0.55% 0.39% Non-performing loans to total loans 0.55% 0.39% Non-performing assets to total assets 0.34% 0.22% Allowance for possible loan losses as a % of non-performing loans 176.27% 252.11% Allowance for Loan Losses Management has established a model for calculating the adequacy of the Company's Allowance for Possible 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 and with groups assigned a general reserve amount. 12 The ALL at year-end of 2000 was $973,000 or .96% of outstanding loans and 176.27% of nonperforming assets versus $837,000 in 1999, or .99% of outstanding loans and 252.11% 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 $229,000 and recoveries of $11,000, offset by charge-offs of $104,000. The following table provides a three year analysis of the changes in the allowance for possible loan losses. Year Ended December 31, 2000 1999 1998 ---------------------------------------------------------------------- Beginning Balance $837,000 $665,000 $685,000 Provision for Loan Losses 229,000 177,000 19,000 Loans charged-off -104,000 -15,000 -40,000 Recoveries 11,000 10,000 1,000 Ending balance $973,000 $837,000 $665,000 The following table sets forth information concerning the allocation of the Company's ALL.
December 31, ------------------------------------------------------- 2000 1999 ------------------------------------------------------- % of % of Amount All Loans Amount All Loans ------ --------- -------- --------- Commercial and industrial $154,000 4.92% $117,000 4.50% Real Estate: Non-Residential 428,000 27.23% 265,000 23.31% Residential 206,000 54.54% 306,000 59.35% Construction 119,000 8.86% 129,000 8.35% Consumer 45,000 2.75% 20,000 2.71% Other Loans 21,000 1.70% - 1.79% -------------------------------------------------------------------------------------- Total $973,000 100.00% $837,000 100.00% ======================================================================================
Net charge-offs were $93,000 for 2000 compared to $5,000 in 1999. Net charge-offs as a percent of average loans were .10% in 2000 and .01% in 1999. 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. Securities are classified as securities held to maturity based on management's intent and the Company's ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities, which are carried at market value. Realized gains and losses and gains and losses from marking the portfolio to market value are included in trading revenue. Securities not classified as securities held to maturity or trading securities are classified as securities available for sale, and are stated at fair value. Unrealized gains and losses on securities available for sale are excluded from results of operations, and are reported as a separate component of stockholders' equity, net of taxes. Securities classified as available for sale include securities that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar requirements. Management determines the appropriate classification of securities at the time of purchase. 13 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, 2000 and 1999, the Company had no securities classified as trading securities.
December 31, -------------------------------------- 2000 1999 1998 -------------------------------------- US Treasury securities and obligations of US Government corporations and agencies Available for sale $ 28,913 $ 30,926 $ 25,121 Corporate bonds available for sale 3,469 6,907 - Equity securities available for sale 804 762 831 Obligations of state and political subdivisions held to Maturity 6,431 7,929 5,939 -------------------------------------- Total Securities $ 39,617 $ 46,524 $ 31,891 ======================================
The Company's securities decreased from $46.5 million at December 31, 1999 to $39.6 million at December 31, 2000. The $6.9 million decrease in securities at December 31, 2000 was due to management's decision to fund increases in loan demand through maturing 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 increased by $3.1 million for the year ended December 31, 2000, to $12.9 million from $9.8 million at December 31, 1999. The increase was due primarily to a $4 million increase in federal funds sold to $8 million on December 31, 2000 from $4 million as of December 31, 1999. Deposits Total deposits increased $2.3 million from $138.6 million at year end 1999 to $140.9 million at year-end 2000, a 1.7% increase. Demand deposits increased to $24.5 million, an increase of 101 thousand, or .4%, from demand deposits of $24.4 million at year-end 1999. Savings deposits decreased to $63.7 million, a decrease of $4.5 million, or 6.6%, from savings deposits of $68.2 million at year-end 1999. Time deposits under $100,000 increased to $42.7 million from $36.4 million for year-end 1999, an increase of $6.3 million. Time deposits over $100,000 increased to $10 million from $9.6 million at year-end 1999, an increase of $387 thousand. The increase in the portfolio reflects the Company's desire to attract time deposits in a competitive market.
Year Ended December 31, ---------------------------------------------------- 2000 1999 ---------------------------------------------------- Average Percent Average Percent Balance of Total Balance of Total NOW Deposits $14,261 10.30% $14,561 10.90% Savings Deposits 45,853 33.13% 42,159 31.57% Money Market Deposits 6,629 4.79% 5,196 3.89% Time Deposits 47,656 34.43% 50,387 37.73% Demand Deposits 24,014 17.35% 21,239 15.90% Total Deposits $138,413 100.00% $133,542 100.00%
14 As of December 31, 2000:
Time Deposits ($100,000 and over ) maturity: Three months or less $6,201 Over three months through six months 1,156 Over six months through twelve months 1,249 Over twelve months 1,378 ------ Total $9,984 ======
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 primarily with deposit growth. In addition, the Bank is a member of the Federal Home Loan Bank of New York and has the ability to borrow $23.6 million against its one to four family mortgages as collateral for long term advances. The Bank also has available an overnight line of credit in the amount of $7.4 million. In December of 2000 the Company entered into three long term FHLB advances totaling $10 million. The three borrowings, which have an average interest rate of 4.96%, mature on December 21, 2010, but are callable beginning in December 2001, 2002 and 2002, respectively. At year-end 1999 overnight credit borrowings 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, 2000, the interest rate sensitivity position evident for the periodic intervals reflects an asset sensitive position.
