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, 2003
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
New Jersey 22-3475473
(State of other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
399 Route 23, Franklin, New Jersey 07416 (973) 827-2914
(Address of principal executive offices) (Zip Code) (Issuer's Telephone Number
Including Area Code)
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Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, no par value American Stock Exchange
Title of Each Class Name of Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Issuer: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_|
The aggregate market value of the voting stock held by non-affiliates of the Issuer as of March 5, 2004 was $25,971,410. The number of shares of the Issuer's Common Stock, no par value, outstanding as of March 5, 2004 was 1,818,991.
For the fiscal year ended December 31, 2003, the Issuer had total revenues of $14,874,000.
DOCUMENTS INCORPORATED BY REFERENCE
10-KSB Item Document Incorporated
----------- ---------------------
Item 6. Management's Discussion and Portions of the 2003 Annual Report
Analysis or Plan of Operation to Shareholders
Item 7. Financial Statements Portions of the 2003 Annual Report
to Shareholders
Item 9. Directors and Executive Proxy Statement for 2004 Annual
Officers of the Company; Meeting of Shareholders to be filed
Compliance with Section 16(a) no later than April 29, 2004.
of the Exchange Act.
Item 10. Executive Compensation Proxy Statement for 2004 Annual
Meeting of Shareholders to be filed
no later than April 29, 2004.
Item 11. Security Ownership of Certain Proxy Statement for 2004 Annual
Beneficial Owners and Meeting of Shareholders to be filed
Management and related no later than April 29, 2004
stockholder matters.
Item 12. Certain Relationships and Proxy Statement for 2004 Annual
Related Transactions Meeting of Shareholders to be filed
no later than April 29, 2004.
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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 Sussex Bank (the "Bank"). The Company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank (the "Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as amended, (the "Banking Act"), and pursuant to approval of the shareholders of the Bank, the Company acquired the Bank and became its holding company on November 20, 1996. As part of the Acquisition, shareholders of the Bank received one share of common stock, no par value ("Common Stock") of the Company for each outstanding share of the common stock of the Bank, $2.50 per share par value ("Bank Common Stock"). The only significant asset of the Company is its investment in the Bank. The Company's main office is located at 399 Route 23, Franklin, Sussex County, New Jersey 07416.
The Bank is a commercial bank formed under the laws of the State of New Jersey in 1975. The Bank operates from its main office at 399 Route 23, Franklin, New Jersey 07416, and its seven branch offices located at 7 Church Street, Vernon, New Jersey; 266 Clove Road, Montague, New Jersey; 33 Main Street, Sparta, New Jersey; 455 Route 23, Wantage, New Jersey; 15 Trinity Street, Newton, New Jersey; 100 Route 206, Augusta, New Jersey; and 165 Route 206, Andover, New Jersey.
Effective October 1, 2001, the Company acquired all of the outstanding stock of Tri-State Insurance Agency, Inc. ("Tri-State"). Tri-State is a full service insurance agency located in Augusta, New Jersey. The purchase price paid by the Company for Tri-State was comprised of an upfront payment of $350,000 at closing, and deferred payments on the first, second and third anniversaries of the closing of $700,000 each, to be satisfied through a mix of cash and common stock of the Company, subject to adjustment based upon the net income of Tri-State as a subsidiary of the Bank. As part of the acquisition, each of the principals of Tri-State have entered into an employment agreement providing for their employment by Tri-State for a period of at least five years. In 2003, the Company expanded its insurance operations through the acquisition of the Garrera Insurance Agency. The operations of the Garrera Insurance Agency have been consolidated with Tri-State.
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 operations of Tri-State are also subject to supervision and regulation by Department. The principal executive offices of the Company are located at 399 Route 23, Franklin, New Jersey 07416, and the telephone number is (973) 827-2914.
Business of the Company
The Company's primary business is ownership and supervision of the Bank and Tri-State, a subsidiary of the Bank. The Company, through the Bank, conducts a traditional commercial banking business, and offers services including personal and business checking accounts and time deposits, money market accounts and regular savings accounts. The Company structures its specific services and charges in a manner designed to attract the business of the small and medium sized business and professional community as well as that of individuals residing, working and shopping in the Sussex County, New Jersey trade area serviced by the Company. The Company engages in a wide range of lending activities and offers commercial, consumer, mortgage, home equity and personal loans. In addition, during 1998, the Bank formed the Sussex Bancorp Mortgage Company (the "Mortgage Company"). The Mortgage Company originates one to four family mortgage loans for resale into the secondary market. Currently, all loans are sold servicing released, although the Company, through the Bank, may seek to service the loans it originates in the future.
Through the Bank's subsidiary, Tri-State, the Company operates a full service general insurance agency, offering both commercial and personal lines of insurance. The Company considers this to be a separate business segment.
Service Area
The Company's service area primarily consists of the Sussex County, New Jersey market, although the Company makes loans throughout New Jersey and, on a more limited basis, in Pike County, Pennsylvania and Orange County, New York. The Company operates its main office in Franklin, New Jersey and seven branch offices in Vernon, Montague, Sparta, Wantage, Newton, Andover and Augusta New Jersey.
Competition
The Company operates in a highly competitive environment competing for deposits and loans with commercial banks, thrifts and other financial institutions, many of which have greater financial resources than the Company. Many large financial institutions in New York City and other parts of New Jersey compete for the business of New Jersey residents located in 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 management's knowledge and awareness of the Company's service area, customers and business.
Employees
At December 31, 2003, the Company employed 101 full-time employees and 28 part-time employees. None of these employees are 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. Insurance agencies licensed in New Jersey are regulated under state law by the New Jersey Department of Banking and Insurance. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank.
Bank Holding Company Regulation
General
As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the BHCA), we are subject to the regulation and supervision of the Federal Reserve Bank (FRB). We are required to file with the FRB annual reports and other information regarding our business operations and those of our subsidiaries.
The BHCA requires, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or control or more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such bank's voting shares) or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions or mergers.
In addition, the BHCA was amended through the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "GLBA"). Under the terms of the GLBA, bank holding companies whose subsidiary banks meet certain capital, management and Community Reinvestment Act standards are permitted to engage in a substantially broader range of non-banking activities than is permissible for bank holding companies under the BHCA. These activities include certain insurance, securities and merchant banking activities. In addition, the GLBA amendments to the BHCA remove the requirement for advance regulatory approval for a variety of activities and acquisitions by financial holding companies. As our business is currently limited to activities permissible for a bank, we have not
elected to become a financial holding company.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default. Under a policy of the FRB with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines for Bank Holding Companies
The FRB has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $150 million or more. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be "Tier I", consisting of common stockholders' equity, certain preferred stock and certain hybrid capital instruments, 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) excess of hybrid capital instruments, (d) debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt. Certain hybrid capital instruments, including specifically trust preferred securities, may be included in Tier I capital up to a maximum of 25% of Tier I capital. In 2002, the Company raised $4.8 million in net proceeds through an offering of trust preferred securities, all of which is counted as Tier I Capital. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations' capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FRB (determined on a case-by-case basis or as a matter of policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property which carry a 50% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes including general guarantees and standby letters of credit backing financial obligations are given 100% risk-weighing. Transaction related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% risk-weighting. Short term commercial letters of credit have a 20% risk-weighting and certain short-term unconditionally cancelable commitments have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the FRB has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the Department. As an FDIC-insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the Department impact virtually all activities of the Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions and various other matters.
Insurance of Deposits
The Bank's deposits are insured up to a maximum of $100,000 per depositor under the BIF. The FDIC has established a risk-based insurance premium assessment system under which the FDIC has developed a matrix that sets the assessment premium for a particular institution in accordance with its capital level and overall regulatory rating by the institutions' primary federal regulatory. Under the matrix that is currently in effect, the assessment rate ranges from 0 to 27 basis points of assessed deposits. In addition to the deposit insurance premium assessment, under the deposit insurance funds act of 1996 (the "Deposit Act"), BIF insured institutions like the Bank are required to contribute to the debt service and principal repayment on bonds issued by the Federal Finance Corporation ("FICO") in the mid-1980s to fund a portion of the thrift bailout. This assessment is currently set at 1.68 basis points of assessed deposits. During the early 1990's, the Bank acquired certain Savings Association Insurance Fund ("SAIF") insured deposits from the Resolution Trust Corporation. The Bank pays FICO assessments on these deposits at the higher SAIF rate. In 2003, the assessment on these SAIF deposits totaled $6,428.
