-----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, BkKgR8zm4d1CAI7959sgBhVxqLUugS/PPt2QfqRXW4JJopliyjbR0ruVtZzR3y7z YlJhOlWwpA7l4JxZ7RsRbA== 0000914317-97-000113.txt : 19970329 0000914317-97-000113.hdr.sgml : 19970329 ACCESSION NUMBER: 0000914317-97-000113 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 001-12569 FILM NUMBER: 97566976 BUSINESS ADDRESS: STREET 1: 399 RTE 23 STREET 2: 9 CITY: FRANKLIN STATE: NJ ZIP: 07416 BUSINESS PHONE: 2018272917 MAIL ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 10KSB 1 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, 1996 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 or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 399 Route 23, Franklin, NJ 07416 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (201) 827-2914 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of class) (Title of class) 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 February 28, 1997, was $9,239,220. The number of shares of the Issuer's Common Stock, no par value, outstanding as of February 28, 1997, was 675,797. For the fiscal year ended December 31, 1996, the Issuer had total revenues of $522,000.
DOCUMENTS INCORPORATED BY REFERENCE 10-KSB Item Document Incorporated ----------- --------------------- Item 6. Management's Discussion Registrant's Annual Report and Analysis or Plan of to Shareholders, under the Operation caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" Item 7. Financial Statements Registrant's Annual Report to Shareholders under the caption "Consolidated Financial Statements" Item 9. Directors and Executive Proxy Statement for 1997 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 1997 Item 10. Executive Compensation Proxy Statement for 1997 Annual Meeting of Shareholders to be filed not later than April 29, 1997 Item 11. Security Ownership of Proxy Statement for 1997 Certain Beneficial Annual Meeting of Owners and Management Shareholders to be filed no later than April 29, 1997 Item 12. Certain Relationships Proxy Statement for 1997 and Related Annual Meeting of Transactions Shareholders to be filed no later than April 29, 1997
PART I Item 1. Description of Business General Sussex Bancorp (the "Company" or "Registrant") is a one-bank holding company incorporated under the laws of the State of New Jersey in January, 1996 to serve as a holding company for The Sussex County State Bank (the "Bank"). The Company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank (the "Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as amended, (the "Banking Act"), and pursuant to approval of the shareholders of the Bank, the Company acquired the Bank and became its holding company on November 20, 1996. As part of the Acquisition, shareholders of the Bank received one share of common stock, no par value ("Common Stock") of the Company for each outstanding share of the common stock of the Bank, $2.50 per share par value ("Bank Common Stock"). The only significant asset of the Company is its investment in the Bank. The Company's main office is located at 399 Route 23, Franklin, Sussex County, New Jersey 07416. The Bank is a commercial bank formed under the laws of the State of New Jersey in 1975. The Bank operates from its main office at 399 Route 23, Franklin, New Jersey 07416, and its six branch offices located at Church Street, Vernon, New Jersey; Clove Road, Montague, New Jersey; Woodport Road, Sparta, New Jersey; Route 23, Wantage, New Jersey; 15 Trinity Street, Newton, New Jersey; and Route 206, Andover, New Jersey. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, FDIC and the New Jersey Department of Banking and Insurance (the "Department"). The principal executive offices of the Company are located at 399 Route 23, Franklin, New Jersey 07416, and the telephone number is (201) 827-2404. 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 Sussex, County, New Jersey trade area of service by the Company. The Company engages in a wide range of lending activities and offers commercial, consumer, mortgage, home equity and personal loans. Service Area The Company's service area primarily consists of the Sussex County, New Jersey market, although the Company makes loans throughout New Jersey. The Company operates its main office in Franklin, New Jersey and six branch offices in Vernon, Montague, Sparta, Wantage, Newton and Andover, New Jersey. 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 the Company's service area. Certain of these institutions have significantly higher lending limits than the Company and provide services to their customers which the Company does not offer. Management believes the Company is able to compete on a substantially equal basis with its competitors because it provides responsive personalized services through managements' knowledge and awareness of the Company's service area, customers and business. Employees At December 31, 1996, the Company employed 61 full-time employees and 12 part-time employees. None of these employees is covered by a collective bargaining agreement and the Company believes that its employee relations are good. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. These laws and regulations are intended to protect depositors, not stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank. Bank Holding Company Regulation General. As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the "BHCA"), the Company is subject to the regulation and supervision of the FRB. The Company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. Under the BHCA, the Company's activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the FRB determines to be so closely related to banking or managing or controlling banks as to be properly incident thereto. The BHCA requires, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such bank's voting shares) or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti- competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions or mergers. Additionally, the BHCA prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries; unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefits to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default. Under a policy of the FRB with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Capital Adequacy Guidelines for Bank Holding Companies. The FRB has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $150 million or more. For bank holding companies with less than $150 million in consolidated assets, the guidelines will be applied on a bank-only basis unless: (a) the parent bank holding company is engaged in non-bank activity involving significant leverage; or (b) the parent company has a significant amount of outstanding debt that is held by the general public. The minimum ratio of total capital at 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 I," 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-weighing. 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 a 100% risk-weighing. Transaction related contingencies such as bid bonds, standby letters of credit backing nonfinancial obligations, and undrawn commitments (including commercial credit lines with an initial maturity or more than one year) have a 50% risk-weighing. Short term commercial letters of credit have a 20% risk-weighing and certain short-term unconditionally cancelable commitments have a 0% risk-weighing. In addition to the risk-based capital guidelines, the FRB has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. Bank Regulation As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the Department. As an FDIC-insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the Department impact virtually all activities of the Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions and various other matters. Insurance of Deposits. The Bank's deposits are insured up to a maximum of $100,000 per depositor under the BIF. The Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA") effected a major restructuring of the federal regulatory framework applicable to depository institutions and deposit insurance. FDICIA requires the FDIC to establish a risk-based assessment system for all insured depository institutions. Under this legislation, the FDIC is required to establish an insurance premium assessment system based upon: (i) the probability that the insurance fund will incur a loss with respect to the institution; (ii) the likely amount of the loss; and (iii) the revenue needs of the insurance fund. In compliance with this mandate, FDIC has developed a matrix that sets the assessment premium for a particular institution in accordance with its capital level and overall rating by the primary regulator. Under the matrix as currently in effect, the assessment date ranges from 0 to 31 basis points of assessed deposits, with those institutions at the low end of the assessment schedule paying only a statutory mandated $2,000 premium. 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. Recent Regulatory Enactments. On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Deposit Act") became law. The primary purpose of the Deposit Act is to recapitalize the Savings Association Insurance Fund of the FDIC (the "SAIF") by charging all SAIF member institutions a one-time special assessment. The Deposit Act will lead to equalization of the deposit insurance assessments between BIF and SAIF insured institutions, and will also separate out from insurance assessments payments required for 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. Under the Deposit Act, BIF-insured institutions like the Bank will, for the first time, be required to pay a portion of the obligations owed under the FICO bonds. SAIF institutions will be required to pay 6.4 basis points on assessed deposits while BIF institutions will only be required to pay 1.3 basis points on assessed deposits. This disparity will stay in effect until such time as the Federal thrift and commercial bank charters are merged and the deposit insurance funds are thereafter merged. Under the Deposit Act, this may occur by January 1, 1999. At that time, all federally insured institutions should have the same total FDIC assessment. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Interstate Act") was enacted. The Interstate Act generally enhances the ability of bank holding companies to conduct their banking business across state borders. The Interstate Act has two main provisions. The first provision generally provides that, commencing on September 29, 1995, bank holding companies may acquire banks located in any state regardless of the provisions of state law. These acquisitions are subject to certain restrictions, including caps on the total percentage of deposits that a bank holding company may control both nationally and in any single state. New Jersey law currently allows interstate acquisitions by bank holding companies whose home state has "reciprocal" legislation which would allow acquisitions by New Jersey- based bank holding companies. The second major provision of the Interstate Act permits, beginning on June 1, 1997, banks located in different states to merge and continue to operate as a single institution in more than one state. States may, by legislation passed before June 1, 1997, opt out of the interstate bank merger provisions of the Interstate Act. In addition, states may elect to opt in and allow interstate bank mergers prior to June 1, 1997. A final provision of the Interstate Act permits banks located in one state to establish new branches in another state without obtaining a separate bank charter in that state, but only if the state in which the branch is located has adopted legislation specifically allowing interstate de novo branching. In April, 1996, the New Jersey legislature passed legislation which would permit interstate bank mergers prior to June 1, 1997, provided that the home state of the institution acquiring the New Jersey institution permits interstate mergers prior to June 1, 1997. In addition, the legislation permits an out-of-state institution to acquire an existing branch of a New Jersey-based institution, and thereby conduct a business in New Jersey. The legislation does not permit interstate de novo branches. This legislation is likely to enhance competition in the New Jersey marketplace as bank holding companies located outside of New Jersey become freer to acquire institutions located within the state of New Jersey. Item 2. Description of Property The Company conducts its business through its main office located at 369 Route 23, Franklin, New Jersey, and its six branch offices. The following table sets forth certain information regarding the Company's properties as of December 31, 1996.