Assets: 0-3 Mos 3-12 Mos 1-5 Years 5+ Years ------- -------- --------- -------- (dollars in thousands) Securities (1) $5,641 $8,467 $15,596 $10,606 Interest bearing deposits in other banks 55 - 100 - Federal Funds 8,030 - - - Loans 10,719 13,380 45,070 32,221 Total Interest Earning Assets $24,445 $21,847 $60,766 $42,827 Liabilities: Certificate of Deposit $18,231 $23,422 $10,571 $474 MMDA 5,683 - - - Savings accounts 22,114 21,971 - - NOW Accounts 1,394 12,543 - - FHLB Advances - 3,000 7,000 - Total Interest Bearing Liabilities $47,422 $60,936 $17,571 $474 Sensitivity Gap ($22,977) ($39,089) $43,195 $42,353 Cumulative Sensitive Gap ($22,977) ($62,066) ($18,871) $23,482
- --------- (1) Includes $693,000 in Federal Home Loan Bank of New York stock, included in the 5+ years category. 15 Capital Resources Stockholders' equity inclusive of accumulated other comprehensive income, net of income taxes, increased $1.0 million to $10.1 million at December 31, 2000 from $9.1 million at December 31, 1999. The growth in stockholders' equity during 2000 was primarily generated through net income of $767,000 and unrealized net gains on securities available for sale of $483,000, partially offset by cash dividends to stockholders of $282,000. 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, 2000, the Company's Tier I and combined Tier I and Tier II capital ratios were 9.62% and 10.58%, respectively. The Bank's Tier I and Tier II were 9.27% and 10.23%, 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, 2000, the Company has a leverage ratio of 6.21% and the Bank has a leverage ratio of 5.98%. In October 2000, the Company agreed to sell 9.9% of its outstanding stock to Lakeland Bancorp, a New Jersey based bank holding company, at a price of $8.50 per share. The transaction closed on January 17, 2001, with Lakeland purchasing 139,906 shares for approximately $1.1 million. 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. 16 ITEM 7. Financial Statements -------------------- SUSSEX BANCORP AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (With Independent Auditors' Report Thereon) December 31, 2000 - -------------------------------------------------------------------------------- Management Responsibility Statement Independent Auditors' Report Consolidated Statements of Condition as of December 31, 2000 and 1999 Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended December 31, 2000 Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the Three-Year Period Ended December 31, 2000 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 2000 Notes to Consolidated Financial Statements [LETTERHEAD - SUSSEX BANCORP] January 19, 2001 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 consideration given 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 standard 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 assurances that assets are safeguarded and financial information is reliable. The Board of Directors through its Audit Committee of 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 COO /s/ Candace Leatham - -------------------- Candace Leatham Senior Vice President and Treasurer [Radics & Co., LLC letterhead] 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, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. 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. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to in the second preceding paragraph present fairly, in all material respects, the financial position of Sussex Bancorp and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with generally accepted accounting principles. /s/ Radics & Co., LLC January 19, 2001 SUSSEX BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION ------------------------------------
--------------------------------- 2000 1999 --------------------------------- ASSETS - ------ Cash and due from banks $ 4,835,000 $ 5,623,000 Interest bearing deposits in other banks 55,000 130,000 Federal funds sold 8,030,000 4,000,000 ------------- ------------- Cash and cash equivalents 12,920,000 9,753,000 Time deposits in other banks 100,000 2,280,000 Securities available for sale 33,186,000 38,595,000 Securities held to maturity; estimated fair value of $6,393,000 in 2000 and $7,737,000 in 1999 6,431,000 7,929,000 Loans held for sale 297,000 772,000 Loans 100,193,000 83,997,000 Premises and equipment, net 4,516,000 3,610,000 Federal Home Loan Bank of New York stock, at cost 693,000 693,000 Accrued interest receivable 981,000 937,000 Intangible assets 535,000 619,000 Other assets 1,777,000 941,000 ------------- ------------- Total assets $ 161,629,000 $ 150,126,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits: Non-interest-bearing demand $ 24,458,000 $ 24,357,000 Savings, club and interest-bearing demand 63,705,000 68,187,000 Time of less than $100,000 42,714,000 36,407,000 Time of $100,000 and over 9,984,000 9,597,000 ------------- ------------- Total deposits 140,861,000 138,548,000 Federal funds purchased -- 1,990,000 Long-term debt 10,000,000 -- Other liabilities 658,000 499,000 ------------- ------------- Total liabilities 151,519,000 141,037,000 ------------- ------------- Commitments and contingencies -- -- Stockholders' Equity Common stock (no par value); authorized shares 5,000,000; issued 1,511,567 in 2000 and 1,427,735 in 1999 6,385,000 5,687,000 Retained earnings 4,027,000 4,136,000 Accumulated other comprehensive income, net of income tax (180,000) (663,000) Treasury stock, at cost; 13,216 shares in 2000 and 6,836 shares in 1999 (122,000) (71,000) ------------- ------------- Total stockholders' equity 10,110,000 9,089,000 ------------- ------------- Total liabilities and stockholders' equity $ 161,629,000 $ 150,126,000 ============= =============
See accompanying notes to consolidated financial statements. SUSSEX BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 ------------- ------------- ------------ INTEREST INCOME: Loans and fees $ 7,553,000 $ 5,960,000 $ 5,601,000 Investments securities: Taxable 2,169,000 2,152,000 1,688,000 Exempt from federal income tax 312,000 353,000 120,000 Federal funds sold 280,000 543,000 548,000 Interest bearing deposits 75,000 107,000 338,000 ------------ ------------ ------------ Total interest income 10,389,000 9,115,000 8,295,000 ------------ ------------ ------------ INTEREST EXPENSE: Deposits 4,560,000 4,303,000 3,818,000 Borrowed money 277,000 19,000 -- ------------ ------------ ------------ Total interest expense 4,837,000 4,322,000 3,818,000 ------------ ------------ ------------ Net interest income 5,552,000 4,793,000 4,477,000 PROVISION FOR POSSIBLE LOAN LOSSES 229,000 177,000 19,000 ------------ ------------ ------------ Net interest income after provision for possible loan losses 5,323,000 4,616,000 4,458,000 ------------ ------------ ------------ OTHER INCOME: Service charges on deposit accounts 456,000 457,000 490,000 (Loss) gain on sales of securities available for sale (14,000) 3,000 65,000 Gain on sale of loans held for sale 3,000 16,000 -- Miscellaneous 394,000 413,000 314,000 ------------ ------------ ------------ Total other income 839,000 889,000 869,000 ------------ ------------ ------------ OTHER EXPENSES: Salaries and employee benefits 2,725,000 2,457,000 2,218,000 Occupancy, net 452,000 348,000 362,000 Furniture and equipment 617,000 562,000 525,000 Stationary and supplies 99,000 96,000 100,000 Advertising and promotion 218,000 146,000 114,000 Audit and exams 108,000 53,000 93,000 Amortization of intangible assets 84,000 84,000 84,000 Miscellaneous 850,000 812,000 791,000 ------------ ------------ ------------ Total other expenses 5,153,000 4,558,000 4,287,000 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 1,009,000 947,000 1,040,000 INCOME TAXES 242,000 188,000 330,000 ------------ ------------ ------------ NET INCOME $ 767,000 $ 759,000 $ 710,000 ============ ============ ============ Net income per common share: Basic $ .51 $ .51 $ .48 ============ ============ ============ Diluted $ .51 $ .50 $ .47 ============ ============ ============ Weighted average number of common shares outstanding: Basic 1,494,671 1,493,237 1,481,062 ============ ============ ============ Diluted 1,506,088 1,509,762 1,497,195 ============ ============ ============