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.
Legislative and Regulatory Changes
On October 26, 2001, a new anti-terrorism bill, the International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001, was signed into law. This law restricts money laundering by terrorists in the United States and abroad. This act specifies new "know your customer" requirements that will obligate financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S. financial institution. Banking regulators will consider compliance with the act's money laundering provisions in making decisions regarding approval of acquisitions and mergers. In addition, sanctions for violations of the act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million.
ITEM 2 -- DESCRIPTION OF PROPERTY
The Company conducts its business through its main office located at 399 Route 23, Franklin, New Jersey, and its seven branch offices and its insurance agency office. The following table set forth certain information regarding the Company's properties as of December 31, 2003. All properties are adequately covered by insurance.
DATE OF
LOCATION LEASED OR OWNED LEASE EXPIRATION
-------- --------------- ----------------
399 Route 23 Owned N/A
Franklin, New Jersey
7 Church Street Owned N/A
Vernon, New Jersey
266 Clove Road Leased March 2007
Montague, New Jersey
96 Route 206 Leased August, 2006
Augusta, New Jersey
455 Route 23 Owned(1) N/A
Wantage, New Jersey
15 Trinity Street Owned N/A
Newton, New Jersey
165 Route 206 Owned N/A
Andover, New Jersey
100 Route 206 Owned N/A
Augusta, New Jersey
33 Main Street Owned N/A
Sparta, New Jersey
200 Munsonhurst Road Leased December, 2008
Franklin, New Jersey
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(1) The Company owns the building housing its Wantage branch. The land on which the building is located is leased pursuant to a ground lease which runs until December 31, 2020, and contains an option for the Company to
extend the lease for an additional 25 year term.
ITEM 3 - LEGAL PROCEEDINGS
The Company and the Bank are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank's business. Management does not believe that there is any pending or threatened proceeding against the Company or the Bank which, if determined adversely, would have a material effect on the business, financial position or results of operation of the Company or the Bank.
ITEM 4 - SUBMISSIONS 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 2003.
PART II
ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on the American Stock Exchange, under the symbol "SBB". As of December 31, 2003, the Company had approximately 699 holders of record of the Common Stock.
The following table shows the high and low closing price, by quarter, for the common stock, as well as dividends declared, for the last two fiscal years:
DIVIDENDS
2003 HIGH LOW DECLARED
---- ---- --- --------
4th Quarter $16.71 $13.50 $0.00
3rd Quarter $15.30 $11.70 $0.07
2nd Quarter $12.20 $10.25 $0.07
1st Quarter $10.70 $10.15 $0.07
DIVIDENDS
2002 HIGH LOW DECLARED
---- ---- --- --------
4th Quarter $11.70 $10.20 $0.07
3rd Quarter 10.97 10.55 0.06
2nd Quarter 10.82 10.60 0.06
1st Quarter 10.68 9.97 0.06
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In addition to the cash dividends disclosed above, the Company paid a 5% stock dividend in November 2003. The market prices and dividends disclosed above have been restated to reflect this stock dividend.
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The information required by this item is incorporated by reference from the Registrant's 2003 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 2003 Annual Report to Shareholders under the caption "Consolidated Financial Statements."
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
For the year ended December 31, 2001, Arthur Andersen, LLP performed the audit of the Company's financial statements. In light of events impacting Arthur Andersen, LLP, the Company changed its independent auditors in April of 2002, dismissing Arthur Andersen, LLP and retaining Beard Miller Company LLP as independent auditors. The decision to change auditors was recommended by the Company's Audit Committee. There were no disagreements with Arthur Andersen, LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Arthur Andersen, LLP, would have caused it to make reference to the subject matter of the disagreement in connection with their reports. The independent auditors report on the consolidated financial statements for the fiscal years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or auditing principles.
ITEM 8A -- CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.
(b) Changes in internal controls.
Not applicable
PART III
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 2004 Annual Meeting under the
captions "ELECTION OF DIRECTORS" and information concerning compliance with
Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE WITH
SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy Statement will
be filed with the Securities and Exchange commission no later than April 29,
2004.
The following table sets forth certain information about each executive officer of the Company who is not also a director.
Principal Occupation
Name, Age and Position Officer Since During Past Five Years
---------------------- ------------- ----------------------
Candace A. Leatham, 49 1984(1) Senior Vice President and
Executive Vice President Treasurer of the Bank
and Treasurer
George B. Harper, 49 2001 President, Tri-State Insurance
President, Tri-State Insurance Agency, Inc.
Agency, Inc.
George Lista, 44 2001 Executive Vice President and
Chief Operating Officer, Chief Operating Officer,
Tri-State Insurance Agency, Inc. Tri-State Insurance
Agency, Inc.
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(1) Includes prior service as an officer of the Bank.
ITEM 10 - EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the Registrant definitive Proxy Statement for the Company's 2004 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, 2004.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management is included in the definitive Proxy statement for the Company's 2004 Annual Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT", which is incorporated herein by reference. It is expected that such Proxy statement will be filed with the Securities and Exchange Commission no later than April 29, 2004.
The following table sets forth information with respect to the Company's equity compensation plans as of the end of the most recently completed fiscal year. Equity Compensation Plan Information
Number of
securities
remaining
Number of available for
securities to future issuance
be issued under equity
upon compensation
exercise of Weighted-average plans
outstanding exercise price of (excluding
options, outstanding securities
warrants and options, warrants reflected in
rights and rights column (a))
Plan category (a) (b) (c)
------------- ----------------- --------------
Equity compensation plans approved
by security holders 207,777 $8.61 151,683
---------- -------- ----------
Equity compensation plans not approved by security
holders (1) (1) (1)
---------- -------- ----------
Total 207,777(1) $8.61(1) 151,863(1)
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(1) In connection with the Company's acquisition of Tri-State effective October 1, 2001, the Company entered into employment agreements with each of Messrs George B. Harper and George Lista. Under these agreements, each of Messrs. Harper and Lista is entitled to receive bonuses based upon the net before tax income of Tri-State for each twelve-month period commencing on the effective date of the acquisition. To the extent Tri-State's net before tax income exceeds certain designated targets contained in each employment agreement, each of Messrs. Harper and Lista will be entitled to receive a bonus equal to 25% of the amount by which the net before tax income of Tri State exceeds the target. The bonus is to be paid in shares of the Company's common stock. The amount of stock to be issued will be determined by dividing the amount of the bonus by the fair market value of the Company's common stock, determined by taking the average closing price of the common stock for the fifteen trading days prior to issuance. For the twelve-month period ended September 30, 2003, Tri-State exceeded its targeted net before tax income, and each of Messrs. Harper and Lista received a bonus of 1,516 shares of the Company's common stock. The employment agreements with Messrs. Harper and Lista expire on September 30, 2006.
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 2004 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, 2004.
ITEM 13 -- EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
------- -----------------------
10.1 Amendment dated January 7, 2004 to Employment Agreement dated
September 15, 1999 with Donald L. Kovach
10.2 Employment Agreement with Terry Thompson dated January 23,
2003
10.3 Amendment, dated January 7, 2004, to Salary Continuation
Agreement dated March 15, 2000 with Donald L. Kovach
13 Portions of the Annual Report to Shareholders for the year
ended December 31, 2003
14 Code of Ethics
21 Subsidiaries of the Registrant
23.1 Consent of Beard Miller Company LLP
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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(b) Reports on form 8-K
Date Filed Item
---------------- --------------------------------------------------
October 20, 2003 5, 7 & 12 - Announcing third quarter earnings and
a 5% stock dividend.