Leased Date of Lease Location or Owned Expiration - -------- -------- ---------- 399 Route 23 Owned N/A Franklin, NJ Church Street Owned N/A Vernon, NJ Clove Road Leased April, 2002 Montague, NJ Woodport Road Leased September, 1998 Sparta, NJ Route 23 Owned N/A Wantage, NJ 15 Trinity Street Owned N/A Newton, NJ Route 206 Owned N/A Andover, NJ
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 or the Bank which, if determined adversely, would have a material effect on the business or financial position 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 1996. PART II Item 5. Market for Common Equity and Related Stockholder Matters There is currently no established pubic market for the Common Stock. The Common Stock is not currently traded on any recognized exchange or trading market. As of December 31, 1996, there were approximately 709 holders of record of Common Stock. The Company may pay dividends as declared from time to time by the Company's Board of Directors out of funds legally available therefor, subject to certain restrictions. Since dividends from the Bank will be the Company's sole source of income, any restriction on the Bank's ability to pay dividends will act as a restriction on the Company's ability to pay dividends. Under the Banking Act, no cash dividend may be paid by the Bank unless, following the payment of such dividend, the capital stock of the Bank will be unimpaired and the Bank will have a surplus of no less than 50% of its capital stock or, if not, the payment of such dividend will not reduce the surplus of the Bank. In addition, the Bank cannot pay dividends in such amounts as would reduce its capital below the regulatorily imposed minimums. During fiscal 1996, the Company paid quarterly cash dividends of $0.11, $0.12, $0.13 and $0.36 per share for an annual dividend payout ratio of 46%. During fiscal 1995, the Company paid quarterly cash dividends of $0.10, $0.11, $0.12 and $0.13 per share, an annual dividend payout ratio of 59%. In addition, the Company was declared and paid a 3% Common Stock dividend during 1996. All amounts stated before giving effect to the March 19, 1997 2% stock dividend. Item 6. Management's Discussion and Analysis or Plan of Operation The information required by this item is incorporated by reference from the Registrant's 1997 Annual Report to Shareholders under the caption "Management Discussion and Analysis". Item 7. Financial Statements The information required by this item is incorporated by reference from the Registrant's 1997 Annual Report to Shareholders under the caption "Consolidated Financial Statements". Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 1997 Annual Meeting under the captions "PROPOSAL 1. 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, 1997. The following table sets forth certain information about each executive officer of the Company who is not also a director.
Principal Occupation During Past Five Name, Age and Position Officer Since (1) Years - ---------------------- ----------------- ----- Candace A. Leatham, 42, 1984 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 included in the definitive Proxy Statement for the Company's 1997 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, 1997. 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 1997 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 19, 1997. 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 1997 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, 1997. Item 13. Exhibits, List and Reports on Form 8-K (a) Exhibits. Exhibit Number Description of Exhibits 3(i) Certificate of Incorporation of the Company(1) 3(ii) Bylaws of the Company(1) 10(i) 1995 Incentive Stock Option Plan(1) 10(ii) 1995 Stock Option Plan for Non-Employee Directors(1) 10(iii) 1988 Non-Qualified Stock Option(1) 13 Annual Report to Shareholders for the year ended December 31, 1996. 21 Subsidiaries of the Registrant 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule - ---------------- (1) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27) from the Company's Registration Statement on Form 8-B, Registration No. 1-12569. (b) Reports on Form 8-K None. 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 Chief Executive Officer Dated: March 24, 1997 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 ---- ----- ---- Chairman of the Board and /s/ Donald L. Kovach Chief Executive Officer March 24, 1997 - --------------------- Donald L. Kovach Treasurer (Principal /s/ Candace A. Leatham Financial Officer and March 24, 1997 - ----------------------- Principal Accounting Candace A. Leatham Officer) /s/ Irvin Ackerson Director March 24, 1997 - ----------------------- Irvin Ackerson /s/ William E. Kulsar Secretary and Director March 24, 1997 - --------------------- William E. Kulsar /s/ Joel D. Marvil Director March 24, 1997 - --------------------- Joel D. Marvil /s/ Richard Scott Director March 24, 1997 - ----------------------- Richard Scott /s/ Joseph Zitone Director March 24, 1997 - ----------------------- Joseph Zitone
SUSSEX BANCORP INDEX TO EXHIBITS Exhibit Number Description of Exhibits 3(i) Certificate of Incorporation of the Company(1) 3(ii) Bylaws of the Company(1) 10(i) 1995 Incentive Stock Option Plan(1) 10(ii) 1995 Stock Option Plan for Non-Employee Directors(1) 10(iii) 1988 Non-Qualified Stock Option(1) 13 Annual Report to Shareholders for the year ended December 31, 1996 21 Subsidiaries of the Registrant 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule - --------------- (1) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27) from the Registrant's Registration Statement on Form 8-B, Registration No. 1-12569. EX-13 2 EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 [LOGO] SUSSEX BANCORP 1996 ANNUAL REPORT [GRAPHIC -- NEW JERSEY MAP WITH BANK BRANCHES HIGHLIGHTED] "Our roots are in Sussex County." OFFICE LOCATIONS Main Office: FRANKLIN Rt. 23 Franklin Bank - 827-2404 Administrative Offices - 827-2914 Branch Offices: VERNON WANTAGE Church Street, Vernon Route 23, Wantage 764-6175 875-9957 MONTAGUE NEWTON Clove Road, Montague 15 Trinity Street, Newton 293-3488 383-2211 SPARTA ANDOVER Woodport Road, Sparta Route 206, Andover 729-7223 786-5150 TABLE OF CONTENTS A Message To Our Stockholders Management Discussion and Analysis Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Five-Year Summary Board of Directors and Officers A MESSAGE TO OUR STOCKHOLDERS The directors and officers of Sussex Bancorp are pleased to report our 1996 results. Our year-end balance sheet reflects total loans of $65.5 million an impressive 24.2% over the previous year. Deposits were up $7 million totaling $93 million by year-end. We increased our provision for loan losses 103% over 1995. With emphasis on higher yielding commercial loans in 1997 we will continue to focus upon a requisite loan loss reserve as our loan growth emerges during the coming year. Net Income for 1996 was negatively impacted by a one-time special assessment of $101,000 related to the recapitalization of the Savings Association Insurance Fund (SAIF). Certainly reviewing last years performance is important -- but where your bank wants to be in the future and how we get there is what will ultimately affect shareholder value. During 1997 the Holding Company will seek to develop off-balance sheet subsidiaries providing increased earnings without a substantial corresponding capital investment. Negotiations with a nationally advertised risk management and insurance brokerage company, a security firm and title company are now underway with the intent to expand our product base as well as our market penetration as soon as possible. A joint venture with Capital Funding, a New Jersey based licensed mortgage banker, is near completion. This will afford our mutual customers the benefits of a full loan menu including products ranging from 30 year fixed mortgages to loans heretofore unavailable because of the necessity to utilize non-conventional underwriting standards. As the public becomes more at ease in utilizing modern technology the demand from our customer base for off-site self-service banking will be increased. Consequently, a substantial portion of our 1997 budget is committed to developing additional banking channels such as more off-site ATM's, tele-banking and other alternative retail delivery systems. Fee income from a service banking business is growing at a rate far exceeding the growth rate of traditional banking industry products. Sussex Bancorp is committed to a program of technology up-grade that will maintain our position as a significant force in our market area. Your Board of Directors anticipate continuing our dividend policy that has produced a combined stock and cash dividend to our shareholders for twenty consecutive years. We believe your commitment to us deserves nothing less. Sincerely, /s/Donald L. Kovach - ------------------- Donald L. Kovach President/CEO MANAGEMENT DISCUSSION AND ANALYSIS This section presents Management's discussion and analysis of and changes to the Company's consolidated financial results of operations and condition and should read in conjunction with the Company's financial statements and notes thereto included herein. MANAGEMENT STRATEGY The Company's goal is to serve as a community-oriented financial institution serving the Sussex County, New Jersey marketplace. All seven of the Company's offices are located within Sussex County, New Jersey, and over 90% of all of the Company's loans are made to borrowers located in Sussex County. Through the year ended December 31, 1996, Management sought to reestablish a higher profile for the Company in the markets which it serves after a period of lower visibility. Management sought this heightened visibility through the aggressive offerings of 1- to 4-family home mortgage loans and time deposit accounts. Management believes that by gaining market share in these areas, the Company will be able to gain more ongoing customer relationships as well as additional customers through its heightened visibility. Management believes its efforts to increase market share during 1996 have been successful, as evidenced by the 30.3% increase in 1-4 family residential mortgages and the 13.2% increase in period end time deposits. Loan growth during 1996 was funded both by a shift of assets out of lower yielding federal funds sold and by the increase in time deposits. For 1997, Management's goals for the Company include (1) enhancing non-interest income by offering additional products, such as insurance and securities brokerage products, (2) managing the Company's interest rate risk by becoming, in selected situations, a seller of 1- to 4-family residential mortgages, and (3) diversifying the Company's loan portfolio by emphasizing the origination of adjustable rate commercial loans and loans to individuals. Although Management anticipates broadening the Company's product offerings, primarily through joint ventures or agreements with third party providers, it has not entered into any agreements with any such third parties as of the date hereof, and no assurances can be given that the Company will successfully be able to negotiate any such agreements or arrangements. RESULTS OF OPERATIONS For the year ended December 31, 1996, the Company's net income was $522,000, representing an increase of $21,000 over the $501,000 earned in 1995, which was $99,000 less than the $600,000 earned in 1994. The net income per share for 1996 was $.76, compared to the reported net income per share of $.74 in 1995 and the reported net income per share of $.90 in 1994. The Company's results for 1996 were affected by an increase of $199,000 in net interest income, partially offset by an increase in the provision for loan losses, an increase in total other expenses caused by a one-time assessment of $101,000 levied by the Federal Deposit Insurance Corporation ("FDIC") in connection with the recapitalization of the Savings Association Insurance Fund ("SAIF") and an increase in income tax expense. The Company's SAIF insured deposits were obtained through the Company's 1992 acquisition of the assets and liabilities of a savings bank. NET INTEREST INCOME Net interest income is the difference between interest and fees earned on loans and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities which support those assets, as well as changing interest rates when differences exist in repricing dates of assets and liabilities. Net interest income, on a fully taxable basis (a 34% tax rate), increased by $199,000 in 1996 to $4.0 million compared net interest income of $3.8 million in 1995. The increase in net income occurred as total interest income increased by $660,000, or 10.9%, to $6.7 million, while interest expense increased by $461,000, or 20.3%, to $2.7 million. Interest income increased primarily as a result of an increase in interest earning assets, as the Company's average earning assets increased by $9.5 million. The increase in volume was partially offset by a decrease in rate as the Company's average yield on its interest earning assets declined to 7.53% for the year ended December 31, 1996, compared to 7.62% for the year ended December 31, 1995. The decrease in rate primarily reflects the Company's strategy of gaining market share by offering lower priced loan products. Interest income on total loans increased from $4.6 million in 1995 to $5.0 million in 1996, an increase of $391,000. As discussed above, this increase was primarily the result of an increase in the volume of the loan portfolio, offset by a decline in average rate. The average yield on loans declined 15 basis points from 8.48% in 1995 to 8.33% in 1996. Total interest income on securities increased from $1.2 million in 1995 to $1.6 million in 1996, an increase of $338,000, or 27.7%. Average securities increased from $21.9 million in 1995 to $26.2 million in 1996, an increase of $4.3 million. Total interest expense increased from $2.3 million in 1995 to $2.7 million for the year ended December 31, 1996, an increase of $461,000, or 20.3%. The increase in interest expense was attributable both to an increase in the Company's total deposits and an increase in the rates paid on deposits by the Company. During 1996, the Company's average interest-bearing liabilities outstanding increased by $7.6 million, to $75.1 million for the year ended December 31, 1996 compared to $67.5 million for the year ended December 31, 1995. The increase in deposits occurred primarily in the Company's time deposits, which bear higher interest rates than the Company's other deposits. Average time deposits increased to $32.5 million, an increase of $8.5 million, or 35.4%, from 1995 to 1996, and the average rate paid by the Bank on its time deposits increased to 5.21% from 5.02% for the twelve months ended December 31, 1995. The net interest spread, or the difference between the yield on earning assets and the average cost of funds was 4.46% in 1996, 4.77% in 1995 and 5.07% in 1994, reflecting the Company's higher cost of funds and the decreased yield earned by the Company on its interest earning assets during these periods as Management implemented its strategy of increasing market share. COMPARATIVE AVERAGE BALANCE SHEETS The following table reflects the components of the Company's net interest income, setting forth for the period presented (1) average assets, liabilities and stockholders' equity, (2) interest income earned on interest earning assets, and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest earning assets and average rates paid on interest-bearing liabilities, (4) the Company's net interest spread, and (5) the Company's net yield on interest earning assets. Rates are computed on a taxable equivalent basis.