See accompanying notes to consolidated financial statements. 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 ------------ --------- ------------ ------------ ------------ 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 ============ Sale of common stock 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 -- ------------ Other comprehensive income: Unrealized loss on securities available for sale, net of income tax benefit 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) -- -- -- (69,000) Sale of common stock 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) Net income -- -- $ 767,000 767,000 -- ------------ Other comprehensive income: Unrealized gain on securities available for sale, net of income taxes of $318,000 474,000 Reclassification adjustment for losses included in income, net of income taxes of $5,000 9,000 ------------ Other comprehensive income -- -- 483,000 -- 483,000 ------------ Comprehensive income $ 1,250,000 ============ Treasury stock purchased (6,330) -- -- -- Sale of common stock 4,250 32,000 -- -- Shares issued through dividend reinvestment plan 8,696 72,000 -- -- Cash dividends -- -- (282,000) -- Stock dividend 70,836 594,000 (594,000) -- --------- ------------ ------------ ------------ Balance, December 31, 2000 1,498,351 $ 6,385,000 $ 4,027,000 $ (180,000) ========= ============ ============ ============
Total Treasury Stockholders' Stock Equity ------------ ------------ 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 Sale of common stock -- 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 Other comprehensive income: Unrealized loss on securities available for sale, net of income tax benefit 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) Sale of common stock -- 11,000 Shares issued through dividend reinvestment plan -- 41,000 Cash dividends -- (170,000) --------- --------- Balance, December 31, 1999 (71,000) 9,089,000 Net income -- 767,000 Other comprehensive income: Unrealized gain on securities available for sale, net of income taxes of $318,000 Reclassification adjustment for losses included in income, net of income taxes of $5,000 Other comprehensive income -- 483,000 Comprehensive income Treasury stock purchased (51,000) (51,000) Sale of common stock -- 32,000 Shares issued through dividend reinvestment plan -- 72,000 Cash dividends -- (282,000) Stock dividend -- -- ------------ ------------ Balance, December 31, 2000 $ (122,000) $ 10,110,000 ============ ============
See accompanying notes to consolidated financial statements. SUSSEX BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 767,000 $ 759,000 $ 710,000 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premiums, discounts and loan origination and commitment fees and expenses, net 122,000 132,000 93,000 Depreciation and amortization 555,000 482,000 439,000 Provision for possible loan losses 229,000 177,000 19,000 Loss (gain) on sales of securities available for sale 14,000 (3,000) (65,000) Gain on trade-in of automobile -- (13,000) -- Loss (gain) on sale of real estate -- 10,000 -- Gain on sale of loans held for sale (3,000) (16,000) -- Origination of loans held for sale (390,000) (1,278,000) (354,000) Proceeds of sales of loans held for sale 393,000 876,000 -- Deferred federal income tax (benefit) (63,000) (91,000) (25,000) (Increase) decrease in accrued interest receivable (44,000) (388,000) 69,000 (Increase) decrease in other assets (1,096,000) (86,000) (47,000) Increase (decrease) in other liabilities 159,000 (10,000) (280,000) ------------ ------------ ------------ Net cash provided by operating activities 643,000 551,000 559,000 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from maturities of time deposits in other banks 2,180,000 -- -- Purchases of time deposits in other banks -- (2,280,000) -- Proceeds from repayments on and maturities of securities available for sale 4,745,000 4,936,000 16,296,000 Proceeds from sales of securities available for sale 4,487,000 507,000 8,490,000 Purchases of securities available for sale (3,115,000) (19,422,000) (24,084,000) Proceeds from maturities of securities held to maturity 2,113,000 3,955,000 1,602,000 Purchases of securities held to maturity (650,000) (5,977,000) (5,464,000) Loans originated, net of repayments (13,366,000) (14,801,000) (2,041,000) Proceeds from sales of loan participations 1,931,000 -- -- Purchases of loans and loan participations (4,518,000) -- -- Proceeds from sale of equipment 8,000 -- -- Additions to premises and equipment (1,385,000) (1,039,000) (1,024,000) Purchase of Federal Home Loan Bank of New York stock -- -- (69,000) Capitalized costs on other real estate owned -- (3,000) (3,000) Proceeds from sale of other real estate -- 29,000 -- - ----------------------------------------------------------------- ------------ ------------ ------------ Net cash used in investing activities (7,570,000) (34,095,000) (6,297,000) ------------ ------------ ------------ Cash flows from financing activities: Net increase in deposits $ 2,313,000 $ 10,834,000 $ 22,832,000 Net (decrease) increase in federal funds purchased (1,990,000) 1,990,000 -- Proceeds of long-term debt 10,000,000 -- -- Proceeds from sales of common stock 32,000 11,000 55,000 Payment of dividends, net of reinvestment (210,000) (129,000) (157,000) Purchase of treasury stock (51,000) (69,000) -- ------------ ------------ Net cash provided by financing activities 10,094,000 12,637,000 22,730,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 3,167,000 (20,907,000) 16,992,000 Cash and cash equivalents - beginning 9,753,000 30,660,000 13,668,000 ------------ ------------ ------------ Cash and cash equivalents - ending $ 12,920,000 $ 9,753,000 $ 30,660,000 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 397,000 $ 249,000 $ 630,000 Interest 4,737,000 4,383,000 3,816,000 Supplemental schedule of noncash investing and financing activities: Transfer of loans to other real estate $ -- $ -- $ 33,000
See accompanying notes to financial statements. 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 eight 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. The Corporation is subject to regulation by the Federal Reserve Board. 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. 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. 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. SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACCOUNTING POLICIES (Cont'd.) 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 possible loan losses. Interest on loans is recognized as income based on the loan principal outstanding. Recognition of interest on the accrual method is generally discontinued when factors indicate that the collection of such amounts is doubtful. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when factors indicating doubtful collectibility no longer exist. Loan origination costs/fees Loan origination fees and certain direct loan origination costs are deferred and subsequently amortized as an adjustment of yield over the contractual lives of the related loans. Allowance for possible loan losses The allowance for possible loan losses is maintained at a level considered adequate to absorb 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. 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 possible 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. SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACCOUNTING POLICIES (Cont'd.) 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. Net income per common share Basic net income per share of common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effect of outstanding stock options. On June 21, 2000, the Corporation's Board of Directors authorized a 5% stock dividend, which was distributed on July 28, 2000. Net income per common share for 1999 and 1998 has been restated to give retroactive effect to the stock dividend. Impact of new financial Accounting Standards The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments Hedging Activities" to establish accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 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, 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. The adoption of SFAS No. 133 on January 1, 2000, did not have a material impact on the Corporation's consolidated financial condition or operations. 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, 1999 and 1998 have been reclassified to conform to the current year's presentation. SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. SUBSEQUENT EVENT On January 17, 2001, the Company sold, in a private placement, 139,906 shares of its common stock, at $8.50 per share, to another financial institution. Net proceeds, after issuance costs, totalled approximately $1,144,000. 4. SECURITIES AVAILABLE FOR SALE