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ITEM 14 -- PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the fees and services of the Registrant's principal accountant is included in the definitive proxy statement for the Company's 2004 Annual Meeting under the caption "Principal Accountant Fees and Services" 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 30, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUSSEX BANCORP
By: /s/ Donald L. Kovach
----------------------------------------
Donald L. Kovach
Chairman of the Board and
Dated: March 23, 2004 Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Donald L. Kovach Chairman of the Board and March 23, 2004
---------------------- Chief Executive Officer
Donald L. Kovach
/s/ Candace A. Leatham Treasurer (Principal Financial March 23, 2004
---------------------- Officer and Principal
Candace A. Leatham Accounting Officer)
/s/ Irvin Ackerson Director March 23, 2004
----------------------
Irvin Ackerson
/s/ William E. Kulsar Secretary and Director March 23, 2004
----------------------
William E. Kulsar
/s/ Edward J. Leppert Director March 23, 2004
----------------------
Edward J. Leppert
/s/ Joel D. Marvil Director March 23, 2004
----------------------
Joel D. Marvil
/s/ Richard Scott Director March 23, 2004
----------------------
Richard Scott
/s/ Terry H. Thompson Director March 23, 2004
----------------------
Terry H. Thompson
/s/ Joseph Zitone Director March 23, 2004
----------------------
Joseph Zitone
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AMENDMENT
TO THE
SUSSEX COUNTY STATE BANK
EMPLOYMENT AGREEMENT
DATED SEPTEMBER 15, 1999
FOR
DONALD L. KOVACH
This Amendment is adopted this 7th date of January, 2004, by and between DONALD L. KOVACH, an individual residing at Branchville, New Jersey (the "Employee"), SUSSEX BANK, (formerly Sussex County State Bank), a state chartered bank with its principal place of business located at 399 State Highway 23, Franklin, New Jersey 07416 (the "Bank"), and SUSSEX BANCORP, a New Jersey corporation with its principal place of business located at 399 State Highway 23, Franklin, New Jersey 07416 (the "Company"; the Bank and the company sometimes collectively are referred to herein as "Employer").
WHEREAS, the Board of Directors of the Bank and the Board of Directors of the Company and Donald L. Kovach desire to amend the Employment Agreement dated the 15th day of September, 1999, pursuant to the terms and conditions of this Agreement;
WHEREAS, the Employee agrees to be employed pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and covenants contained herein, and with the intent to be legally bound hereby, the parties do hereby agree that hereof the Employment Agreement shall be amended as follows:
1. Paragraph 2. Position and Duties is amended as follows:
The Employee shall be employed as Chairman of the Board of Directors, President and Chief Executive Officer of the Company and Chairman of the Board
of Directors and Chief Executive Officer of the Bank, or in any of said positions, individually or in combination as said parties shall agree from and after this date, and perform such services in that capacity as are usual and customary for comparable institutions and as shall from time-to-time be established by the Board of Directors of the Company and the Bank. Employee agrees that he will devote his full business time and efforts to his duties hereunder. Notwithstanding the foregoing, the Company and the Bank acknowledge that Employee may maintain a position as a non-equity partner or of Counsel with a law firm of his choosing, provided that such association shall not conflict with Employee's performance of his duties hereunder.
2. Paragraph 3(a) Base Salary is amended as follows:
The Employee shall be entitled to receive, commencing upon January 1, 2004, an annual base salary (the "Base Salary") of Two Hundred Twenty Three Thousand and Three Hundred Dollars ($223,300), which shall be payable in installments in accordance with Employer's usual payroll method. Annually thereafter, on or prior to the anniversary date of this Agreement, the Board of Directors shall review the Employee's performance, the status of Employer and such other factors as the Board of Directors or a committee thereof shall deem appropriate and shall adjust the Base Salary accordingly.
3. Paragraph 3 (b) Discretionary Bonus is amended as follows:
Employee shall be entitled to receive annually a bonus in cash, stock options, restricted stocks or deferred compensation as determined by the Board of Directors or a committee thereof.
4. Paragraph 4 (b) Retirement Plan is amended as follows:
The parties acknowledge that the Salary Continuation Agreement ("The Agreement") dated March 15, 2000 by and between SussexBank (the "Company") and Donald L. Kovach (the "Executive") and any amendments thereto constitutes the Retirement Plan required in the Agreement.
5. Paragraph 5 Term is amended as follows:
This Agreement shall be extended three years, commencing on
September 1, 2004 and continuing until August 31, 2007; provided, however,
that the term of this Agreement shall automatically renew for one (1)
additional year on each anniversary date hereof unless, at least sixty
(60) days prior to such anniversary date, either Employer or Employee
shall have provided the other with written notice of their intention not
to extend the term of this Agreement; further provided,
however, that this Agreement shall not be extended for more than two (2) additional one (1) year terms under this provision.
6. Except as otherwise set forth herein, the parties acknowledge and agree that the Employment Agreement dated September 15, 1999 shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
SUSSEX BANK
By: /s/ Joel D. Marvil ---------------------------------------- Name: Joel D. Marvil Title: Chairman, Compensation Committee |
SUSSEX BANCORP
By:/s/ Joel D. Marvil ---------------------------------------- Name: Joel D. Marvil Title: Chairman, Compensation Committee |
EMPLOYEE
By: /s/ Donald L. Kovach ---------------------------------------- Name: Donald L. Kovach, Esq. |
EMPLOYMENT AGREEMENT
Employment Agreement (the "Employment Agreement") made as of this 23"d day of January, 2003, by and between TERRY THOMPSON, an individual residing at 36 Beacon Hill, Sparta, New Jersey 07871 (the "Employee"), SUSSEX BANK, a state chartered bank with its principal place of business located at 399 State Highway 23, Franklin, New Jersey 07416 (the "Employer"), and SUSSEX BANCORP, a New Jersey corporation with its principal place of business located at 399 State Highway 23, Franklin, New Jersey 07416 (the "Company").
WHEREAS, the Board of Directors of the Employer and the Board of Directors of the Company have each determined that it is in the best interests of each of the Employer and the Company to enter into this Agreement with Employee, and each respective Board has authorized the Employer and the Company to enter into this Agreement;
WHEREAS, the Employee agrees to be employed pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and covenants contained herein, and with the intent to be legally bound hereby, the parties hereto hereby agree as follows:
1. Employment. The Employer agrees to employ the Employee, and the Employee hereby accepts such employment, upon the terms and conditions set forth herein..
2. Position and Duties. The Employee shall be employed as President of the Employer, to perform such services in that capacity as are usual and customary for comparable institutions and as shall from time-to-time be established by the Chief Executive Officer and the Board of Directors of the Employer. Employee agrees that he will devote his full business time and efforts to his duties hereunder.
3. Cash Compensation. Employer shall pay to the Employee compensation for his services as follows:
4. Other Benefits; Fringe Benefits. The Employee shall be entitled to the exclusive and unlimited use of an automobile or a cash allowance to be used for the purpose of maintaining an automobile of a type and style commensurate with the Employee's status as President of the Employer. In addition, the Employee shall be entitled to receive hospital, health, medical, and life insurance of a type currently provided to and enjoyed by other senior officers of Employer, and shall be entitled to participate in any other employee benefit or retirement plans offered by Employer to its employees generally or to its senior management.
5. Term. The term of this Agreement shall be three (3) years, commencing on
the date hereof and continuing until the third anniversary of the date hereof;
provided, however, that the term of this Agreement shall automatically renew for
one (1) additional year on the third anniversary hereof unless, at least three
(3) months prior to such anniversary date, either Employer or Employee shall
have provided the other with written notice of their intention not to extend the
term of this Agreement; further provided, however, that in the event the term of
this Agreement is so extended, it shall also automatically renew for one (1)
additional year on the fourth anniversary hereof unless, at least three (3)
months prior to such anniversary date, either Employer or Employee shall have
provided the other with written notice of their intention not to further extend
the term of this Agreement.
6. Termination. Employee may be terminated at any time, without prejudice to Employee's right to compensation or benefits as provided herein. Employee's rights upon a termination shall be as follows:
the benefits payable by Employer hereunder, Employer may permanently terminate the duplicative benefits it is obligated to provide hereunder.
(d) Suspension and Special Regulatory Rules.
(i) If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Employer by a notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDI Act"), Employer's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.
(ii) If the Employee is removed and/or permanently prohibited from participating in the conduct of the affairs of the Employer by an order issued under Section 8(e) or Section 8(g)(1) of the FDI Act, all obligations of Employer under this Agreement shall terminate as of the effective date of the order and the Employee shall not be entitled to received the payments provided for under Paragraph (c) above.
(iii) If the Employer is in default, as defined in Section 3(x)(1) of the FDI Act, all obligations of Employer under this Agreement shall terminate as of the date of default.
7. Resignation for Cause. During the term of this Agreement, the Employee shall be entitled to resign from his employment with Employer, and receive the payments provided for below, in the event that the Employee is not in breach of this Agreement and Employer (i) reassigns the Employee to a position of lesser rank or status than President, or (ii) reduces the Employee's compensation or other benefits below the amounts provided for under Sections 3 and 4 hereof. Upon the occurrence of any of these events, the Employee shall have thirty days to provide Employer notice of his intention to terminate this Agreement. In the event the Employee elects to so terminate this Agreement, such termination shall be treated as a termination without "cause" by Employer under Section 6(c) hereof, and the Employee shall be entitled to receive all payments and other benefits called for under such Section 6(c).