Comparative Average Balance Sheets Year Ended December 31, 1996 1995 =================================================================================================================================== Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Assets Interest Earning assets: Taxable loans (net of unearned income) $59,111 $4,958 8.33% $52,976 $4,5678 .48% Tax exempt securities 1,060 62 5.81% 3,823 2416 .31% Taxable investment securities 25,131 1,512 6.24% 18,109 1,0516. 32% Interest bearing deposits 0 0 0.00% 45 20 .00% Federal funds sold 3,609 195 5.40% 4,472 2625 .88% Total earning assets 88,911 6,727 7.53% 79,425 6,1237 .62% Non-interest earning assets 8,576 8,386 Allowance for possible loan losses (491) (492) Total Assets $96,996 $87,319 Liabilities and Shareholders' Equity Interest bearing liabilites: NOW deposits $11,962 $223 1.86% $11,446 $2041 .82% Savings deposits 26,789 672 2.51% 26,849 6692 .49% Money market deposits 3,818 84 2.20% 5,203 1162 .21% Time deposits 32,515 1,749 5.21% 23,981 1,2745 .02% Subordinated debt 0 0 0.00% 0 00 .00% Total interest bearing liabilites 75,084 2,728 3.63% 67,479 2,2673 .36% Non-interest bearing liabilites: Demand deposits 13,165 11,879 Other liabilities 1,116 807 Total non-interest bearing liablilites 14,281 12,686 Shareholders' equity 7,631 7,154 Total liabilities and shareholders' equity $96,996 $87,319 Net interest differential $3,999 $3,856 Net yield on interest-earning assets 4.46% 4.77%
The following table presents by category the major factors that contributed to the changes in net interest income for each of the years ended December 31, 1996 and 1995, as compared to each respective previous period. Amounts have been computed on a fully tax equivalent basis, assuming a federal income tax rate of 34%.
Year Ended December 31, 1996 versus 1995 ========================================================================================= Increase (Decrease) Due to Change In: Average Average Volume Rate Net - ----------------------------------------------------------------------------------------- (In Thousands) Interest Income: Taxable loans (net of unearned income) $475 (84) 391 Tax exempt securites (161) (18) (179) Taxable investment securities. 419 42 461 Interest bearing deposits. (2) 0 (2) Federal funds sold. (47) (20) (67) Total interest income. 684 (80) 604 Interest expense: NOW deposits. 9 6 15 Savings deposits. 0 3 3 Money market deposits. (31) (1) (32) Time deposits 463 12 475 Total interest expense 441 20 461 Net interest income $243 $(100) $143
PROVISION FOR POSSIBLE LOAN LOSSES The provision for possible loan losses in 1996 was $130,000 compared to provisions of $64,000 and $187,000 in 1995 and 1994, respectively. The increase for 1996 compared to 1995 reflects the increase in the Company's loan portfolio. The decrease from 1994 to 1995 reflects reduced chargeoffs during 1995. The Company anticipates that it will continue to increase its provision for possible loan losses during 1997 to reflect both the increase in the Company's total loan portfolio and increased diversification as the Company stresses the origination of commercial and individual loans, which may entail a greater degree of risk than loans secured by 1- to 4-family residential properties. OTHER INCOME The Company's other income is primarily generated through service charges on deposit accounts. Other income increased $22,000 in 1996 compared to an increase of $85,000 in 1995, reflecting the increase in the Company's total deposits. The Company anticipates that other income may become an increasingly important component of net income as the Company seeks to expand its product offerings beyond loan and deposit products. OTHER EXPENSE Total other expense increased from $3,641,000 in 1995 to $3,707,000 in 1996, an increase of $66,000. Increases in net occupancy expenses and other operating expenses were partially offset by decreases in salaries and employee benefits and furniture and equipment expense. In addition, the Company incurred a $33,000 loss on the sale of real estate owned in 1996, compared to a gain of $3,000 recognized in 1995. Finally, other operating expenses increased by $79,000, or 6.4%, during 1996. This increase was primarily attributable to the one-time SAIF assessment of $101,000. Excluding the special assessment, other operating expenses decreased by $22,000. Salary and employee benefits decreased by $63,000, or 3.6%, to $1.7 million for the year ended December 31, 1996 from $1.8 million for the year ended December 31, 1995. INCOME TAX EXPENSE The Company's income tax provision, which includes both federal and state taxes, was $322,000, $254,000 and $234,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The increase provision for income taxes reflects both the Company's increased net income and increase in the Company's effective tax rate. Financial Condition At December 31, 1996, the Company had total assets of $101.8 million, compared to total assets of $94.9 million at December 31, 1995. Total loans increased to $65.5 million at December 31, 1996 from $52.7 million at December 31, 1995. Total deposits increased to $92.9 million at December 31, 1996 from $85.9 million at December 31, 1995. LOANS Total loans increased from $52.7 million at December 31, 1995 to $65.5 million at December 31, 1996, an increase of $12.8 million. Total loans increased by $681,000, or 1.3%, from 1994 to 1995. The increase in the Company's loan portfolio during 1996 occurred primarily in loans secured by one- to four-family residential properties, which increased by $12.0 million, or 30.3%, to $51.6 million at December 31, 1996 from $39.6 million at December 31, 1995. The increase in 1-4 family mortgage loans occurred as the Company sought to aggressively reestablish its presence it the markets served by its branch offices after a period of declining visibility. To implement this strategy, the Company began to competitively price and promote its loan products, particularly its 1-4 family mortgage loans. The Company's marketing strategy resulted in the above described increase in mortgage loans, while the average rate earned on taxable loans declining from 8.48% for the year ended December 31, 1995 to 8.33% for the year ended December 31, 1996. Although the Company anticipates continuing to provide competitively priced home mortgage products, the Company does not anticipate continuing to be one of the lowest cost sources of home mortgages in its trade area. In addition, the Company's commercial loans increased by $170,000, to $1.8 million from $1.6 million, the Company's loans to individuals, primarily automobile loans, increased by $476,000 to $2.1 million from $1.6 million, and the Company's loans secured by non-residential properties decreased by $193,000. The increase in loan originations was funded during 1996 both by a $6.3 million reduction in federal funds sold and through an increase in the Company's time deposits. The Company has defined its primary market area to be Sussex County, New Jersey. Over ninety percent of all loans in the Company's portfolio are made to borrowers located in Sussex County. The majority of approved loans are secured by real estate and the borrower's primary residences. The end of year loan to deposit ratios for 1996, 1995 and 1994 were 69.9%, 60.7% and 69.3% respectively. The Company retains all closed loans for its portfolio and seldom purchases loans from third parties. The Company does enter into loan participations from time to time, especially on larger loans, to reduce the Company's exposure and to enable the Company to make loans in excess of its loan-to-one borrower limit. During 1997, the Company anticipates becoming, on a selected basis, a seller of 1- to 4-family residential mortgages. The Company anticipates using selected loan sales as an asset/liability management tool, but does not anticipate becoming a participant in the secondary market. Rather, the Company anticipates making selected sales to other locally-based financial institutions, with servicing retained by the Company. The following tables set forth certain information concerning the distribution of the Company's loan portfolio and its interest rate sensitivity.