December 31, 2000 ------------------------------------------------------------------------- Gross Unrealized Amortized ----------------------------- Carrying Cost Gains Losses Value ------------- --------- ---------- ------------ U.S. Treasury $ 4,043,000 $ 6,000 $ 16,000 $ 4,033,000 U.S. Government agencies, including mortgage-backed securities 25,116,000 64,000 300,000 24,880,000 Corporate bonds 3,477,000 1,000 9,000 3,469,000 Equity securities 850,000 -- 46,000 804,000 -------- --------- ---------- ------------ $ 33,486,000 $ 71,000 $ 371,000 $ 33,186,000 ============= ========= ========== ============
December 31, 2000 ------------------------------------------------------------------------- Gross Unrealized Amortized ----------------------------- Carrying Cost Gains Losses Value ------------- --------- ---------- ------------ 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 =========== =========== =========== ===========
December 31, --------------------------------------------------------------- 2000 1999 ----------------------------- ---------------------------- Amortized Carrying Amortized Carrying Cost Value Cost Value ------------ ----------- ----------- ----------- Due in one year or less $ 2,227,000 $ 2,217,000 $ 4,508,000 $ 4,494,000 Due after one year through five years 11,279,000 11,271,000 14,845,000 14,430,000 Due after five years through ten years 4,315,000 4,187,000 4,334,000 4,059,000 Due after ten years 14,815,000 14,707,000 15,164,000 14,850,000 Equity securities 850,000 804,000 850,000 762,000 ----------- ----------- ----------- ----------- $33,486,000 $33,186,000 $39,701,000 $38,595,000 =========== =========== =========== ===========
The amortized cost and carrying value of securities at December 31, 2000 and 1999 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. The following presents details of sales of securities available for sale: Year Ended December 31, ------------------------------------------------ 2000 1999 1998 ------------ ---------- ---------- Sales proceeds $4,487,000 $ 507,000 $8,490,000 Gross gains -- 3,000 65,000 Gross losses 14,000 -- -- SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Securities with a carrying value of approximately $1,263,000 and $4,134,000 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes required by applicable laws and regulations. 5. SECURITIES HELD TO MATURITY
December 31, 2000 ----------------------------------------------------------------------- Gross Unrealized Amortized ----------------------------- Estimated Cost Gains Losses Fair Value ------------ ----------------------------- ----------- Obligations of state and political subdivisions $ 6,431,000 $ 21,000 $ 59,000 $ 6,393,000 ============ ========= ========= ===========
December 31, 1999 ---------------------------------------------------------------------- Gross Unrealized Amortized --------------------------- Estimated Cost Gains Losses Fair Value ------------ -------- --------- ----------- Obligations of state and political subdivisions $ 7,929,000 $ 1,000 $ 193,000 $ 7,737,000 ============ ======== ========== ===========
December 31, -------------------------------------------------------------------------- 2000 1999 ---------------------------------- --------------------------------- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ----------- ------------ ------------ ------------ Due in one year or less $ 1,431,000 $ 1,431,000 $ 2,114,000 $ 2,114,000 Due after one year through five years 3,122,000 3,088,000 3,071,000 3,000,000 Due after five years through ten years 1,878,000 1,874,000 2,744,000 2,623,000 ---------- ---------- ---------- ----------- $ 6,431,000 $ 6,393,000 $ 7,929,000 $ 7,737,000 ============ ============ ============ ============
The amortized cost and carrying value of securities at December 31, 2000 and 1999 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, 2000, 1999 and 1998. 6. LOANS
December 31, ------------------------------------- 2000 1999 -------------- -------------- Loans secured by one to four family residential properties $ 55,138,000 $ 50,305,000 Loans secured by nonresidential properties 27,529,000 19,759,000 Loans to individuals 2,780,000 2,295,000 Commercial and industrial loans 4,968,000 3,811,000 Loans secured by construction and land development 8,960,000 7,074,000 Other loans 1,718,000 1,519,000 ------------ ------------ 101,093,000 84,763,000 ------------ ------------ Less: Unearned income and net deferred loan costs, net (73,000) (71,000) Allowance for possible loan losses 973,000 837,000 ------------ ------------ 900,000 766,000 ------------ ------------ $ 100,193,000 $ 83,997,000 ============== =============
SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. 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 $17,000, $13,000 and $9,000 higher in 2000, 1999 and 1998, respectively. Non-performing loans were as follows: December 31, ----------------------------------------------- 2000 1999 1998 --------- --------- --------- Nonaccrual $ 552,000 $ 332,000 $ 398,000 Renegotiated -- -- -- --------- --------- --------- $ 552,000 $ 332,000 $ 398,000 ========= ========= ========= 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, 2000, 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: Year Ended December 31, 2000 ----------------------- Balance - beginning $ 2,450,000 Loans originated 124,000 Repayments (442,000) ----------- Balance - ending $ 2,132,000 =========== 7. ALLOWANCE FOR POSSIBLE LOAN LOSSES Year Ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Balance - beginning $ 837,000 $ 665,000 $ 685,000 Provision for loan losses 229,000 177,000 19,000 Loans charged off (104,000) (15,000) (40,000) Recoveries 11,000 10,000 1,000 --------- --------- --------- Balance - ending $ 973,000 $ 837,000 $ 665,000 ========= ========= ========= Impaired loans and related amounts recorded in the allowance for possible loan losses are summarized as follows:
December 31, -------------------------------- 2000 1999 ----------- ----------- Recorded investment in impaired loans: With recorded allowances $ 1,690,000 $ 337,000 Without recorded allowances -- -- ----------- ----------- Total impaired loans 1,690,000 337,000 Related allowance for possible loan losses (128,000) (189,000) ----------- --------- Net impaired loans $ 1,562,000 $ 148,000 =========== =========
SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the years ended December 31, 2000, 1999 and 1998, the average recorded investment in impaired loans totalled $653,000, $449,000 and $898,000, respectively. Interest income recognized on such loans during the time each was impaired totalled $20,000, $38,000 and $79,000, respectively. 8. PREMISES AND EQUIPMENT
December 31, ------------------------------ 2000 1999 ------------ ----------- Land $ 505,000 $ 417,000 Buildings and building improvements 3,173,000 1,696,000 Leasehold improvements 139,000 139,000 Furniture, fixtures and equipment 3,111,000 3,049,000 Assets in progress 926,000 1,393,000 ----------- ----------- 7,854,000 6,694,000 Less accumulated depreciation and amortization 3,338,000 3,084,000 ----------- ----------- $ 4,516,000 $ 3,610,000 =========== ==========
During the years ended December 31, 2000, 1999 and 1998, depreciation and amortization expenses totalled $471,000, $398,000 and $355,000, respectively. Assets in progress at December 31, 2000, primarily includes property in Sparta, New Jersey, which was purchased in 2000 and is being prepared for use in the Bank's branch network, having a carrying value of $891,000. Assets in progress at December 31, 1999, primarily included property in Frankford Township, New Jersey, which was purchased in 1998 and was being prepared for use in the Bank's branch network, having a carrying value of $1,196,000. Such property was placed in service during 2000. 9. DEPOSITS Scheduled maturities of time deposits are as follows: December 31, -------------------------------- 2000 1999 ----------- ----------- One year or less $41,653,000 $40,960,000 After one through three years 10,499,000 4,805,000 After three years 546,000 239,000 ----------- ----------- $52,698,000 $46,004,000 =========== =========== At both December 31, 2000 and 1999, time deposits include $4,000,000 owned by a local municipality which mature within 30 days. 10. LONG-TERM DEBT Long-term debt at December 31, 2000, consisted of the following Federal Home Loan Bank of New York borrowings: Maturity Initial Interest Date Call Date Rate Amount ----------------- ----------------- ------------ ----------------- December 21, 2010 December 21, 2001 4.77% $ 3,000,000 December 21, 2010 December 21, 2002 4.90% 3,000,000 December 21, 2010 December 21, 2003 5.14% 4,000,000 ----------- $ 10,000,000 ============ SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Each of the borrowings is callable on the initial call date and quarterly thereafter. The Corporation had no long-term debt outstanding at December 31, 1999. At December 31, 2000, the borrowings are secured by a pledge of qualifying one-to-four-family mortgage loans having an aggregate unpaid principal balance of approximately $23,907,000. 11. INCOME TAXES The components of income taxes are as follows: Year Ended December 31, -------------------------------------- 2000 1999 1998 ---------- --------- --------- Current $ 305,000 $ 279,000 $ 355,000 Deferred (63,000) (91,000) (25,000) -------- -------- -------- Total $ 242,000 $ 188,000 $ 330,000 ========= ========== ========= 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:
December 31, -------------------------- 2000 1999 ---------- --------- Deferred tax assets: Allowance for possible loan losses $ 388,000 $ 334,000 Deferred loan fees 29,000 20,000 Other 45,000 52,000 Unrealized loss on securities available for sale 120,000 443,000 --------- --------- 582,000 849,000 --------- --------- Deferred tax liabilities: Depreciation and amortization (161,000) (168,000) Other (3,000) (3,000) --------- --------- (164,000) (171,000) --------- --------- Net deferred tax assets included in other assets $ 418,000 $ 678,000 ========= =========
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:
Year Ended December 31, ------------------------------------------------------------------------------ 2000 1999 1998 --------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent ---------- ------- --------- ------- --------- ------- Federal income tax $ 343,000 34.0% $ 322,000 34.0% $ 354,000 34.0% Add (deduct) effect of: Non-taxable interest income (89,000) (8.8) (114,000) (12.0) (38,000) (3.7) State income tax, net of federal income tax effect (14,000) (1.4) (24,000) (2.5) 1,000 0.1 Other items, net 2,000 0.2 4,000 0.4 13,000 1.3 --------- ---- --------- ---- --------- ---- $ 242,000 24.0% $ 188,000 19.9% $ 330,000 31.7% ========= ==== ========= ==== ========= ====
SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK OPTION PLANS The following data have been adjusted to give retroactive effect to stock dividends declared subsequent to option authorizations, grants and exercises. During 1995, the stockholders approved a stock option plan for nonemployee directors (the "Director Plan"). As of December 31, 2000, there were 70,600 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 5,516 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 1,102 shares of the Corporation's common stock with a maximum of 16,547 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, 2000, 29,437 options at $5.08, 3,150 options at $8.07, 3,213 options at $8.26, 2,100 options at $8.55, 4,200 options at $10.16 and 3,150 options at $11.16 were outstanding, of which all were exercisable and none of which have been forfeited. During 1995, the stockholders approved an incentive stock option plan for executives of the Corporation (the "Executive Plan"). As of December 31, 2000, there were 141,201 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, 2000, 4,928 options at $8.38, 5,137 options at $8.49, 7,319 options at $9.39 and 3,738 options at $9.86 were outstanding, of which all were exercisable and none of which have been forfeited. The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model. The following represents the weighted average fair values and weighted average assumptions used to determine such fair values for options granted: Year Ended December 31, ----------------------------- 2000 1999 1998 -------- -------- ------- Grant date fair value $ 2.50 $ 3.49 $ 5.59 Expected option lives 5 years 5 years 5 years Dividend yield 1.85% 1.12% 2.61% Risk-free interest rate 6.45% 4.91% 5.61% Expected volatility rate 22.56% 31.67% 30.95% Transactions under all stock option plans are summarized as follows: Weighted Average Range of Exercise Number of Exercise Price Price Shares Per Share Per Share ------- ---------------- ----------- Outstanding, December 31, 1997 48,716 $ 5.08 - $ 8.55 $ 6.16 Options granted 12,569 9.39 - 10.16 9.72 Options exercised (7,988) 5.08 - 8.55 6.92 ------ Outstanding, December 31, 1998 53,297 5.08 - 10.16 6.89 Options granted 6,888 9.86 - 11.16 10.42 Options exercised (1,050) 10.16 10.16 ------ Outstanding, December 31, 1999 59,135 5.08 - 11.16 7.21 Options granted 8,287 8.07 - 8.49 8.33 Options exercised (1,050) 8.55 8.55 ------ Outstanding, December 31, 2000 66,372 $ 5.08 - $11.16 $ 7.35 ====== 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 SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) plan. Had compensation cost for the Corporation's 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 SFAS No. 123, the Corporation's net income and income per share would have been reduced to the pro forma amounts indicated below: Year Ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- --------- Net income As reported $ 767,000 $ 759,000 $ 710,000 Pro forma 755,000 746,000 690,000 Diluted income per share As reported $ 0.51 $ 0.50 $ 0.47 Pro forma 0.50 0.49 0.46 The following table summarizes information about fixed stock options outstanding at December 31, 2000: Exercise Number Remaining Number Price Outstanding Contractual Life Exercisable --------- ------------- ----------------- --------------- $ 5.08 29,437 4.5 years 29,437 8.07 3,150 9.5 years 3,150 8.26 3,213 5.5 years 3,213 8.38 4,928 6.0 years 4,928 8.49 5,137 9.0 years 5,137 8.55 2,100 6.5 years 2,100 9.39 7,319 7.0 years 7,319 9.86 3,738 8.0 years 3,738 10.16 4,200 7.5 years 4,200 11.16 3,150 8.5 years 3,150 ------ ----- 66,372 66,372 ====== ====== 13. RELATED PARTY TRANSACTIONS Certain directors of the Corporation are associated with legal, tax accounting, real estate and construction businesses that rendered various services to the Corporation. The Corporation paid these businesses $147,000, $179,000 and $168,000 during 2000, 1999 and 1998, respectively. 14. COMMITMENTS AND CONTINGENCIES 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: December 31, ---------------------------------- 2000 1999 ------------ ----------- (In Thousands) Commitments to extend credit $ 15,976 $ 16,358 Standby letters of credit 384 6 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, residential real estate and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. Rentals under long-term operating leases amounted to approximately $52,000 for each of the years ended December 31, 2000, 1999 and 1998. At December 31, 2000, 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 --------------- -------- 2001 $ 35,000 2002 15,000 2003 10,000 2004 10,000 2005 10,000 Thereafter 146,000 --------- $ 226,000 ========= 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. 15. 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. 16. REGULATORY CAPITAL REQUIREMENTS The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory 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. 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, 2000, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 16. REGULATORY CAPITAL REQUIREMENTS (Cont'd.) As of March 31, 2000, the most recent notification from the Federal Deposit Insurance Corporation, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. The Corporation has not been notified by the Federal Reserve Bank of its capital category. To be categorized as well-capitalized, the Bank must maintain minimum total risk based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since the aforementioned notification that management believes have changed the institution's category. The Corporation's and the Bank's actual capital amounts and ratios are presented in the following table:
To Be Well Capitalized Minimum Capital Under Prompt Corrective Actual Requirements Actions Provisions --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- --------- ------- --------- --------- (Dollars in Thousands) December 31, 2000 - ----------------- Total Capital (to risk-weighted assets): Corporation $ 10,700 10.58% $ 8,093 8.00% $ 10,116 10.00% Bank 10,342 10.23% 8,086 8.00% 10,107 10.00% Tier 1 Capital (to risk-weighted assets): Corporation 9,727 9.62% 4,047 4.00% 6,070 6.00% Bank 9,369 9.27% 4,043 4.00% 6,064 6.00% Tier 1 Capital (to average total assets): Corporation 9,727 6.21% 6,269 4.00% 7,836 5.00% Bank 9,369 5.98% 6,267 4.00% 7,834 5.00%