8. Change in Control.
(a) Upon the occurence of a Change in Control (as herein defined) followed at any time during the term of this Agreement by the involuntary termination of the Employee's employment other than for "cause", as defined in Section 6(a) hereof, or, as provided below the voluntary termination of the Employee within eighteen (18) months of such Change in Control, Employee shall become entitled to receive the payments provided for under paragraph (c) below. Upon the occurrence of a Change in Control, the Employee shall have the right to elect to voluntarily terminate his employment within eighteen (18) months of such Change in Control following any demotion, loss of title, office of significantly authority, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than thirty (30) miles from its location immediately prior to the Change in Control.
(b) A "Change in Control" shall mean:
(i) a reorganization, merger, consolidation or sale of all or substantially all of the assets of the Company, or a similar transaction, in which the shareholders of the Company prior to such transaction hold less than a majority of the voting power of the resulting entity;
(ii) individuals who constitute the Incumbent Board (as herein defined) of the Company cease for any reason to constitute; a majority thereof,
(iii) an event of a nature that would be required to be reported in response to Item I of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") if Employer were a reporting company subject to the Exchange Act; or
(iv) without limitation, a change in control shall be deemed to have
occurred at such time as any "person" (as the term. is used in
Section 13(d) and 14(d) of the Exchange Act) other than the
Company or the Employer or the trustees or any administration of
any employee stock ownership plan and trust, or any other
employee benefit plans, established by the Company or the
Employer from time-to-time in is or becomes a "beneficial owner"
(as defined in Rule 13-d under the Exchange Act) directly or
indirectly, of securities of the Employer representing 25% or
more of the Company's outstanding securities ordinarily having
the right to vote at the election of directors (the "Trigger
Amount"); provided, however, that in the event any such person
acquires the Trigger Amount in a transaction (i) which has been
approved in advance by the Incumbent Board and (ii) which does
not result in such person controlling a majority of the voting
power of the full Board of Directors of the Company, then any
such transaction shall not be deemed a Change in Control under
this subsection (iv); or
(v) A tender offer is made for 25% or more of the voting securities of the Company and the shareholder owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender and such tendered shares have been accepted by the tender offeror.
For these purposes, "Incumbent Board" means the Board of Directors of the Company on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a voting of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be; considered as though he were a member of the Incumbent Board.
(c) In the event the conditions of Section (a) above are satisfied, Employee shall be entitled to receive a lump sum payment equal to 2.99 times Employee's then current Base Salary; provided, however, that in no event shall any payments provided for hereunder constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended or any successor thereto, and in order to avoid such a result the benefits provided for hereunder will be reduced, if necessary, to an amount which is One Dollar ($1.00) less than an amount equal to three (3) times Employee's "base amount" as determined in accordance with such Section 280G. In addition to the foregoing, Employee shall be entitled to receive from Employer, or its successor, hospital, health, medical and life insurance on the terms and at the cost to Employee as Employee was receiving such benefits upon the date of his termination. Employer's obligation to continue such insurance benefits will be for a period of three (3) years.
9. Covenant Not to Compete. Employee agrees that during the term of his employment hereunder and for a period of one (1) year after the termination of his employment, he will not in any way, directly or indirectly, manage, operate, control, accept employment or a consulting position with or otherwise advise or assist or be connected with or own or have any other interest in or right with respect to (other than through ownership of not more than five percent (5%) of the outstanding shares of a corporation whose stock is
listed on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System) any enterprise which competes with the Company in the financial services business in the counties in which the Company conducts its business on the date of Employee's termination. In the event that this covenant not to compete shall be found by a court of competent jurisdiction to be invalid or unenforceable as against public policy, such court shall exercise discretion in reforming such covenant to the end that Employee shall be subject to a covenant not to compete that is reasonable under the circumstances and enforceable by the Company. Employee agrees to be bound by any such modified covenant not to compete.
10. Miscellaneous.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
SUSSEX BANK
By: /s/ Donald L. Kovach
-----------------------------------
Name: Donald L. Kovach
Title: Chief Executive Officer
|
EMPLOYEE:
/s/ Terry Thompson ----------------------------------- Name: Terry Thompson |
Sussex Bancorp guarantees the payments described in paragraphs 4(b), 6(c), 7 & 8(c) of this Agreement and executes this Agreement solely for that purpose.
SUSSEX BANCORP
By: /s/ Donald L. Kovach
---------------------------------------------
Name: Donald L. Kovach
Title: President and Chief Executive Officer
|
AMENDMENT
TO THE
SUSSEX COUNTY STATE BANK
SALARY CONTINUATION AGREEMENT
DATED MARCH 15, 2000
FOR
DONALD L. KOVACH
THIS AMENDMENT is adopted this 7th day of January, 2004, by and between SUSSEX BANK, (formerly Sussex County State Bank), a bank located in Franklin, New Jersey (the "Company") and DONALD L. KOVACH (the "Executive").
The Company and the Executive executed the Salary Continuation Agreement on March 15, 2000 (the "Agreement").
The Executive desires to remain working for the Company beyond his originally anticipated retirement date and the Company also desires to have Executive continue working beyond the originally anticipated retirement date. Therefore, the Company and the Executive desire to amend the Agreement so as to fix benefits under the Agreement based upon Executive's salary level at the originally anticipated retirement date with a four percent (4%) annual adjustment thereafter until Executive's full retirement.
WHEREFORE, the Company and the Executive agree to amend the Agreement as follows:
Amendments to Article 1
Section 1.5 shall be deleted in its entirety and replaced by the Section 1.5 below:
1.5 "Final Pay" means the average of the reported base pay (W-2
compensation) paid to the Executive by the Company for the last five
(5) full calendar years preceding the Executive's 70th birthday
increased by four percent (4%) per year from Executive's 70th
birthday until Termination of Employment.
IN WITNESS OF THE ABOVE, the Executive and the Company hereby consent to this First Amendment.
Executive: SUSSEX BANK
By: /s/ Donald L. Kovach By: /s/ Terry Thompson
------------------------ -------------------------------------
DONALD L. KOVACH
Title President/COO
-----------------------------------
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SELECTED FINANCIAL DATA
The following selected financial data as of December 31 for each of the five years should be read in conjunction with the Company's audited consolidated financial statements and the accompanying notes elsewhere herein
Year Ended December 31
------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INCOME:
Interest income $10,771 $10,860 $11,589 $10,389 $9,115
Interest expense 2,860 3,536 5,688 4,837 4,322
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,911 7,324 5,901 5,552 4,793
Provision for loan losses 405 300 252 229 177
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,506 7,024 5,649 5,323 4,616
Other income 4,103 3,292 1,628 839 889
Other expense 9,663 8,634 6,165 5,153 4,558
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,946 1,682 1,112 1,009 947
Income taxes 505 526 317 242 188
------------------------------------------------------------------------------------------------------------------------------------
Net income $1,441 $1,156 $795 $767 $759
====================================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES: (a)
Basic 1,790,142 1,748,102 1,725,410 1,569,405 1,567,899
Diluted 1,859,409 1,820,724 1,758,483 1,581,392 1,585,250
PER SHARE INFORMATION:
Basic net income $0.80 $0.66 $0.46 $0.49 $0.48
Diluted net income 0.78 0.64 0.44 0.48 0.48
Cash dividends (b) 0.20 0.24 0.18 0.18 0.10
Stock dividends 5% 0% 0% 5% 0%
Dividend payout ratio 25% 36% 39% 37% 21%
PERFORMANCE YIELDS:
Return on average assets 0.62% 0.54% 0.42% 0.50% 0.53%
Return on average stockholders' equity 10.27% 9.06% 6.72% 8.22% 8.31%
Average equity/average assets 6.02% 5.94% 6.27% 6.11% 6.35%
END OF PERIOD DATA:
Loans, net $132,640 $112,069 $105,005 $100,193 $83,997
Total assets 240,617 225,904 203,343 161,629 150,126
Total deposits 207,657 189,858 178,554 140,861 138,548
Total stockholders' equity 14,904 13,680 12,237 10,110 9,089
Average assets 233,027 214,897 188,785 152,623 143,909
Average stockholders' equity 14,035 12,766 11,838 9,326 9,136
|
(a) The average number of shares outstanding was computed based on the average number of shares outstanding during each period as adjusted for subsequent stock dividends.
(b) Cash 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.