December 31, 1996 1995 =========================================================================================================================== Amount Percent Amount Percent - --------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Commercial and industrial $ 1,817 2.75% $ 1,647 3.10% Real Estate-non residential properties. 9,603 14.65% 9,796 18.60% Residential properties 51,621 78.80% 39,620 75.10% Construction. 381 0.60% 69 0.15% Lease financing. 0 0 0 0.00% Consumer 2,091 3.20% 1,615 3.05% - --------------------------------------------------------------------------------------------------------------------------- Total Loans. $65,513 100.00% $52,747 100.00% - --------------------------------------------------------------------------------------------------------------------------- Within 1 Year 1 to 5 Years After 5 Years Total - --------------------------------------------------------------------------------------------------------------------------- Loans with fixed rates: Commercial $313 $ 183 $189 $ 685 Real Estate 381 0 0 381 Loans with adjustable rates: Commercial 283 827 22 1,132 Real Estate 0 0 0 0 - --------------------------------------------------------------------------------------------------------------------------- $977 $1,010 $211 $2,198 - ---------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY Non-performing assets consist of non-accrual loans and all loans over ninety days delinquent and other real estate owned ("OREO"). Management ceases to accrue interest on all loans when they are over ninety days delinquent. All previously accrued interest is reversed unless management determines that the loan is adequately collateralized and that the principal and interest will be recovered within the original term of the loan. Impaired loans include non accrual loans and loans which have been restructured that were not paying in accordance with their original terms. As of December 31, 1996, the Company had two restructured loans with a remaining balance of $483,000. As of year-end both loans are current and performing in accordance with their restructured terms. Restructured loans are put on accrual basis if the customer demonstrates the ability to repay the debt under the terms of the renegotiation by a period of performance, by financial statements or other evidence of ability to service debt. OREO has been reduced since the year-end 1994 by 34%. The current total as of December 31, 1996 is $396,477 which represent three properties. Management has rented one property to the former owner, while final legal issues are resolved. A contract was under consideration for another property. Properties are analyzed by appraisals and/or broker opinions prior to being placed in OREO. The outstanding loan balance is adjusted to reflect current market value and cost associated with a sale. It is the practice of management to actively market all OREO so that carrying costs are minimized. Thus, there are no remaining properties which were on the 1994 and 1995 OREO lists, except for one property which is part of a prospective bankruptcy plan under dispute by the Company. In addition to active monitoring and collecting on all delinquent loans with an emphasis on both the short and long term delinquent customers, management has an active loan review process for commercial customers with aggregate loan amounts unsecured of $100,000 or more and real estate secured of $250,000 or more. This review consists of a detailed presentation for the Directors Loan Committee with both a narrative and analysis of the customer and all relevant financial information. The Company has set goals to ensure the continued focus in the area of problem loans. Management has produced significant reduction in all categories. While there are inherent risks and uncertainties in the financial industry which can be compounded by down turns in the local economy, management has developed strategies and an overall plan to continue to minimize the impact of delinquent, non-performing and OREO to the Company. While the Company's loan portfolio has grown over the last three years, the percentage and total amount of delinquent loans has dropped significantly. Delinquent loans totaled $1.6 million at December 31, 1996, $3.3 million at December 31, 1995 and $3.3 million at December 31, 1994, with the percentages to the total portfolio of 2.44% for 1996, 6.26% for 1995 and 6.34% for 1994. Management has worked aggressively to reduce losses from the portfolio via aggressive collection efforts. The following table provides information concerning risk elements in the loan portfolio.
December 31, 1996 1995 ================================================================================ Non-accrual loans $935 $1,621 Non-accrual loans to total loans. 1.43% 3.07% Non-performing assets to total assets 1.31% 2.15% Allowance for possible loan losses as a percentage of non-performing loans 57.98% 27.80%
ALLOWANCE FOR LOAN LOSSES Management has established a model for calculating the adequacy of the Company's Allowance for Loan Losses ("ALL"). Restructured loans, as well as loans designated by the Company's internal loan watch list, are assigned a percentage of their balance as a specific reserve. Additionally, all other delinquent loans are grouped by the number of days delinquent with this amount assigned a general reserve figure for this calculation. Historic and economic adjustments are also factored in with the resulting figure compared to the current ALL. The allowance for possible loan losses at year end of 1996 was $542,000 versus $476,000 in 1995 and $478,000 in 1994. Management recognizes the importance of adequate reserves and their proper allocation. Over time management reviews and adjusts this reserve in line with our objectives and the underlying credit risk inherent in the total portfolio. The following table provides a three year analysis of the changes in the allowance for possible loan losses: Allowance for Loan Loss
December 31, 1996 1995 1994 ===================================================================================================== Beginning Balance $476,453 $477,756 $440,353 Provision for Loan Loss 130,000 64,000 187,000 Loans Charged-off 66,444 68,119 182,799 Recoveries 1,996 2,817 33,203 - ----------------------------------------------------------------------------------------------------- Ending Balance $542,005 $476,454 $477,757 - -----------------------------------------------------------------------------------------------------
The following table sets forth information concerning the allocation of the Company's ALL.
December 31, 1996 1995 ===================================================================================================== % of % of Amount All Loans Amount All Loans - ----------------------------------------------------------------------------------------------------- Balance Applicable to: Commericial and industrial. $ 5,420 1.0% $ 4,765 1.0% Real Estate: Nonresidential properties. 77,507 14.3% 74,803 15.7% Residential properties 444,986 82.1% 387,357 81.3% Construction. 3,252 0.6% 1,429 0.3% Consumer. 10,840 2.0% 8,100 1.7% - ----------------------------------------------------------------------------------------------------- Total $542,005 100.00% $476,454 100.00% - -----------------------------------------------------------------------------------------------------
Net charge-offs were $64,448 for 1996 as opposed to $65,303 in 1995 and $149,596 in 1994. Net charge-offs as a percent of year-end total loans were .10% in 1996, .12% in 1995 and .28% in 1994. SECURITIES PORTFOLIO The following table shows the carrying value of the Company's security portfolio as of the dates indicated. Securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discounts. Securities available for sale are stated at their fair value.
December 31, 1996 1995 1994 =========================================================================================================================== (In Thousands) U. S. treasury securities and obligations of U. S. government corporations and agencies: Available for sale $22,154 $21,564 $15,369 Obligations of states and political subdivisions: Held to maturity 652 1,671 4,865 Other investments: Held to maturity 470 471 394 - --------------------------------------------------------------------------------------------------------------------------- Total Securities $23,276 $23,706 $20,628 - ---------------------------------------------------------------------------------------------------------------------------
DEPOSITS Total deposits increased $7.0 million from $85.9 million at year-end 1995 to $92.9 million at year-end 1996, an 8.1% increase. The increase was primarily attributable to an increase in time deposits, which increased to $52.6 million, an increase of $6.1 million, or 13.2%, from time deposits of $46.5 million at year-end 1995. The increase in time deposits reflects Management's strategy of reestablishing the Company in its trade areas, and growing the Company's balance sheet through the origination of additional loans and using the time deposits as a funding source for those loans. The increase in time deposits occurred as the Company offered highly competitive rates for medium-term deposit products. The time deposits originated in 1996 had an average maturity, at the time of origination, of 20 months. It has been Management's experience that the majority of its time deposit products have, upon maturity, stayed with the Company, either in new time deposits or other deposit products, even if the Company has lowered the rates initially paid on the time deposits at the time of their origination. Management believes that through the Company's available for sale securities portfolio and secondary liquidity sources, such as lines of credit with the Federal Home Loan Bank of New York, the Company will have sufficient liquidity to fund its operating needs, even if a substantial portion of the time deposits do not renew. The following tables provide information concerning the Company's deposits.
December 31, 1996 December 31, 1995 Amount % Amount % - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Average Balance Deposits: NOW deposits $11,962 13.60% $11,446 14.40% Savings deposits. 26,789 30.40% 26,849 33.80% Money market deposits 3,818 4.30% 5,203 6.60% Time deposits 32,515 36.80% 23,981 30.20% Demand deposits 13,165 14.90% 11,879 15.00% - --------------------------------------------------------------------------------------------------------------------------- Total deposits $88,249 100.00% $79,358 100.00% - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Time Deposits ($100,000 and over) Three months or less. $ 720 Over three months through six months. 1,235 Over six months through twelve months. 315 Over twelve months 607 - --------------------------------------------------------------------------------------------------------------------------- Total $2,877 - ---------------------------------------------------------------------------------------------------------------------------
LIQUIDITY Liquidity is a measure of the Company's ability to provide sufficient cash flow for current and future financial obligations and commitments on a timely basis. Sources of liquidity include deposits, liquidation or maturity of loans and investments and short-term borrowings. It is management's intent to fund future loan demand with deposit growth, sales of securities and, to a lesser extent, sales of mortgages. In addition, the Bank is a member of Federal Home Loan Bank of New York and has available an overnight line of credit in the amount of $4.3 million. The Bank did not borrow against this line of credit during 1996. The Company believes that its current level of liquidity is sufficient to meet its current and anticipated operational needs. INTEREST RATE SENSITIVITY An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. Interest rate sensitivity is the volatility of a Company's earnings resulting from a movement in market interest rates. The Company has developed an Asset and Liability Management Policy. The policy provides for the Company to generally maintain a relatively balanced position between interest rate sensitive assets and interest rate sensitive liabilities. At December 31, 1996, the interest rate sensitivity position evident for periodic intervals reflects an asset sensitive position.