To Be Well Capitalized Minimum Capital Under Prompt Corrective Actual Requirements Actions Provisions --------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- --------- ------- --------- --------- (Dollars in Thousands) 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%
17. SUSSEX BANCORP (PARENT COMPANY ONLY) Condensed financial statements of the Corporation (Parent Company only) follow: STATEMENTS OF CONDITION
December 31, ---------------------------- 2000 1999 ----------- ----------- Assets: Cash and interest-bearing deposits $ 332,000 $ 346,000 Investment in subsidiaries 9,752,000 8,708,000 Other assets 133,000 82,000 ----------- ----------- Total assets $10,217,000 $ 9,136,000 =========== =========== Liabilities: Other liabilities $ 107,000 $ 47,000 Stockholders' equity 10,110,000 9,089,000 ----------- ----------- Total liabilities and stockholders' equity $10,217,000 $ 9,136,000 =========== ===========
SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) STATEMENTS OF INCOME
Year Ended December 31, ----------------------------------------- 2000 1999 1998 --------- --------- --------- Dividends from subsidiary bank $ 280,000 $ 177,000 $ 361,000 Interest income 1,000 4,000 -- --------- --------- --------- Total income 281,000 181,000 361,000 Other expenses 125,000 77,000 42,000 --------- --------- --------- Income before income tax expense 156,000 104,000 319,000 Income tax expense (benefit) (50,000) (29,000) -- --------- --------- --------- Income before undistributed earnings of subsidiaries 206,000 133,000 319,000 Equity in undistributed earnings of subsidiaries 561,000 626,000 391,000 --------- --------- --------- Net income $ 767,000 $ 759,000 $ 710,000 ========= ========= =========
STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------ 2000 1999 1998 ---------- --------- --------- Cash flows from operating activities: Net income $ 767,000 $ 759,000 $ 710,000 Adjustments to reconcile net income to net cash provided by operating activities: Net change in other assets and liabilities 9,000 (57,000) 22,000 Equity in undistributed earnings of subsidiaries (561,000) (626,000) (391,000) --------- --------- --------- Net cash provided by operating activities 215,000 76,000 341,000 --------- --------- --------- Cash flows from financing activities: Cash dividends paid net of reinvestments (210,000) (129,000) (205,000) Purchase of treasury stock (51,000) (69,000) -- Proceeds of sales of common stock 32,000 11,000 55,000 --------- --------- --------- Net cash (used in) financing activities (229,000) (187,000) (150,000) --------- --------- --------- Net (decrease) increase in cash and cash equivalents (14,000) (111,000) 191,000 Cash and cash equivalents - beginning 346,000 457,000 266,000 --------- --------- --------- Cash and cash equivalents - ending $ 332,000 $ 346,000 $ 457,000 ========= ========= =========
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used for the purposes of this disclosure. Estimated fair values have been determined using the best available data and estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. The estimation methodologies used and the estimated fair values and carrying values of the financial instruments are set forth below: Cash and cash equivalents, 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. SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. 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. Federal funds purchased and long-term debt The fair value of federal funds purchased and long-term debt is estimated by discounting future cash flows, using rates currently available for borrowings of similar remaining maturities. Commitments The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The carrying values and estimated fair values of financial instruments are as follows:
December 31, --------------------------------------------------------- 2000 1999 ------------------------- -------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------- ---------- --------- ------------ (In Thousands) (In Thousands) Financial assets ---------------- Cash and cash equivalents $ 12,920 $ 12,920 $ 9,753 $ 9,753 Time deposits in other banks 100 101 2,280 2,298 Securities available for sale 33,186 33,186 38,595 38,595 Securities held to maturity 6,431 6,393 7,929 7,737 Loans held for sale 297 308 772 772 Loans 100,193 99,257 83,997 79,339 Accrued interest receivable 981 981 937 937 Financial liabilities Deposits 140,861 140,851 138,548 138,716 Federal funds purchased -- -- 1,990 1,990 Long-term debt 10,000 9,987 -- -- Commitments To extend credit 15,976 15,976 16,358 16,358 Standby letters of credit 384 384 6 6
SUSSEX BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. 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. 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended --------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ------- ------ ------ ------ (In Thousands, Except Per Share Amounts) Total interest income $2,479 $2,522 $2,648 $2,740 Total interest expense 1,123 1,140 1,257 1,317 ------ ------ ------ ------ Net interest income 1,356 1,382 1,391 1,423 ------ ------ ------ ------ Provision for loan losses 48 63 63 55 Other income 190 209 220 220 Other expenses 1,240 1,288 1,295 1,330 Income taxes 58 56 61 67 ------ ------ ------ ------ Net income $ 200 $ 184 $ 192 $ 191 ====== ====== ====== ====== Net income per common share - Basic $0.134 $0.123 $0.128 $0.128 Diluted 0.133 0.122 0.128 0.126 ====== ====== ====== ======
Quarter Ended ------------------------------------------------------------ March 31, June 30, September 30, December 31, 1999 1999 1999 1999 --------- --------- ------------- ------------- (In Thousands, Except Per Share Amounts) 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 ====== ====== ====== ======
Net income per common share data for the quarters ended March 31, 2000, and prior have been restated to give retroactive effect to the 5% stock dividend declared June 21, 2000. ITEM 8. Changes in and Disagreements with Accountants on Accounting and ----------------------------------------------------------------------- Financial Disclosure -------------------- Not applicable. 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 2001 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, 2001. The following table sets forth certain information about each executive officer of the Company who is not also a director. Principal Occupation Name, Age and Position Officer Since (1) During Past Five Years - ---------------------- ----------------- ---------------------- Candace A. Leatham, 46 1984 Senior Vice President and Senior Vice President Treasurer of the Bank and Treasurer - --------- (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 2001 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, 2001. 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 2001 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, 2001. 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 2001 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, 2001. 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 Consent of Radics & Co., LLC - ------- (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 Date Filed Item -------------------- ----------------------------------------------- October 20, 2000 Item 5 - Announcing the third quarter results October 31, 2000 Item 5 - Announcing agreement to sell 9.9% of the Registrant's outstanding stock to Lakeland Bancorp 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 26, 2001 --------------------------- Chief Executive Officer Donald L. Kovach /s/ Candace A. Leatham Treasurer (Principal Financial March 26, 2001 ---------------------------- Officer and Principal Candace A. Leatham Accounting Officer) /s/ Irvin Ackerson ---------------------------- Director March 26, 2001 Irvin Ackerson /s/ William E. Kulsar ---------------------------- Secretary and Director March 26, 2001 William E. Kulsar /s/ Joel D. Marvil ---------------------------- Director March 26, 2001 Joel D. Marvil /s/ Richard Scott ---------------------------- Director March 26, 2001 Richard Scott /s/ Terry H. Thompson ---------------------------- Director March 26, 2001 Terry H. Thompson /s/ Joseph Zitone ---------------------------- Director March 26, 2001 Joseph Zitone