MANAGEMENT DISCUSSION AND ANALYSIS
This section presents management's discussion and analysis of changes to the Company's consolidated financial results of operations and conditions and should be read in conjunction with the Company's financial statements and notes thereto included herein.
MANAGEMENT STRATEGY
The Company's goal is to serve as a community-oriented financial institution serving the Tri-State marketplace. While offering traditional community bank loan and deposit products and services, the Company obtains significant non-interest income through its Tri-State Insurance Agency, Inc. ("Tri-State") insurance brokerage operations and the sale of non-deposit products. The Company's offices are located within Sussex County, New Jersey, with one office in Montague, New Jersey, which borders Pike County, Pennsylvania and another in Vernon Township, New Jersey, which borders Orange County, New York. During 2003, the Company continued its strategy of seeking to gain market share through specialized transaction accounts and other low cost deposit products and by actively bidding on municipal deposits. In addition, during 2003, the Company continued its efforts to increase its non-interest income by beginning a residential mortgage banking/brokerage division offering 30-year fixed residential mortgages which were funded by third party investors. Although the contribution of this operation to the Company's results was not material during 2003, management believes it will continue to diversify the Company's revenue base and become a more significant contributor in future periods. During 2003, primarily due to Tri-State's continued performance, the Company's non-interest income increase by 25%. For 2004, the Company intends to continue to seek to develop other sources of non-interest fee income. In January of 2004 the Company began offering title insurance through the establishment of Sussex Settlement Services in our Augusta location.
FORWARD LOOKING STATEMENTS
When used in this discussion, the words: "believes", "anticipates", "contemplated", "expects" or similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses, general economic conditions, and the success of the Company's efforts to diversify its revenue base by developing additional sources of non-interest income while continuing to manage its existing fee based business. The Company undertakes no obligations to publicly release the results of any revisions to those forward looking statements that may be made to reflect events or circumstances after this date or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING MATTERS
Note 1 to the Company's consolidated financial statements lists
significant accounting policies used in the development and presentation
of its financial statements. This discussion and analysis, the significant
accounting policies, and other financial statement disclosures identify
and address key variables and other qualitative and quantitative factors
that are necessary for an undertaking and evaluation of the bank and its
results of operation.
The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio. Management's judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions, and other relevant factors. Loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance.
Management uses significant estimates to determine the allowance for loan losses. Consideration is given to a variety of factors in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent, to a great extent on conditions that may be beyond our control, it is possible that management's estimates of the allowances for loan losses and actual results could differ in the near term. In addition, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, would adversely affect our future results of operations.
As permitted by SFAS No. 123, the Company accounts for stock-based compensation in accordance with Accounting Principals Board Opinion (APB) No. 25. Under APB No. 25, no compensation expense is recognized in the income statement related to any option granted under the Company stock option plans. The pro forma impact to net income and earnings per share that would occur if compensation expense was recognized, based on the estimated fair value of the options on the date of the grant, is disclosed in the notes to the consolidated financial statement. The Company intends to continue to account for stock-based compensation in this matter unless there is more specific guidance issued by the Financial Accounting Standards Board or unless a clear consensus develops in the financial services industry on the application of accounting methods.
RESULTS OF OPERATIONS
For the year ended December 31, 2003, the Company's net income was $1,441,000, an increase of $285,000 over the $1,156,000 earned in 2002. Basic net income per share, as adjusted for the 2003 5% stock dividend, was $.80 for 2003, compared to basic net income per share of $.66 in 2002. Diluted net income per share for 2003 was $.78, compared to diluted net income per share of $.64, in 2002. The change in per share earnings reflects an increase in net income partially offset by an increased number of average shares outstanding during 2003, as the Company's weighted average basic shares outstanding increased to 1,790,142 from 1,748,102.
The Company's results for 2003 were affected by increases of $587,000 in net interest income and $811,000 in non-interest income, partially offset by an increase of $1,029,000 in total other expenses, and $105,000 in provision for loan losses.
Comparative Average Balances and Average Interest Rates
The following table reflects the components of the Company's daily average balances for the years ended December 31, 2003, 2002 and 2001 and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods and the Company's net interest income and net interest margin. Rates are computed on a tax-equivalent basis.
Year Ended December 31,
(dollars in thousands) 2003 2002
----------------------------------- -----------------------------------
Average Average Average Average
Earning Assets: Balance Interest (1) Rate (2) Balance Interest (1) Rate (2)
-------- ------------ -------- -------- ------------ --------
Securities:
Tax exempt (3) $18,903 $1,049 5.55% $12,523 $686 5.48%
Taxable 56,733 1,783 3.14% 45,838 2,127 4.64%
---------------------------------------------------------------------------
Total securities 75,636 2,832 3.74% 58,361 2,813 4.82%
Taxable loans: (net of unearned income)
Mortgage and construction 77,754 5,207 6.70% 63,113 4,598 7.29%
Commercial 17,538 1,004 5.72% 12,410 793 6.39%
Consumer 28,873 1,882 6.52% 32,696 2,343 7.17%
---------------------------------------------------------------------------
Total loans receivable (4) 124,165 8,093 6.52% 108,219 7,734 7.15%
Other interest-earning assets 13,099 156 1.19% 30,045 505 1.68%
---------------------------------------------------------------------------
Total earning assets 212,900 $11,081 5.20% 196,625 $11,052 5.62%
Non-interest earning assets 21,697 19,553
Allowance for loan losses (1,570) (1,281)
-------- --------
Total Assets $233,027 $214,897
======== ========
Sources of Funds:
Interest bearing deposits:
NOW $45,965 $249 0.54% $34,829 $282 0.81%
Money market 3,970 28 0.72% 4,272 42 0.98%
Savings 64,831 511 0.79% 61,405 777 1.27%
Time 53,146 1,251 2.35% 57,186 1,750 3.06%
---------------------------------------------------------------------------
Total interest bearing deposits 167,912 2,039 1.21% 157,692 2,851 1.81%
Borrowed funds 12,772 573 4.49% 12,192 553 4.54%
Capital debentures 5,000 248 4.96% 2,383 132 5.54%
---------------------------------------------------------------------------
Total interest bearing liabilities 185,684 $2,860 1.54% 172,267 $3,536 2.05%
Non-interest bearing liabilities:
Demand deposits 31,112 27,469
Other liabilities 2,196 2,395
-------- --------
Total non-interest bearing liabilities 33,308 29,864
Stockholders' equity 14,035 12,766
-------- --------
Total Liabilities and Stockholders' Equity $233,027 $214,897
======== ========
------------ -------- ------------ --------
Net Interest Income and Margin (5) $8,221 3.86% $7,516 3.82%
============ ======== ============ ========
Year Ended December 31,
(dollars in thousands) 2001
-----------------------------------
Average Average
Earning Assets: Balance Interest (1) Rate (2)
-------- ------------ --------
Securities:
Tax exempt (3) $7,014 $371 5.29%
Taxable 38,164 2,183 5.72%
-----------------------------------
Total securities 45,178 2,554 5.65%
Taxable loans: (net of unearned income)
Mortgage and construction 59,268 4,700 7.93%
Commercial 10,238 837 8.18%
Consumer 33,511 2,555 7.62%
-----------------------------------
Total loans receivable (4) 103,017 8,092 7.86%
Other interest-earning assets 27,734 1,027 3.70%
-----------------------------------
Total earning assets $175,929 $11,673 6.64%
Non-interest earning assets $13,904
Allowance for loan losses ($1,048)
--------
Total Assets $188,785
========
Sources of Funds:
Interest bearing deposits:
NOW $17,885 $226 1.26%
Money market 7,029 185 2.63%
Savings 50,334 1377 2.74%
Time 65,486 3,398 5.19%
-----------------------------------
Total interest bearing deposits 140,734 5,186 3.68%
Borrowed funds 10,000 502 5.02%
Capital debentures 0 0 0.00%
-----------------------------------
Total interest bearing liabilities $150,734 $5,688 3.77%
Non-interest bearing liabilities:
Demand deposits $25,412
Other liabilities 801
--------
Total non-interest bearing liabilities $26,213
Stockholders' equity $11,838
--------
Total Liabilities and Stockholders' Equity $188,785
========
------------ --------
Net Interest Income and Margin (5) $5,985 3.40%
============ ========
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(1) Includes loan fee income
(2) Average rates on securities are calculated on amortized costs
(3) Full taxable equivalent basis, using a 39% effective tax rate and adjusted for "TEFRA" disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets
Net Interest Income
Net interest income is the difference between interest and fees on loans and other interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities that 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 equivalent basis (a 39% tax rate), increased by $705 thousand in 2003 to $8.2 million compared to $7.5 million in 2002. Total interest income, on a fully taxable equivalent basis, increased by $29 thousand to remain at $11.1 million for the years ended December 31, 2003 and 2002 as the rate earned on average earning assets declined by 42 basis points to 5.20% for the year ended December 31, 2003 from 5.62% for the prior year. Average
earning assets increased by $16.3 million to $212.9 million from $196.6 million for the year ended December 31, 2002, partially offsetting the decline in rates. Interest expense decreased by $676 thousand, or 19.1% to $2.9 million from $3.5 million for the year ended December 31, 2002 as a result of declines in market rates of interest. The average rate paid on interest bearing liabilities declined by 51 basis points to 1.54% for the current year from 2.05% for the year ended December 31, 2002. The decrease in rate on both earning assets and interest bearing liabilities reflects the stable rate environment that occurred during 2003, as the Federal Reserve kept interest rates at their current levels and assets and liabilities repriced to those levels.