Rate Sensitivity Analysis December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Assets 0-3 Mos 3-12 Mos 1-5 Years 5+ Years - --------------------------------------------------------------------------------------------------------------------------- Securities. $ 1,922 $ 8,671 $12,683 0 Fed Funds 4,250 0 0 0 Commercial Loans (Fixed). 267 200 218 0 Commercial Loans (Variable) 0 283 8272 2 Home Equity (Fixed). 0 0 0 0 Home Equity (Variable). 4,549 0 0 0 Consumer Loans 1,269 2,748 6,975 5,124 SBA Loans (Variable). 0 0 0 0 Mortgages. 1,162 3,994 15,535 22,340 Deposit Loans 0 0 0 0 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Assets $13,419 $15,896 $36,238 $27,486 - --------------------------------------------------------------------------------------------------------------------------- Liabilities 0-3 Mos 3-12 Mos 1-3 Yrs 4-15 Yrs - --------------------------------------------------------------------------------------------------------------------------- Certificate of Deposits. $ 7,746 $ 14,517 $14,129 $ 438 Money Market Deposit Accounts. 3,693 0 0 0 Savings Accounts. 2,650 23,852 0 0 Now Accounts. 1,205 10,852 0 0 Money Market Savings Accounts. 0 0 0 0 Subordinated Debt 0 0 0 0 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities $15,294 $ 49,221 $14,12 $ 438 - --------------------------------------------------------------------------------------------------------------------------- Cumulative Sensitivity Gap. $ (1,875) $(33,325) $22,109 $27,048
CAPITAL RESOURCES Stockholders equity inclusive of Unrealized Gain (Loss) on Securities Available for Sale, net of income taxes was $7,882,000 at December 31, 1996. The growth in stockholders' equity is generated primarily through earnings retention. The Company's and SCSB's regulators have classified and defined bank holding company capital into the following components - (1) Tier I capital which includes tangible stockholders' equity for common stock and certain perpetual preferred stock, and Tier II capital, which includes a portion of the allowance for possible loan losses, certain qualifying long-term debt and preferred stock which does not qualify for Tier I capital. The Company's and SCSB's regulators have implemented risk-based capital guidelines which require banks and bank holding companies to maintain certain minimum capital as a percent of such bank's assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). Banks and bank holding companies are required to maintain, at a minimum, Tier I capital as a percent of risk-adjusted assets of 4.0% and combined Tier I and Tier II capital as a percent of risk-adjusted assets of 8.0%. As of December 31, 1996, the Company's Tier I and combined Tier I and Tier II capital ratios were 14.29% and 15.40%, respectively. In addition to the risk-based guidelines discussed above, the Company's and SCSB's regulators require that banks and bank holding companies which meets the regulators' highest performance and operational standards maintain a minimum leverage ratio (Tier I capital as a percent of tangible assets) of 3.0%. For those banks and bank holding companies with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be proportionately increased. Minimum leverage ratios for each bank and bank holding company are established and updated through the ongoing regulatory examination process. As of December 31, 1996, the Company has a leverage ratio of 6.90%. EFFECT OF INFLATION Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, the level of interest rates has a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or change with the same magnitude as the prices of goods and services since such prices are affected by inflation. Accordingly, the liquidity, interest rate sensitivity and maturity characteristics of the Company's assets and liabilities are more indicative of its ability to maintain acceptable performance levels. Management of the Company monitors and seeks to mitigate the impact of interest rate changes by attempting to match the maturities of assets and liabilities to manage its gap, thus seeking to minimize the potential effects of inflation.[GRAPHIC OMITTED] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Sussex Bancorp: We have audited the accompanying consolidated balance sheets of Sussex Bancorp (a New Jersey corporation) and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sussex Bancorp and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP ---------------------- Arthur Andersen LLP Roseland, New Jersey January 10, 1997 (except with respect to the matter discussed in Note 10, as to which the date is March 19, 1997)
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS (Notes 2 and 11) $4,605,000 $3,652,000 FEDERAL FUNDS SOLD (Note 2): Overnight 4,250,000 9,050,000 Term -- 1,500,000 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 8,855,000 14,202,000 - --------------------------------------------------------------------------------------------------------------------------- SECURITIES (Notes 2 and 3): Available for sale, at market value 22,154,000 21,564,000 Held to maturity, at amortized cost (market value of $1,116,000 in 1996 and $2,142,000 in 1995) 1,122,000 2,142,000 - --------------------------------------------------------------------------------------------------------------------------- Total securities 23,276,000 23,706,000 - --------------------------------------------------------------------------------------------------------------------------- LOANS (Notes 2, 4 and 5) 65,513,000 52,747,000 Less-- Unearned income 49,000 123,000 Allowance for possible loan losses 542,000 476,000 - --------------------------------------------------------------------------------------------------------------------------- Net loans 64,922,000 52,148,000 - --------------------------------------------------------------------------------------------------------------------------- PREMISES AND EQUIPMENT, net (Notes 2 and 7) 2,242,000 2,307,000 - --------------------------------------------------------------------------------------------------------------------------- ACCRUED INTEREST RECEIVABLE 544,000 582,000 - --------------------------------------------------------------------------------------------------------------------------- OTHER REAL ESTATE (Note 2) 396,000 329,000 - --------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS (Notes 2 and 9): Intangibles 870,000 954,000 Other 671,000 642,000 - --------------------------------------------------------------------------------------------------------------------------- Total other assets 1,541,000 1,596,000 - --------------------------------------------------------------------------------------------------------------------------- Total assets $101,776,000 $94,870,000 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits -- Demand -- noninterest bearing $13,807,000 $13,010,000 Savings -- interest bearing 26,502,000 26,451,000 Time -- interest bearing (includes deposits $100,000 and over of $2,877,000 in 1996 and $2,346,000 in 1995) 52,580,000 46,464,000 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 92,889,000 85,925,000 Accrued interest payable and other liabilities 1,005,000 1,336,000 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 93,894,000 87,261,000 - --------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY (Notes 2, 3, 8, 10 and 12): Common stock -- no par value, authorized 5,000,000 and 2,000,000 shares in 1996 and 1995; issued and outstanding 688,496 in 1996 and 647,236 in 1995 5,246,000 4,532,000 Retained earnings 2,729,000 3,023,000 Unrealized gain (loss) on securities available for sale, net of income taxes (93,000) 54,000 - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 7,882,000 7,609,000 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $101,776,000 $94,870,000 - --------------------------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ================================================================================================================================ INTEREST INCOME: Interest and fees on loans $4,958,000 $4,567,000 $4,386,000 Interest on Federal funds sold 195,000 262,000 81,000 Interest on deposits with banks -- 2,000 4,000 Interest on securities-- Taxable 1,512,000 1,051,000 886,000 Exempt from Federal income tax 45,000 168,000 159,000 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 6,710,000 6,050,000 5,516,000 INTEREST EXPENSE 2,728,000 2,267,000 1,656,000 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 3,982,000 3,783,000 3,860,000 PROVISION FOR POSSIBLE LOAN LOSSES (Notes 2 and 5) 130,000 64,000 187,000 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 3,852,000 3,719,000 3,673,000 - --------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME: Service charges on deposit accounts 512,000 509,000 443,000 Safe deposit rental income 32,000 31,000 31,000 Trust department income (Note 2) 9,000 12,000 11,000 Other income 146,000 125,000 107,000 - -------------------------------------------------------------------------------------------------------------------------------- Total other income 699,000 677,000 592,000 - -------------------------------------------------------------------------------------------------------------------------------- OTHER EXPENSES: Salaries and employee benefits 1,692,000 1,755,000 1,609,000 Net occupancy expense 357,000 334,000 335,000 Furniture and equipment expense 319,000 328,000 259,000 (Gain) loss on sale of other real estate, securities and equipment 33,000 (3,000) (19,000) Other operating expenses (Notes 2 and 14) 1,306,000 1,227,000 1,247,000 - -------------------------------------------------------------------------------------------------------------------------------- Total other expenses 3,707,000 3,641,000 3,431,000 - -------------------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 844,000 755,000 834,000 PROVISION FOR INCOME TAXES (Notes 2 and 9) 322,000 254,000 234,000 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 522,000 $ 501,000 $ 600,000 - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2) 684,309 672,808 667,290 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Note 2) $ .76 $ .74 $ .90 - -------------------------------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Unrealized Gain(Loss) on Common Stock Retained Securities Available Shares Amount Earnings for Sale Total =================================================================================================================================== BALANCE, December 31, 1993 634,838 $4,383,000 $2,434,000 $106,000 $6,923,000 Net income -- -- 600,000 -- 600,000 Cash dividends ($.32 per share) -- -- (216,000) -- (216,000) Shares issued through dividend reinvestment plan 1,873 22,000 -- -- 22,000 Change in unrealized loss on securities available for sale, net of income taxes (Note 3) -- -- -- (683,000) (683,000) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1994 636,711 4,405,000 2,818,000 (577,000) 6,646,000 Net income -- -- 501,000 -- 501,000 Cash dividends ($.44 per share) -- -- (296,000) -- (296,000) Shares issued through dividend reinvestment plan 10,525 127,000 -- -- 127,000 Change in unrealized gain on securities available for sale, net of income taxes (Note 3) -- -- -- 631,000 631,000 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1995 647,236 4,532,000 3,023,000 54,000 7,609,000 Net income -- -- 522,000 -- 522,000 Cash dividends ($.35 per share) -- -- (242,000) -- (242,000) Stock dividend (5%) 32,660 569,000 (574,000) -- (5,000) Stock options exercised 500 5,000 -- -- 5,000 Shares issued through dividend reinvestment plan 8,100 140,000 -- -- 140,000 Change in unrealized gain on securities available for sale, net of income taxes (Note 3) -- -- -- (147,000) (147,000) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 688,496 $5,246,000 $2,729,000 ($ 93,000) $7,882,000 - ---------------------------------------------------------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ================================================================================================================================= CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 522,000 $ 501,000 $ 600,000 - --------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization 343,000 343,000 281,000 Provision for possible loan losses 130,000 64,000 187,000 Premium amortization on securities, net 39,000 127,000 177,000 Accretion of loan origination and commitment fees, net (74,000) (40,000) (50,000) Gain on sale of equipment -- -- (10,000) Loss (gain) on sale of other real estate 33,000 (3,000) (9,000) Deferred Federal income tax provision (benefit) 54,000 (6,000) 11,000 Decrease in accrued interest receivable 38,000 3,000 12,000 Decrease in other assets (39,000) (380,000) (353,000) (Decrease) increase in accrued interest payable and other liabilities (331,000) 834,000 (95,000) - --------------------------------------------------------------------------------------------------------------------------------- Total adjustments 193,000 942,000 151,000 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 715,000 1,443,000 751,000 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities -- Available for sale 10,232,000 11,280,000 1,588,000 Held to maturity 2,239,000 5,366,000 4,390,000 Purchases of securities -- Available for sale (11,105,000) (16,627,000) -- Held to maturity (1,220,000) (2,171,000) (4,871,000) Proceeds from sale of other real estate 366,000 698,000 565,000 Proceeds from sale of equipment -- -- 10,000 Net increase in loans (13,235,000) (1,177,000) (4,925,000) Capital expenditures (201,000) (304,000) (659,000) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (12,924,000) (2,935,000) (3,902,000) - --------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ================================================================================================================================= CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in demand deposits and savings accounts 848,000 (1,778,000) (719,000) Net increase in time deposits 6,116,000 12,616,000 699,000 Exercise of stock options 5,000 -- -- Stock dividend, net of fractional shares paid (5,000) -- -- Payment of dividends, net of reinvestment (102,000) (169,000) (216,000) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 6,862,000 10,669,000 (236,000) - --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (5,347,000) 9,177,000 (3,387,000) CASH AND CASH EQUIVALENTS, beginning of year 14,202,000 5,025,000 8,412,000 - --------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 8,855,000 $14,202,000 $5,025,000 ================================================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for -- Interest $ 2,968,000 $ 1,715,000 $1,670,000 Income taxes 182,000 201,000 138,000 Loans transferred to other real estate 473,000 417,000 695,000 ================================================================================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of Sussex Bancorp (the "Parent Company") and its wholly-owned subsidiary, Sussex County State Bank (the "Bank", or when consolidated with the Parent Company, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Effective November 20, 1996, all of the then outstanding common shares of the Bank were exchanged for an equal number of shares of the Parent Company common stock and the Parent Company acquired all of the outstanding common shares of the Bank. This exchange of shares has been accounted for as a reorganization of entities under common control resulting in no changes to the underlying carrying amount of assets and liabilities. The Bank, a New Jersey State Chartered commercial bank, commenced operation in 1976. It provides commercial banking and trust services for a broad range of individual and corporate customers and various community bodies. The Bank operates seven branches in Sussex County, New Jersey. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A summary of significant accounting policies of the Company applied in the preparation of the accompanying consolidated financial statements follows. Basis of Presentation and Use of Estimates -- The consolidated financial statements include the accounts of the Company and its wholly--owned subsidiary. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities -- Securities which the Company has the ability and intent to hold until maturity are classified as held to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts on a straight-line basis which is not materially different from the interest method. Securities which are held for indefinite periods of time and which management intends to use as part of its asset/ liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, increased capital requirements or other similar factors, are classified as available for sale and are carried at fair value. Differences between an investment's amortized cost and fair value is charged/credited directly to stockholders' equity, net of income taxes. The cost of securities sold is determined on a specific identification basis. Gains and losses on sales of securities are recognized in the income statement upon sale. The Company has no securities held for trading purposes as of December 31, 1996 and 1995. Loans -- Interest is accrued on loans primarily based upon the principal amount outstanding over the terms of the respective loan instruments. The general policy of the Company is to discontinue the accrual of interest income on loans where principal or interest is past due 90 days or more and timely collection thereof is doubtful. Loan origination and commitment fees and the related costs are deferred and accreted as a yield adjustment over the contractual life of the related loans. The unaccreted balance is included in unearned income. Allowance For Possible Loan Losses -- The allowance for possible loan losses is maintained at a level considered adequate to provide for potential loan losses. The allowance is increased by provisions charged to expense and reduced by net charge-offs. The level of the allowance is based on management's evaluation of potential losses in the loan portfolio, after consideration of appraised collateral values, financial condition of borrowers, as well as prevailing and anticipated economic conditions. Credit reviews of the loan portfolio, designed to identify potential charges to the allowance, are made on a periodic basis during the year by senior management. Impaired Loans -- The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures, as of January 1, 1995. SFAS No. 114 requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. This statement is not applicable to large groups of smaller-homogeneous loans, such as residential mortgage loans, credit card loans and consumer loans, which are collectively evaluated for impairment. The Company had previously measured the allowance for credit losses using methods similar to those prescribed in SFAS No. 114. As a result of adopting these statements, no additional allowance for loan losses was required as of January 1, 1995. Other Real Estate -- Other real estate includes loan collateral that has been formally repossessed. All amounts have been transferred into and carried in other real estate at the lower of the loan value or fair market value less estimated costs to sell the underlying collateral. During 1996 and 1995, the Company incurred operating expenses, net of rents received related to the operation of such properties and made adjustments to their carrying values resulting in net expense of $17,000 in 1996 and net income of $17,000 in 1995, which is included in other income and other operating expenses in the accompanying financial statements. In addition, the Company realized a loss on sales of other real estate amounting to $33,000 in 1996 and a gain of $3,000 in 1995. Intangibles -- Core deposit intangibles relating to premiums paid on the acquisition of deposits are amortized on a straight-line basis over 15 years. Premises and Equipment -- Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the shorter of the estimated lives of the related assets or the lease term. Maintenance and repairs are charged to operations as incurred. Income Taxes -- The Company uses the liability method of computing deferred income taxes. Deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities. Statement Of Cash Flows -- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest bearing amounts due from banks and Federal funds sold. Generally, overnight Federal funds sold are for a one day period and term Federal funds are sold for a 30 to 60-day period. Net Income Per Common Share -- Per share amounts are computed by dividing net income by the weighted average number of common shares outstanding during the year, adjusted for the effects of stock dividends declared. The dilutive effect of stock options is not material. Trust Operations -- Trust income is recorded on a cash basis, which approximates the accrual basis. Securities and other property held by the Company in fiduciary or agency capacities for customers of the trust department are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements. New Financial Accounting Standards -- The Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in March 1995. This statement is effective for the year ended December 31, 1996. Statement No. 121 requires that long-lived assets to be held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As a result of adopting this statement no adjustments to the carrying value of the Company's assets were necessary. Reclassifications -- Certain reclassifications have been made to the December 31, 1995 and 1994 consolidated financial statements to conform them to the December 31, 1996 presentation. (3) SECURITIES: Information relative to the Company's securities portfolio as of December 31, is as follows --
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- 1996 Available for Sale - U. S. Treasury securities $ 8,068,000 $ 31,000 ($ 77,000) $ 8,022,000 U. S. Government mortgage- backed securities 14,239,000 8,000 ( 115,000) 14,132,000 - --------------------------------------------------------------------------------------------------------------------- Total $22,307,000 $ 39,000 ($192,000) $22,154,000 - --------------------------------------------------------------------------------------------------------------------- Held to Maturity - Obligations of state and political subdivisions $ 652,000 $-- ($ 6,000 $ 646,000 Other debt securities 470,000 -- -- 470,000 - --------------------------------------------------------------------------------------------------------------------- Total $ 1,122,000 $-- ($ 6,000) $ 1,116,000 - --------------------------------------------------------------------------------------------------------------------- 1995 Available for Sale - U. S. Treasury securities $ 7,637,000 $121,000 ($ 11,000) $ 7,747,000 U. S. Government mortgage-backed securities 13,835,000 41,000 ( 59,000) 13,817,000 - --------------------------------------------------------------------------------------------------------------------- Total $21,472,000 $162,000 ($ 70,000) $21,564,000 - --------------------------------------------------------------------------------------------------------------------- Held to Maturity - Obligations of state and political subdivisions $ 1,671,000 $-- $ -- $ 1,671,000 Other debt securities 471,000 -- -- 471,000 - --------------------------------------------------------------------------------------------------------------------- Total $ 2,142,000 $-- $ -- $ 2,142,000 - ---------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of securities at December 31, 1996, by contractual maturity, are shown below for securities to be held to maturity and available for sale. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity - --------------------------------------------------------------------------------------------------------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value - --------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ -- $ -- $1,122,000 $1,116,000 Due in one to five years 13,068,000 13,003,000 -- -- Due in five to ten years 2,000,000 1,982,000 -- -- Due after ten years 7,239,000 7,169,000 -- -- - --------------------------------------------------------------------------------------------------------------------------- $22,307,000 $22,154,000 $1,122,000 $1,116,000 - ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale as of December 31, 1996 have been recorded at their fair value with the net unrealized loss of $93,000 (net of income tax effect of $60,000) reflected as a decrease to stockholders' equity. At December 31, 1996, U. S. Treasury securities having a book value of $198,000 were pledged to secure public deposits and for other purposes as required by law. (4) LOANS: Loans outstanding by classification at December 31 are as follows --
1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Loans secured by one to four family residential properties $51,621,000 $39,620,000 Loans secured by nonresidential properties 9,603,000 9,796,000 Loans to individuals 2,091,000 1,615,000 Commercial loans 1,817,000 1,647,000 Other loans 381,000 69,000 - --------------------------------------------------------------------------------------------------------------------------- Gross loans $65,513,000 $52,747,000 - ---------------------------------------------------------------------------------------------------------------------------
Loans made by the Company are generally made in the local and surrounding communities in which it operates. (5) ALLOWANCE FOR POSSIBLE LOAN LOSSES: The allowance for possible loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reflected in operations in the periods in which they become known. Changes in the allowance for possible loan losses are summarized as follows --
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $476,000 $478,000 $440,000 Provision charged to expense 130,000 64,000 187,000 Loans charged off (66,000) (68,000) (183,000) Recoveries of charged off loans 2,000 2,000 34,000 - --------------------------------------------------------------------------------------------------------------------------- Balance, end of year $542,000 $476,000 $478,000 ===========================================================================================================================
Nonperforming loans include nonaccrual loans, renegotiated loans (prior to December 31, 1996) and loans which are 90 days delinquent. Nonaccrual loans include loans for which accrual of interest income has been discontinued. Renegotiated loans are loans for which the terms have been modified to provide a reduction or deferral of interest or principal due to a deterioration in the financial position of the borrower. The principal amounts of nonperforming loans were $935,000 and $1,714,000 at December 31, 1996 and 1995, respectively, which includes $935,000 and $1,621,000 of nonaccrual loans, respectively. If interest had been accrued on the nonaccrual loans, the effect on net interest income would have been approximately $68,000 and $101,000 in 1996 and 1995, respectively. In accordance with SFAS No. 114, a loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. These loans consist primarily of nonaccrual loans but may include loans that have been renegotiated that are performing in accordance with their modified terms. As of December 31, 1996, the Company's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 are as follows --