EX-10 2 0002.txt KOVACH EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Employment Agreement (the "Employment Agreement") made as of this 15th day of September, 1999, by and between DONALD L. KOVACH, an individual residing at Branchville, New Jersey (the "Employee"), SUSSEX COUNTY STATE BANK, a state chartered bank with its principal place of business located at 399 State Highway 23, Franklin, New Jersey 07416 (the "Bank"), and SUSSEX BANCORP, a New Jersey corporation with its principal place of business located at 399 State Highway 23, Franklin, New Jersey 07416 (the "Company"; the Bank and the company sometimes collectively are referred to herein as "Employer"). WHEREAS, the Board of Directors of the Bank and the Board of Directors of the Company have each determined that it is in the best interests of each of the Bank and the Company to enter into this Agreement with Employee, and each respective Board has authorized the Bank and the Company to enter into this Agreement; WHEREAS, the Employee agrees to be employed pursuant to the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises and covenants contained herein, and with the intent to be legally bound hereby, the parties hereto hereby agree as follows: 1. Employment. The Company and the Bank hereby jointly agree to employ the Employee, and the Employee hereby accepts such employment, upon the terms and conditions set forth herein. 2. Position and Duties. The Employee shall be employed as President and Chief Executive Officer of the Company and President and Chief Executive Officer of the Bank, to perform such services in that capacity as are usual and customary for comparable institutions and as shall from time-to-time be established by the Board of Directors of the Company and the Bank. Employee agrees that he will devote his full business time and efforts to his duties hereunder. Notwithstanding the foregoing, the Company and the Bank acknowledge that Employer may maintain a position as a non-equity partner or of Counsel with a law firm of his choosing, provided that such association shall not conflict with Employee's performance of his duties hereunder. 3. Cash Compensation. Employer shall pay to the Employee compensation for his services as follows: (a) Base Salary. The Employee shall be entitled to receive, commencing upon the date of this Agreement, an annual base salary (the "Base Salary") of One Hundred Sixty Thousand and Two Hundred Dollars ($160,200), which shall be payable in installments in accordance with Employer's usual payroll method. Annually thereafter, on or prior to the anniversary date of this Agreement, the Board of Directors shall review the Employee's performance, the status of Employer and such other factors as the Board of Directors or a committee thereof shall deem appropriate and shall adjust the Base Salary accordingly. (b) Discretionary Bonus. Employee shall be entitled to receive annually at the discretion of the Board of Directors or a committee thereof a cash bonus. 4. Other Benefits. (a) Fringe Benefits. The Employee shall be entitled to the exclusive and unlimited use of an automobile or a cash allowance to be used for the purpose of maintaining an automobile of a type and style commensurate with the Employee's status as President and Chief Executive Officer of Employer. In addition, the Employee shall be entitled to receive hospital, health, medical, and life insurance of a type currently provided to and enjoyed by other senior officers of Employer, and shall be entitled to participate in any other employee benefit or retirement plans offered by Employer to its employees generally or to its senior management. (b) Retirement Plan. Employer and Employee shall immediately commence negotiations for the adoption of a mutually acceptable retirement plan for Employee. Such retirement plan will include provisions for post-employment payments, an equity position in Employer, or any combination of the foregoing or any other benefits which Employer and Employee may consider mutually acceptable. In the event that Employer and Employee are unable to agree upon a mutually acceptable form of retirement benefits package for Employee within one (1) year of the date of this agreement, Employee and Employer shall immediately renegotiate the compensation and other terms of this agreement to reflect the absence of a retirement plan for Employee. Alternatively, Employee may, upon written notice to Employer within thirty (30) days of such anniversary date, terminate his employment with Employer. In such case, he shall be paid a lump sum payment equal to three (3) times his then current Base Salary. Such payment shall be made by Employer within thirty (30) days of receipt of Employee's written notice of termination. 5. Term. The term of this Agreement shall be three years, commencing on September 15, 1999 and continuing until August 31, 2002; provided, however, that the term of this Agreement shall automatically renew for one (1) additional year on each anniversary date hereof unless, at least sixty (60) days prior to such anniversary date, either Employer or Employee shall have provided the other with written notice of their intention not to extend the term of this Agreement; further provided, however, that this Agreement shall not be extended for more than two (2) additional one (1) year terms under this provision. 6. Termination. Employee may be terminated at any time, without prejudice to Employee's right to compensation or benefits as provided herein. Employee's rights upon a termination shall be as follows: (a) Cause. As used in this Agreement, the term "Cause" shall mean the Employee's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or a material breach of any provision of this Agreement. Notwithstanding the above, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board of Directors of the Bank at a meeting of its Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for him, together with counsel, to be heard before such Board of Directors), finding that in the good faith opinion of the Board of Directors, the Employee was guilty of conduct justifying termination for cause and specifying the particulars thereof in detail; provided, however, that nothing contained herein shall prohibit Employee from being suspended from his duties hereunder by a duly authorized agent of the Board upon a good faith determination that "cause" exists. Such suspension shall last until such time as the Board meeting provided for above shall have occurred, provided that such Board meeting shall occur within a reasonable period of time. During such suspension Employee shall continue to be an employee, entitled to all salary and benefits provided for hereunder. (b) Termination With Cause. Employer shall have the right to terminate the Employee for "cause", upon written notice to him of such determination, specifying the alleged "cause". In the event of such termination, the Employee shall not be entitled to any further benefits under this Agreement. (c) Termination Without Cause. Upon a termination of Employee's employment hereunder without "cause", Employee shall be entitled to receive his then current base salary for the remaining term of this Agreement. Such payments may be made over the remaining term of this Agreement in periodic payments in the same manner in which the Employee's salary was paid through the time of such termination, or by a lump sum payment of the discounted present value of all base salary payments through the remaining term of this Agreement. The determination of the method of payment shall be made mutually by Employer and the Employee; provided, however, that in the event the parties cannot agree on the method of payment, Employee shall be entitled to choose. In addition, Employer shall continue to provide the Employee with hospital, health, medical and life insurance, and any other like benefits in effect at the time of such termination through the end of the term of this Agreement. The Employee shall have no duty to mitigate damages in connection with his termination by Employer without "cause". However, if the Employer obtains new employment and such new employment provides for hospital, health, medical and life insurance, and other benefits, in a manner substantially similar to the benefits payable by Employer hereunder, Employer may permanently terminate the duplicative benefits it is obligated to provide hereunder. (d) Suspension and Special Regulatory Rules. (i) If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Company of the Bank by a notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDI Act"), Employer's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. (ii) If the Employee is removed and/or permanently prohibited from participating in the conduct of the affairs of the Company or the Bank by an order issued under Section 8(e) or Section 8(g)(1) of the FDI Act, all obligations of Employer under this Agreement shall terminate as of the effective date of the order and the Employee shall not be entitled to received the payments provided for under Paragraph (c) above. (iii) If the Bank is in default, as defined in Section 3(x)(1) of the FDI Act, all obligations of Employer under this Agreement shall terminate as of the date of default. 