Interest income on total loans increased from $7.7 million in 2002 to $8.1 million in 2003, an increase of $359 thousand. Average loans increased by $15.9 million to $124.2 million from $108.2 million for the year ended December 31, 2002, offset by a decrease in the average rate earned to 6.52% for the year ended December 31, 2003 from 7.15% for the prior year. As discussed above, the low rate environment in 2003 caused the decline in yield on the loan portfolio, as older, higher rate loans were replaced by new loans bearing the current low rates.
Total interest income on securities, on a fully taxable equivalent basis, increased by $19 thousand to remain at $2.8 million for both years ended December 31, 2003 and 2002, as the increase in the average balance of investment securities was offset by a reduction in yield on the portfolio. The rate environment continued to remain low in the mortgage backed securities market with consumers taking advantage of refinancing opportunities. Higher rate mortgage backed securities during 2003 continued to pre-pay due to the low rate environment. The average yield on tax-exempt securities increased by 7 basis points, which was offset by a decrease of 150 basis points earned on taxable investment securities. The yield on the total securities portfolio fell to 3.74% in the current year from 4.82% for the year ended December 31, 2002.
Interest income on other interest-earning assets, primarily federal funds sold and, to a lesser extent, interest bearing deposits in other financial institutions, decreased by $349 thousand, or 69.1% to $156,000 from $505,000. The decrease primarily occurred due to the Company's average balance in federal funds sold decreasing by $14.2 million to $9.6 million for the year 2003 compared to $23.8 million in 2002 and a 51 basis point decrease in the average yield on federal funds sold during the same periods.
Total interest expense decreased from $3.5 million in 2002 to $2.9 million for 2003, a decrease of $676 thousand or 19.1%. The decrease is attributable to the Company's ability to lower the interest rate paid on its liabilities to lower current rates and a continued change in the Company's deposit mix toward demand and NOW accounts and away from time deposits. During 2003, the Company's average interest-bearing liabilities increased by $13.4 million, to $185.7 million compared to $172.3 million in 2002. The increase in deposits occurred due to the Company's continued focus on low cost demand and NOW accounts. Average NOW deposits increased by $11.1 million to $46.0 million from $34.9 million, while the yield on NOW accounts declined to .54% in 2003 from .81% in 2002. Savings deposits increased by $3.4 million to $64.8 million from $61.4 million, while the yield on savings deposits declined to .79% in 2003 from 1.27% in 2002. The average balance of time deposits decreased by $4.0 million to $53.1 million in 2003 from $57.1 million in 2002, while the yield on time deposits declined to 2.35% in 2003 from 3.06% in 2002, a decrease of 71 basis points. The average rate paid on all the Company's interest bearing liabilities decreased to 1.54% in 2003 compared to 2.05% in 2002. This reflects the continued decline in market rates during 2003. In addition, the Company's average non-interest bearing deposits increased by $3.6 million, or 13.3% in 2003 from year end 2002
The net interest margin was 3.86%, an increase from the net interest margin of 3.82% in 2002 reflecting a 41 basis point decrease in yield on total earning assets from 5.62% in 2002 to 5.21% in 2003, compared to a 51 basis point decline in rate on total interest bearing liabilities.
The following table reflects the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balance.
2003 v. 2002 2002 v. 2001
Increase (decrease) Increase (decrease)
Due to changes in: Due to changes in:
----------------------------------------- -----------------------------------------
(Dollars in thousands) Rate Volume Rate/Volume Total Rate Volume Rate/Volume Total
------ ------ ----------- ------ ------ ------ ----------- ------
Interest-earning assets:
Loans receivable:
Mortgage ($373) $1,068 ($86) $609 ($382) $305 ($25) ($102)
Consumer (211) (274) 25 (460) (154) (62) 4 (212)
Commercial (81) 325 (33) 211 (183) 178 (39) (44)
------ ------ ----------- ------ ------ ------ ----------- ------
Total loans (665) 1,119 (94) 360 (719) 421 (60) (358)
Securities (1) (628) 833 (186) 19 (376) 745 (110) 259
Other interest-earning assets (147) (285) 83 (349) (562) 85 (45) (522)
------ ------ ----------- ------ ------ ------ ----------- ------
Total net change in income on
interest-earning assets (1,440) 1,667 (197) 30 (1,657) 1,251 (215) (621)
------ ------ ----------- ------ ------ ------ ----------- ------
Interest-bearing liabilities:
Deposits:
NOW (93) 90 (30) (33) (81) 214 (77) 56
Money market (12) (3) 1 (14) (116) (73) 46 (143)
Savings (293) 43 (16) (266) (740) 303 (163) (600)
Time (404) (124) 29 (499) (1,394) (431) 177 (1,648)
------ ------ ----------- ------ ------ ------ ----------- ------
Total deposits (802) 6 (16) (812) (2,331) 13 (17) (2,335)
Borrowings (12) 151 (3) 136 (32) 230 (15) 183
Total net change in expense on
interest-bearing liabilities (814) 157 (19) (676) (2,363) 243 (32) (2,152)
------ ------ ----------- ------ ------ ------ ----------- ------
Change in net interest income ($626) $1,510 ($178) $706 $706 $1,008 ($183) $1,531
------ ------ ----------- ------ ------ ------ ----------- ------
|
(1) Fully taxable equivalent basis, using 39% effective tax rate and adjusted for TEFRA allowance.
Provision for Loan Losses
The provision for loan losses in 2003 was $405,000 compared to a provision of $300,000 in 2002. The increase reflects growth in the Company's loan portfolio of $21.0 million for the year ended December 31, 2003, as well as management's view of the potential impact of the economy on the portfolio. See discussion on allowance for loan losses.
Non Interest Income
The Company's non-interest income is primarily generated through insurance commission income earned through the operation of Tri-State, service charges on deposit accounts, ATM and debit card fees and mortgage banking fees. The Company's non-interest income increased by $811,000, or 24.6%, to $4.1 million for the year ended December 31, 2003 from $3.3 million for the prior year. The increase in non interest income included an increase of $374,000 in commission income from Tri-State, $110,000 in service charges on deposit accounts, and $133,000 from net realized gain on sale of securities. With the addition of the real estate lending division, mortgage banking fee income increased by $199,000.
Non Interest Expense
Total non-interest expense increased from $8.6 million in 2002 to $9.7 million in 2003, an increase of $1 million, or 11.9%. The increase in non-interest expense reflects operating expenses associated with Tri-State, which are primarily volume driven based on the amount of premium income, as well as other expenses associated with the Company's continued growth. In 2003, salaries and employee benefits, the largest component of non-interest-expense, increased by $838,000 or 18.1%. This increase reflects customary increases for the Bank's and Tri-State's existing staff and increased staffing needs associated with the Company's growth. In addition, all other expenses increased by $191,000 reflecting the Company's growth and associated costs.
Income Tax Expense
The Company's income tax provision, which includes both federal and state taxes, was $505 thousand and $526 thousand for the years ended December 31, 2003 and 2002, respectively. The decrease in the tax provision was due to increased tax-exempt income.
FINANCIAL CONDITION
At December 31, 2003, the Company had total assets of $240.6 million compared to total assets of $225.9 million at December 31, 2002. Net loans increased to $132.6 million at December 31, 2003 from $112.1 million at December 31, 2002. Total deposits increased to $207.7 million at December 31, 2003 from $189.9 million at December 31, 2002.