1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Recorded Valuation Recorded Valuation Investment Allowance Investment Allowance - ------------------------------------------------------------------------------------------------------------------------------- Impaired loans -- Valuation allowance required $1,418,000 $234,000 $2,310,000 $370,000 - -------------------------------------------------------------------------------------------------------------------------------
This valuation allowance is included in the allowance for possible loan losses on the accompanying balance sheet. The average recorded investment in impaired loans for the period ended December 31, 1996 and 1995 was $1,864,000 and $2,313,000, respectively. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions of principal. The Company recognized interest income on impaired loans of $132,000 and $152,000 for the period ended December 31, 1996 and 1995, respectively. (6) RELATED PARTIES: The Company has extended credit in the ordinary course of business to various directors, executive officers and their associates. A summary of the changes in such loans are as follows --
Balance, beginning of year $1,394,000 New loans 289,000 Repayments(922,000) - --------------------------------------------------------------------------------------------------------------------- Balance, end of year $ 761,000 - ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1996, all loans to directors, executive officers and their associates were current as to principal and interest payments. Certain directors of the Company are associated with legal and accounting firms that rendered various services to the Company. The Company paid the firms approximately $82,000, $99,000 and $66,000 during 1996, 1995 and 1994, respectively for legal and tax services. (7) PREMISES AND EQUIPMENT: A summary of premises and equipment as of December 31 are as follows --
1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Land $ 417,000 $ 417,000 Buildings 1,525,000 1,513,000 Furniture and equipment 2,339,000 2,505,000 Leasehold improvements 198,000 163,000 - ------------------------------------------------------------------------------------------------------------------- 4,479,000 4,598,000 Less-Accumulated depreciation and amortization 2,237,000 2,291,000 - ------------------------------------------------------------------------------------------------------------------- $2,242,000 $2,307,000 - -------------------------------------------------------------------------------------------------------------------
(8) EMPLOYEE STOCK OWNERSHIP PLAN: The Company maintains a qualified nonleveraged employee stock ownership plan for substantially all employees. The plan provides that a contribution not to exceed that allowed by the Internal Revenue Service may be made at the discretion of the Board of Directors. No contributions were made in 1996 and 1995. In July 1994, the Company established a 401(k) savings plan covering substantially all employees. Under the plan, the Company matches 50% of employee contributions for all participants not to exceed 6% of their salary. Contributions made by the Company were approximately $20,000, $16,000 and $8,000 in 1996, 1995 and 1994, respectively. (9) INCOME TAXES: The components of the provision for income taxes for 1996, 1995 and 1994, are as follows --
1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Federal income taxes (benefit) -- Current $198,000 $190,000 $183,000 Deferred 54,000 (6,000) 11,000 State 70,000 70,000 40,000 - ------------------------------------------------------------------------------------------------------------------------------- Total $322,000 $254,000 $234,000 - -------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Cumulative temporary differences at December 31, 1996 and 1995 are as follows --
Deferred Tax Asset (Liability) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses $184,000 $162,000 Loan fee income recognition 37,000 42,0000 Accrued liabilities -- 51,000 Depreciation and amortization (134,000) (114,000) Discount accretion (1,000) -- Unrealized (gain) loss on securities available for sale 62,000 (36,000) - --------------------------------------------------------------------------------------------------------------------------------- $148,000 $105,000 - ---------------------------------------------------------------------------------------------------------------------------------
A comparison of income tax expense at the Federal statutory rate in 1996, 1995 and 1994 to the Company's provision for income taxes is as follows--
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- At statutory rate $287,000 $257,000 $284,000 Increase (decrease) from statutory rate resulting from Tax-exempt interest income (12,000) (46,000) (45,000) State income taxes, net of Federal tax benefit 46,000 46,000 27,000 Other 1,000 (3,000) (32,000) - --------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $322,000 $254,000 $234,000 - ---------------------------------------------------------------------------------------------------------------------------
(10) STOCKHOLDERS' EQUITY: Stock Dividends -- On March 20, 1996 and on March 19, 1997 the Company declared a 3% and 2% stock dividend, respectively. The December 31, 1996 balance sheet and all share and per share amounts have been restated to give effect for these stock dividends. Nonqualified Stock Option Plan -- During 1988, the stockholders approved a nonqualified stock option plan (the 1988 Plan). As of December 31, 1996, there were 32,494 authorized shares of the Company's common stock to be granted. Options may be granted to any officer of the Parent Company or the Bank, at a grant price not to be less than the higher of the par value of the stock or 85% of its fair market value at the grant date. Options are exercisable when granted with the option period determined by the Company's Board of Directors, but not to exceed five years. As of December 31, 1996, no options have been granted. Stock Option Plan for Nonemployee Directors -- During 1995, the stockholders approved a stock option plan for nonemployee directors (the Director Plan). As of December 31, 1996, there were 32,640 authorized shares of the Company's common stock to be granted. Upon approval of the Director Plan, each director was granted an option to purchase 2,550 shares. In addition to the foregoing, each person serving as a nonemployee director on the date of each annual meeting of the shareholders who is elected or reelected as a nonemployee director of the Company at such annual meeting of stockholders, shall be granted an option to purchase 510 shares of the Company's common stock with a maximum of 7,650 shares total. The option price under each grant shall not be less than the fair market value on the date of the grant. Options are exercisable in their entirety six months after the date of the grant and expire after 10 years. As of December 31, 1996, 17,850 options at $11.03 and 2,550 options at $17.40 were outstanding, of which all were exercisable and none have been forfeited. Incentive Stock Option Plan -- During 1995, the stockholders approved an incentive stock option plan for executives of the Company (the Executive Plan). As of December 31, 1996 there were 65,280 authorized shares of the Company's common stock to be granted. Executive Plan options are granted at the sole discretion of the Board of Directors. The option price under each grant shall not be less than the fair market value on the date of grant. The Company may establish a vesting schedule that must be satisfied before the options may be exercised; but not within six months after the date of grant and have a term not longer than 10 years from the date of grant. No options were granted or outstanding as of December 31, 1996. Transactions under the plan are summarized as follows --
Number Exercise of Price Shares Per Share - -------------------------------------------------------------------------------------------------------------------------------- Outstanding, January 1, 1995 -- $ -- Options granted 18,360 11.03 - -------------------------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1995 18,360 11.03 Options granted 2,550 17.40 Options exercised (510) 11.03 - -------------------------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1996 20,400 $11.03-$17.40 - --------------------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plan. Had compensation cost for the Company's three stock based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and income per share would have been reduced to the pro forma amounts as follows --
1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Net income -- As reported $522,000 $501,000 Pro forma 516,000 481,000 Income per share -- As reported $ .76 $ .76 Pro forma .75 .71 - --------------------------------------------------------------------------------------------------------------------------------
The average fair value of options granted during 1996 and 1995 was $3.95 and $1.84, respectively. The fair value of each option grant of the Director Plan is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 2.0% and 4.1% for both years; expected volatility of 15.8% and 15.7%, risk-free interest rates of 6.3% and 6.7%; and expected lives of five years for 1996 and 1995. The following table summarizes information about fixed stock options outstanding at December 31, 1996 --
Number Number Exercise Outstanding at Remaining Exercisable at Price December 31, 1996 Contractual Life December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------ $11.03 17,850 8.5 years 17,850 17.40 2,550 9.5 years 2,550 - ------------------------------------------------------------------------------------------------------------------------------ 20,400 20,400 - ------------------------------------------------------------------------------------------------------------------------------
(11) COMMITMENTS AND CONTINGENCIES: Litigation -- The Company from time-to-time may be a defendant in legal proceedings relating to the conduct of its business. In management's judgment, the consolidated financial position or results of operations of the Company will not be affected materially by the outcome of any present legal proceedings. Commitments With Off-Balance Sheet Risk -- The balance sheet does not reflect various commitments relating to financial instruments which are used in the normal course of business. Management does not anticipate that the settlement of those financial instruments will have a material adverse effect on the Company's financial position. These instruments include commitments to extend credit and letters of credit. These financial instruments carry various degrees of credit risk, which is defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The Company receives a fee for providing a commitment. The Company was committed to advance $7,381,000 to its borrowers as of December 31, 1996; such commitments generally expire within one year. Standby letters of credit are provided to customers to guarantee their performance, generally in the production of goods and services or under contractual commitments in the financial markets. The Company has entered into standby letter of credit contracts with its customers totaling $16,000 as of December 31, 1996, which generally expire within one year. Required Cash Balances -- Cash balances reserved to meet regulatory requirements amounted to approximately $549,000 and $400,000 at December 31, 1996 and 1995, respectively. Operating Leases -- The Company leases one of its branch offices from a company which is majority owned by a director at an annual rental of $18,000. The minimum annual rental commitments for all noncancellable leases for bank premises subsequent to December 31, 1996, are as follows --
1997 $ 53,000 1998 53,000 1999 31,000 2000 28,000 2001 and thereafter 54,000 - --------------------------------------------------------------------------------- Total $219,000 - ---------------------------------------------------------------------------------
Total rental expense amounted to $53,000, $53,000 and $54,000 in 1996, 1995 and 1994, respectively. (12) REGULATORY CAPITAL REQUIREMENTS: The Parent Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Parent Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Parent Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Parent Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Parent Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Parent Company and the Bank meet all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. The Parent Company has not been notified by the Federal Reserve Bank of its capital category. To be categorized as wellcapitalized, the Bank must maintain minimum total risk based, Tier I risk based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Parent Company's and the Bank's actual capital amounts and ratios are also presented in the table. For both 1996 and 1995, the Parent Company's and the Bank's actual capital amounts and ratios are the same.