7. Resignation for Cause. During the term of this Agreement, the Employee shall be entitled to resign from his employment with Employer, and receive the payments provided for below, in the event that the Employee is not in breach of this Agreement and Employer (i) reassigns the Employee to a position of lesser rank or status than President and Chief Executive Officer, (ii) relocates the Employee's principal place of employment by more than thirty miles from its location on the date hereof, or (iii) reduces the Employee's compensation or other benefits. Upon the occurrence of any of these events, the Employee shall have thirty days to provide Employer notice of his intention to terminate this Agreement. In the event the Employee elects to so terminate this Agreement, such termination shall be treated as a termination without "cause" by Employer under Section 6(c) hereof, and the Employee shall be entitled to receive all payments and other benefits called for under such Section 6(c). 8. Change in Control. (a) Upon the occurrence of a Change in Control (as herein defined) followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment other than for "cause", as defined in Section 6(a) hereof, or, as provided below the voluntary termination of the Employee within eighteen months of such Change in Control, Employee shall become entitled to receive the payments provided for under paragraph (c) below. Upon the occurrence of a Change in Control, the Employee shall have the right to elect to voluntarily terminate his employment within eighteen months of such Change in Control following any demotion, loss of title, office of significantly authority, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than thirty miles from its location immediately prior to the Change in Control. (b) A "Change in Control" shall mean: (i) a reorganization, merger, consolidation or sale of all or substantially all of the assets of the Company, or a similar transaction in which the Company is not the resulting entity; (ii) individuals who constitute the Incumbent Board (as herein defined) of the Company cease for any reason to constitute a majority thereof; (iii)(a) an event of a nature that would be required to be reported in response to Item I of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (iv) Without limitation, a change in control shall be deemed to have occurred at such time as (i) any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the Company or the trustees or any administration of any employee stock ownership plan and trust, or any other employee benefit plans, established by Employer from time-to-time in is or becomes a "beneficial owner" (as defined in Rule 13-d under the Exchange Act) directly or indirectly, of securities of the Company representing 25% or more of the Company's outstanding securities ordinarily having the right to vote at the election of directors; or (v) A proxy statement soliciting proxies from stockholders of the Company is disseminated by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged or converted into cash or property or securities not issued by the Company; (vi) A tender offer is made for 25% or more of the voting securities of the Company and the shareholder owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender and such tendered shares have been accepted by the tender offeror. For these purposes, "Incumbent Board" means the Board of Directors on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a voting of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board. (c) In the event the conditions of Section (a) above are satisfied, Employee shall be entitled to receive a lump sum payment equal to 2.99 times Employee's then current Base Salary; provided, however, that in no event shall any payments provided for hereunder constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended or any successor thereto, and in order to avoid such a result the benefits provided for hereunder will be reduced, if necessary, to an amount which is One Dollar ($1.00) less than an amount equal to three (3) times Employee's "base amount" as determined in accordance with such Section 280G. In addition to the foregoing, Employee shall be entitled to receive from Employer, or its successor, hospital, health, medical and life insurance on the terms and at the cost to Employee as Employee was receiving such benefits upon the date of his termination. Employer's obligation to continue such insurance benefits will be for a period of three years. 9. Covenant Not to Compete. Employee agrees that during the term of his employment hereunder and for a period of one (1) year after the termination of his employment, he will not in any way, directly or indirectly, manage, operate, control, accept employment or a consulting position with or otherwise advise or assist or be connected with or own or have any other interest in or right with respect to (other than through ownership of not more than five percent (5%) of the outstanding shares of a corporation whose stock is listed on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System) any enterprise which competes with Employer in the business of banking in the counties in which Employer conducts its business on the date of Employee's termination. In the event that this covenant not to compete shall be found by a court of competent jurisdiction to be invalid or unenforceable as against public policy, such court shall exercise discretion in reforming such covenant to the end that Employee shall be subject to a covenant not to compete that is reasonable under the circumstances and enforceable by Employer. Employee agrees to be bound by any such modified covenant not to compete. 10. Termination of Prior Agreement. Employee and Employer acknowledge that this Agreement is being entered into in substitution of that certain existing Employment Agreement between Employee and Employer dated as of November 20, 1996, which is hereby terminated. 11. Miscellaneous. (a) Governing Law. In the absence of controlling Federal law, this Agreement shall be governed by and interpreted under the substantive law of the State of New Jersey. (b) Severability. If any provision of this Agreement shall be held to be invalid, void, or unenforceable, the remaining provisions hereof shall in no way be affected or impaired, and such remaining provisions shall remain in full force and effect. (c) Entire Agreement; Amendment. This Agreement sets for the entire understanding of the parties with regarding to the subject matter contained herein and supersedes any and all prior agreements, arrangements or understandings relating to the subject matter hereof and may only be amended by written agreement signed by both parties hereto or their duly authorized representatives. (d) Successors and Assigns. This Agreement shall be binding upon and become the legal obligation of the successors and assigns of Employer. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SUSSEX COUNTY STATE BANK By:_______________________________________ Name: Joel D. Marvil Title: Chairman, Compensation Committee SUSSEX BANCORP By:_______________________________________ Name: Joel D. Marvil Title: Chairman, Compensation Committee EMPLOYEE: ----------------------------------------- Name: Donald L. Kovach, Esq. EX-21 3 0003.txt SUBSIDIARIES OF THE REGISTRANT Sussex Bancorp has a single subsidiary, Sussex County State Bank. Sussex County State Bank has two subsidiaries, Sussex Bancorp Mortgage Company and SCB Investment Company. EX-23 4 0004.txt 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 19, 2001, included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000. RADICS & CO., LLC Pine Brook, New Jersey March 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----