Cash and Cash Equivalents
The Company's cash and cash equivalents decreased by $10.6 million for the year ended December 31, 2003, to $15.5 million from $26.1 million at December 31, 2002. The decrease reflects the Company's reduction in federal funds sold balance, as these funds were used to fund loan demand and purchase investment securities.
Securities Portfolio
The Company's securities portfolio is comprised of securities that not only provide interest income, including tax-exempt income, but also provide a source of liquidity (as all securities are classified as available for sale, as discussed below), diversify the earning assets portfolio, allow for management of interest rate risk, and provide collateral for public fund deposits and borrowings. The portfolio is composed primarily of obligations of U.S. Government agencies and government sponsored entities, including collateralized mortgage obligations issued by such agencies and entities, and tax-exempt municipal bonds.
The Company has no securities classified as held to maturity or as trading securities. Securities not classified as securities held to maturity or trading securities are classified as securities available for sale, and are stated at fair value. Unrealized
gains and losses on securities available for sale are excluded from results of operations, and are reported as a separate component to stockholders' equity, net of taxes. Securities classified as available for sale include securities that may be sold in response to changes to interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar requirements. Management determines the appropriate classification of securities at the time of purchase. At December 31, 2003, all of the Company's securities were classified as available for sale.
The following table shows the carrying value of the Company's security portfolio as of December 31, 2003, 2002 and 2001. Securities available for sale are stated at their fair value.
(dollars in thousands) December 31,
---------------------------
Available for sale 2003 2002 2001
------- ------- -------
U.S. Treasury securities $ -- $ -- $1,531
U.S. Government agency 14,658 13,612 7,295
State and political subdivisions 21,542 15,785 7,626
Mortgage-backed securites 34,972 35,554 20,745
Corporate securities 4,479 6,886 4,661
Equity securities 894 883 854
------- ------- -------
Total available for sale $76,545 $72,720 $42,712
======= ======= =======
|
The Company's securities increased from $72.7 million at December 31, 2002 to $76.5 million at December 31, 2003. The $3.8 million net increase in securities at December 31. 2003 was due to the Company investing $56.1 million in new purchases offsetting $45.9 million in called securities, scheduled maturities and paydowns, as well as $4.9 million in securities sales. Year end balances increased in state and political tax-exempt securities by $5.8 million to $21.5 million.
The Company also holds $760,000 in Federal Home Loan Bank of New York stock that it does not consider an investment security. Ownership of this restricted stock is required for membership in the Federal Home Loan Bank of New York.
The contractual maturity distribution and weighted average yield of the Company's securities portfolio at December 31, 2003 are summarized in the following table. Securities available for sale are carried at amortized cost in the table for purposes of calculating the weighted average yield received on such securities. Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment and has not been tax-effected on the tax-exempt obligations.
December 31, 2003 Due under 1 Year Due 1-5 Years Due 5-10 Years Due over 10 Years
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- ------- -----
Available for sale:
U.S. Government agency $1,499 6.63% $11,370 2.13% $1,782 2.07% $ -- --
State and political subdivisions 755 1.80% -- -- 2,865 3.85% 17,594 3.76%
Mortgage-backed securities -- -- 374 3.64% 9,408 3.50% 25,274 3.89%
Corporate securities 1,756 4.56% 2,555 6.16% -- -- -- --
Equity securities -- -- -- -- -- -- 899 4.35%
------- ----- ------- ----- ------- ----- ------- -----
Total available for sale $4,010 4.81% $14,299 2.89% $14,055 3.39% $43,767 3.85%
======= ===== ======= ===== ======= ===== ======= =====
|
Loans
The loan portfolio comprises the largest part of the Company's earning assets. Loans, net of the allowance for loan losses and deferred loan fees, increased from $112.1 million at December 31, 2002 to $132.6 million at December 31, 2003, an increase of $20.6 million, or 18.4%. The increase in the Company's loan portfolio during 2003 was concentrated in loans secured by non-residential mortgages and other commercial loans. Loans secured by commercial properties increased by $18.1 million, or 44.2%, to $59.2 million at December 31, 2003 from $41.0 million at December 31, 2002. Commercial and industrial loans increased by $1.4 million, or 12.8%, to $12.4 million at December 31, 2003 from $11.0 million at December 31, 2002. Loans secured by 1-4 family residential properties decreased by $2.9 million to $46.6 million at December 31, 2003 from $49.5 million at December 21, 2002, representing 34.7% of the loan portfolio. This decrease reflects the flat rate environment that we are currently experiencing, as prepayments exceed new loan origination held in portfolio.
The increase in loans was funded during 2003 by an increase in the Company's demand deposits, NOW deposits and savings deposits, as well as a reduction in federal funds sold.
Other than as described herein, management does not believe there are any trends, events, or uncertainties which are reasonably expected to have a materially adverse impact on future results of operations, liquidity, or capital resources. The end of year loan to deposit ratios for 2003 and 2002 were 64.7% and 59.7%, respectively.
The following table summarizes the composition of the Company's loan portfolio by type as of December 31, for the years 1999 through 2003.
December 31,
----------------------------------------------------
(dollars in thousands) 2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial and industrial loans $12,392 $10,985 $8,065 $4,968 $3,811
Non-residential real estate loans 59,182 41,035 34,811 27,529 19,759
One to four family residential property loans 46,587 49,517 51,338 55,138 50,305
Construction and land development loans 8,656 8,310 8,515 8,960 7,074
Consumer loans 1,430 2,189 2,245 2,780 2,295
Other loans 6,114 1,335 1,086 1,718 1,519
-------- -------- -------- -------- --------
Total loans $134,361 $113,371 $106,060 $101,093 $84,763
======== ======== ======== ======== ========
|
The maturity ranges of the loan portfolio and the amounts of loans with predetermined interest rates and floating rates in each maturity range, as of December 31, 2003, are presented in the following table.
December 31, 2003
--------------------------------
Due Under Due 1-5 Due Over
(dollars in thousands) One Year Years Five Years
--------- ------- ----------
Real estate:
Commercial mortgage $ 5,521 $ 2,493 $51,168
Construction and land development 1,421 2,036 5,199
Residential mortgage 8,619 16,937 21,031
--------- ------- ----------
Total real estate 15,561 21,466 77,398
Commercial 5,896 3,264 3,232
Consumer 1,207 2,060 4,277
--------- ------- ----------
Total loans $22,664 $26,790 $84,907
========= ======= ==========
Interest rates:
Predetermined 7,932 16,248 35,694
Floating 14,732 10,542 49,213
--------- ------- ----------
Total loans $22,664 $26,790 $84,907
========= ======= ==========
|
Loan and Asset Quality
Non-performing assets consist of non-accrual loans and all loans over ninety days delinquent and other real estate owned ("OREO"). The Company's non-accrual loans decreased to $1.2 million at December 31, 2003 from $1.3 million at December 31, 2002. At December 31, 2003, the Company's restructured loans amounted to $150 thousand. Restructured loans are put on accrual basis if the customer demonstrates the ability to repay the debt under the terms of the renegotiation by a period of performance, by financial statements or other evidence of ability to service debt.
The Company seeks to actively manage its non-performing and questionable assets. The Company had $223 thousand in OREO properties at December 31, 2003 and $187 thousand at December 31, 2002. In addition to active monitoring and collecting on delinquent loans management has an active loan review process for customers with aggregate relationships of $250,000 or more if the credit(s) are unsecured or secured, in whole or substantial part, by collateral other than real estate and $1,000,000 or more if the credit(s) are secured in whole or substantial part of real estate.
The following table provides information regarding non-performing loans and non-performing assets of December 31, 1999 through 2003.