To Be Well-Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions - ------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1996 - Total Capital (to Risk Weighted Assets) $7,553,000 15.40% 3,924,000 8.0% $4,906,000 10.0% Tier I Capital (to Risk Weighted Assets) 7,011,000 14.29 1,962,000 4.0 2,943,000 6.0 Tier I Capital (to Average Assets) 6,891,000 6.90 3,996,000 4.0 4,995,000 5.0 As of December 31, 1995 - Total Capital (to Risk Weighted Assets) 7,231,000 16.33 3,543,000 8.0 4,429,000 10.0 Tier I Capital (to Risk Weighted Assets) 6,755,000 15.25 1,772,000 4.0 2,657,000 6.0 Tier I Capital (to Average Assets) 6,601,000 7.11 3,712,000 4.0 4,640,000 5.0
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following is a summary of fair value versus the carrying value of the Company's financial instruments. For the Company, as for most financial institutions, the bulk of its assets and liabilities are considered financial instruments. Many of the Company's financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company's general practice and intent to hold its financial instruments to maturity and not engage in trading or sales activities. Therefore, significant estimations and present value calculations were used by the Company for the purpose of this disclosure. Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and the recorded book balances, were as follows -- Financial instruments actively traded in the secondary market have been valued using available market prices.
December 31 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value - --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 8,855,000 $ 8,855,000 $14,202,000 $14,202,000 Securities available for sale (Note 3) 22,154,000 22,154,000 21,564,000 21,564,000 Securities held to maturity (Note 3) 1,122,000 1,116,000 2,142,000 2,142,000
Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. For those loans and deposits with floating interest rates, it is assumed that estimated fair values generally approximate the recorded book balances.
December 31 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value - --------------------------------------------------------------------------------------------------------------------------------- Loans, including accrued interest $65,446,000 $65,057,000 $52,730,000 $52,999,000 Deposits, including accrued interest 93,329,000 94,573,000 86,604,000 87,400,000
There is no material difference between the notional amount and the estimated fair value of off-balance sheet unfunded loan commitments which totaled $7,381,000 at December 31, 1996. Standby letters of credit totaling $16,000 as of December 31, 1996 are based on fees charged for similar agreements; accordingly, the estimated fair value of standby letters of credit is nominal. See also Note 11 for additional discussion relating to these off balance-sheet activities. (14) OTHER OPERATING EXPENSES: The major components of other operating expenses are as follows --
December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- FDIC and other assessments $ 150,000 $ 108,000 $ 169,000 Legal and professional fees 123,000 167,000 97,000 Audit and examination fees 85,000 48,000 80,000 Courier service 85,000 78,000 54,000 Core deposit amortization 84,000 84,000 84,000 Stationary and supplies 83,000 69,000 87,000 Advertising 76,000 70,000 14,000 Postage and freight 74,000 74,000 70,000 Data processing fees 57,000 59,000 44,000 Telephone 54,000 56,000 56,000 Bonding and insurance 45,000 62,000 59,000 Directors' fees 40,000 39,000 39,000 Other 350,000 313,000 394,000 - ------------------------------------------------------------------------------------------------------------------------------- $1,306,000 $1,227,000 $1,247,000 - ---------------------------------------------------------------------------------------------------------------------------
(15) CONDENSED FINANCIAL STATEMENTS OF SUSSEX BANCORP (PARENT COMPANY ONLY):
December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- Balance sheet Assets -- Investment in Bank subsidiary (equity method) $7,882,000 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity- Liabilities -- Other liabilities $ -- - --------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock 5,003,000 Retained earnings 2,972,000 Net unrealized holding losses on securities available for sale, net of tax (93,000) - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 7,882,000 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $7,882,000 - ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- Statement of Income Operating Income- Dividends from Bank subsidiary $102,000 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiary 102,000 Provision for Income Taxes (a) -- - --------------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiary 102,000 Equity in Undistributed Income of Subsidiary 420,000 - --------------------------------------------------------------------------------------------------------------------------- Net income $522,000 - ---------------------------------------------------------------------------------------------------------------------------
(a) No Federal income tax is applicable to the dividends and other income received from subsidiary since the Parent Company and subsidiary file a consolidated Federal income tax return.
Year Ended December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- Statement of Cash Flows Cash Flows from Operating Activities- Net income $522,000 Adjustments to reconcile net income to net cash provided by operating activities- Equity in undistributed income of subsidiary (420,000) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 102,000 - --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Cash dividends paid (102,000) Stock dividend, net of fractional shares paid (5,000) Exercise of stock options 5,000 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (102,000) - --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents -- Cash and Cash Equivalents, beginning of year -- - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, end of year $ -- - ---------------------------------------------------------------------------------------------------------------------------
THE SUSSEX BANCORP, INC. FIVE-YEAR SUMMARY (not covered by report of independent public accountants)
December 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF INCOME: Interest income $ 6,710,000 $ 6,050,000 $ 5,516,000 $ 5,382,000 $ 5,525,000 Interest expense 2,728,000 2,267,000 1,656,000 1,903,000 2,483,000 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 3,982,000 3,783,000 3,860,000 3,479,000 3,042,000 Provision for possible loan losses 130,000 64,000 187,000 101,000 23,000 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 3,852,000 3,719,000 3,673,000 3,378,000 3,019,000 Other income 699,000 677,000 592,000 636,000 555,000 Other expense 3,707,000 3,641,000 3,431,000 3,535,000 3,293,000 - ------------------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 844,000 755,000 834,000 479,000 281,000 Provision for income taxes 322,000 254,000 234,000 129,000 89,000 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 522,000 $ 501,000 $ 600,000 $ 350,000 $ 192,000 =============================================================================================================================== AVERAGE NUMBER OF SHARES OUTSTANDING (a) 684,309 672,808 667,209 667,209 667,209 PER SHARE INFORMATION: Net income $.76 $.74 $.90 $.52 $.29 Cash dividends (b) .35 .44 .32 .19 0 Stock dividends (b) 5% 0% 0% 0%4.75% Dividend payout ratio 45% 58% 35% 35% 0% PERFORMANCE YIELDS: Return on average assets .54% .57% .73% .43%.25% Return on average stockholders' equity 6.84% 6.98% 8.84% 5.20%2.96% Average equity/average assets 7.87% 8.11% 8.24% 8.20% 8.30% END OF PERIOD DATA: Total assets $101,776,000 $94,870,000 $82,243,000 $82,444,000 $90,962,000 Total deposits 92,889,000 85,925,000 75,087,000 75,107,000 84,190,000 Total stockholders' equity 7,882,000 7,609,000 6,646,000 6,923,000 6,594,000 Average assets 96,996,000 88,535,000 82,344,000 82,122,000 78,179,000 Average stockholders' equity 7,630,000 7,178,000 6,785,000 6,735,000 6,485,000 =============================================================================================================================== (a) The average number of shares outstanding was computed based on the average number of shares outstanding during each period as adjusted for stock dividends. (b) Cash and stock dividends per common share are based on the actual number of common shares outstanding on the dates of record as adjusted for subsequent stock dividends. There is currently no established trading market for the Company's CommonStock. As of March 18, 1997 there were 709 holders of record of the Common Stock.
SUSSEX BANCORP, INC. BOARD OF DIRECTORS and EXECUTIVE OFFICERS Donald L. Kovach Chairman of the Board, President andChief Executive Office Irvin Ackerson Excavator, AckersonExcavating William Kulsar CPA, Caristia, Kulsar and Wade, P.A. Joel D. Marvil President and Chief Executive Officer, Ames Rubber Corporation Richard Scott Dentist, Richard W. Scott, D.D.S. Joseph Zitone General Contractor, Zitone Construction Co. SUSSEX COUNTY STATE BANK BOARD OF DIRECTORS Donald L. Kovach Chairman of the Board, President andChief Executive Office TerryThompson Secretary, Senior Vice President/COO Irvin Ackerson Excavator, Ackerson Excavating William Kulsar CPA, Caristia, Kulsar and Wade, P.A. Candace Leatham Senior Vice President/Treasurer Joel D. Marvil President and Chief Executive Officer Richard Scott Dentist, Richard W. Scott, D.D.S. Joseph Zitone General Contractor, Zitone Construction Co. OFFICERS Donald L. Kovach President/Chief Executive Officer Candace Leatham Senior Vice President/Treasurer Terry Thompson Senior Vice President &COO Mary Cannistra Vice President/Personnel Officer Elizabeth Martin Vice President/Operations Officer Valerie Seufert Vice President/Senior Lending Officer Samuel Tolley Vice President/Loans &Compliance Donald Hobart Assistant Vice President/Branch Manager-Sparta Mardella Venable Assistant Vice President/Branch Manager-Newton Darlene Davids Assistant Secretary/Branch Manager-Vernon Laurie Grafeld Assistant Secretary/Branch Manager-Montague Colleen Herman Assistant Secretary/Branch Manager-Wantage Janice Mandeville Assistant Secretary/Loan Administrations Maryann Parker Assistant Secretary/Branch Manager-Franklin Margaret Sisco Assistant Secretary/Deposit Operations Diana Whitehead Assistant Secretary/Asst. Operations Officer Pepper Puccetti Executive Secretary
EX-21 3 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT The Registrant has one subsidiary, The Sussex County State Bank. The Sussex County State Bank has a single subsidiary, SCB Investment Company. EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Sussex Bancorp: As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 10, 1997 (except with respect to the matter discussed in Note 10, as to which the date is March 19, 1997) and to all references to our Firm in this Form 10-KSB and into Sussex Bancorp's previously filed Registration Statement No. 333-20643 on Form S-3 and Registration Statement No. 333-20603 on Form S-8. It should be noted that we have not audited any financial statements of Sussex Bancorp subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP Roseland, New Jersey March 26, 1997 EX-27 5
9 YEAR YEAR DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 4,605 3,652 0 0 4,250 10,550 0 0 22,154 21,564 1,122 2,142 0 0 64,922 52,148 542 476 101,776 94,870 92,889 82,925 0 0 0 0 0 0 0 0 0 0 5,003 4,532 2,972 3,023 101,776 94,870 4,958 4,567 1,752 1,483 0 0 6,710 6,050 2,728 2,267 2,728 2,267 3,982 3,783 130 64 (9) 0 3,707 3,641 844 755 844 755 0 0 0 0 522 501 0.76 0.74 0.76 0.74 0 0 935 1,621 0 0 172 279 0 0 476 478 66 68 2 2 542 476 542 476 0 0 0 0
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