December 31,
------------------------------------------
(dollars in thousands) 2003 2002 2001 2000 1999
------ ------ ------ ---- ----
Non-accrual loans:
Commercial $ 343 $ 256 $ -- $ 5 $ --
Consumer -- 21 16 5 --
Construction -- 145 1,512 -- --
Mortgage 834 836 966 542 332
------ ------ ------ ---- ----
Total nonaccrual loans $1,177 $1,258 $2,494 $552 $332
Loans past due 90 days and still accruing -- 36 -- -- --
Restructured loans 150 -- -- -- --
------ ------ ------ ---- ----
Total non-performing loans $1,327 $1,294 $2,494 $552 $332
Other real estate 223 187 187 -- --
------ ------ ------ ---- ----
Total non-performing assets $1,550 $1,481 $2,681 $552 $332
------ ------ ------ ---- ----
Non-performing loans to total loans 0.99% 1.14% 2.35% 0.55% 0.39%
Non-performing assets to total assets 0.64% 0.66% 1.32% 0.34% 0.22%
------ ------ ------ ---- ----
Interest income received on nonaccrual loans $ 33 $ 16 $ 3 N/A N/A
------ ------ ------ ---- ----
Interest income that would have been recorded
under the original terms of the loans $ 117 $ 118 $ 25 N/A N/A
====== ====== ====== ==== ====
|
Allowance for Loan Losses
The allowance is allocated to specific loan categories based upon management's classification of problem loans under the bank's internal loan grading system and to pools of other loans that are not individually analyzed. Management makes allocations to specific loans based on the present value of expected future cash flows or the fair value of the underlying collateral for impaired loans and to other classified loans based on various credit risk factors. These factors include collateral values, the financial condition of the borrower and industry and current economic trends.
Allocations to commercial loan pools are categorized by commercial loan type and are based on management's judgment concerning historical loss trends and other relevant factors. Installment and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and current conditions. Additionally, all other delinquent loans are grouped by the number of days delinquent with this amount assigned a general reserve amount.
The provision for loan losses was $405,000 and $300,000 for the years 2003 and 2002, respectively.
The allowance for loan losses represented 1.29% of total loans receivable at December 31, 2003 as compared to 1.22% at December 31, 2002. Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the reserve is reasonable and adequate for each of the periods presented.
Total charge-offs were $62,000 for 2003 compared to $59,000 in 2002. Total charge-offs as a percent of average loans were 0.05% for both years 2003 and 2002.
The table below presents information regarding the Company's provision and allowance for loan losses.
Year Ended December 31,
------------------------------------------
(dollars in thousands) 2003 2002 2001 2000 1999
------ ------ ------ ---- ----
Balance at beginning of year $1,386 $1,143 $973 $837 $665
------ ------ ------ ---- ----
Provision charged to operating expenses 405 300 252 229 177
------ ------ ------ ---- ----
Recoveries of loans previously charged-off:
Commercial -- -- 1 8 7
Consumer 1 2 -- 1 3
Real Estate 4 -- -- 2 --
------ ------ ------ ---- ----
Total recoveries 5 2 1 11 10
------ ------ ------ ---- ----
Loans charged-off:
Commercial -- -- -- -- --
Consumer 31 19 26 -- 15
Real Estate 31 40 57 104 --
------ ------ ------ ---- ----
Total charge-offs 62 59 83 104 15
------ ------ ------ ---- ----
Net charge-offs 57 57 82 93 5
------ ------ ------ ---- ----
Balance at end of year $1,734 $1,386 $1,143 $973 $837
------ ------ ------ ---- ----
Net charge-offs to average loans outstanding 0.05% 0.05% 0.08% 0.10% 0.01%
Allowance for loan losses to year-end loans 1.29% 1.22% 1.08% 0.96% 0.99%
====== ====== ====== ==== ====
|
The following table sets forth details concerning the allocation of the allowance for loan losses to the various categories. The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses from any segment of loans.
Allowance for Loans Losses at December 31,
--------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
% of % of % of
(dollars in thousands) Amount Gross Loans Amount Gross Loans Amount Gross Loans
------ ----------- ------ ----------- ------ -----------
Commercial $ 494 9.22% $ 396 9.69% $ 233 7.60%
Consumer and other loans 109 5.62% 45 3.11% 37 3.14%
Real estate, constuction and development:
Commercial 990 50.49% 681 43.52% 656 40.85%
Residential 141 34.67% 264 43.68% 217 48.41%
------ ----------- ------ ----------- ------ -----------
Total $1,734 100.00% $1,386 100.00% $1,143 100.00%
====== =========== ====== =========== ====== ===========
Allowance for Loans Losses at December 31,
--------------------------------------------
2000 1999
-------------------- --------------------
% of % of
(dollars in thousands) Amount Gross Loans Amount Gross Loans
------ ----------- ------ -----------
Commercial $159 4.91% $95 4.50%
Consumer and other loans 44 4.45% 7 4.50%
Real estate, constuction and development:
Commercial 553 36.09% 359 31.66%
Residential 217 54.55% 376 59.34%
------ ----------- ------ -----------
Total $973 100.00% $837 100.00%
====== =========== ====== ===========
|
Deposits
Total average deposits increased $13.9 million from $185.1 million at year end 2002 to $199.0 million at year-end 2003, a 7.5% increase. Average savings, NOW and money market accounts increased to $114.8 million, an increase of $14.3 million, or 14.2% from $100.5 million at year-end 2002. Average time deposits decreased to $53.1 million compared to $57.2 million at year end 2002. The increase primarily in savings and interest bearing transaction deposits reflects the Company's continued offering of low cost accounts through a marketing program. The Company also continues to actively bid on municipal deposits along with its efforts to cultivate commercial deposit relationships with its commercial loan customers.
The average balances and weighted average rates paid on deposits for 2003, 2002 and 2001 are presented below.
Year Ended December 31,
-----------------------------------------------------
2003 Average 2002 Average 2001 Average
--------------- --------------- ---------------
(dollars in thousands) Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
Demand , non-interest bearing $31,112 $27,469 $25,412
Now accounts 45,965 0.54% 34,829 0.81% 17,885 1.26%
Money market accounts 3,970 0.72% 4,272 0.98% 7,029 2.63%
Savings 64,831 0.79% 61,405 1.27% 50,334 2.74%
Time 53,146 2.35% 57,186 3.06% 65,486 5.19%
-------- -------- --------
Total deposits $199,024 $185,161 $166,146
======== ======== ========
|
The remaining maturity for certificates of deposit rates paid on deposits of $100,000 or more as of December 31, 2003 are presented in the following table.
(dollars in thousands) 2003
-------
3 months or less $5,245
3 to 6 months 1,101
6 to 12 months 1,986
Over 12 months 3,689
-------
Total $12,021
=======
|
Borrowings
Borrowings consist of notes from the Federal Home Loan Bank. These notes are secured under terms of a blanket collateral agreement by a pledge of qualifying investment securities and certain mortgage loans. As of December 31, 2003 the Company had $11.0 million in notes outstanding which had an average interest rate of 4.78%, compared to $15.0 million in notes at December 31, 2002 which had an average interest rate of 4.54%.
Interest Rate Sensitivity
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. Interest rate sensitivity is the volatility of a company's earnings from a movement in market interest rates. Interest rate "gap" analysis is a common, though imperfect, measure of interest rate risk. We do not employ gap analysis as rate risk management tool, but rather we rely upon earnings at risk analysis to forecast the impact on our net interest income instantaneous 100 and 200 basis point increases and decreases in market rates. In assessing the impact on earnings, the rate shock analysis assumes that no change occurs in our funding sources or types of assets in response to the rate change.
Our Board of Directors has established limits for interest rate risk based on the percentage change in net interest income we would incur in differing interest rate scenarios. Through year end 2003, we sought to remain relatively balanced, and our policies called for no more than 25% of net interest income, at a 100 and 200 basis point increase or decrease. At December 31, 2003 the percentage of change were within policy limits.
Our financial modeling simulates our cash flows, interest income and interest expense from earning assets and interest bearing liabilities for a twelve month period in each of the different interest rate environments, using actual individual deposit, loan and investment maturities and rates in the model calculations. Assumptions regarding the likelihood of prepayments on residential mortgage loans and investments are made based on historical relationships between interest rates and prepayments. Commercial loans with prepayment penalties are assumed to pay on schedule to maturity. In actual practice, commercial borrowers may request and be granted interest rate reductions during the life of a commercial loan due to competition from financial institutions and declining interest rates.
The following table sets forth our interest rate risk profile at December 31, 2003 and 2002. The interest rate sensitivity of our assets and liabilities, and the impact on net interest income, illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by the assumptions.
2003 2002
---------------------------- ----------------------------
Change in Gap as a Change in Gap as a
Net Interest % of Net Interest % of
(dollars in thousands) Income Total Assets Income Total Assets
------------ ------------ ------------ ------------
Down 200 basis points ($513) 10.68% ($586) 12.98%
Down 100 basis points (150) 6.24% (250) 11.07%
Up 100 basis points 209 -8.68% (81) -3.59%
Up 200 basis points (493) -10.26% (223) -4.94%
|
Liquidity
Liquidity is a measure of the Company's ability to provide sufficient cash flow and future financial obligations and commitments on a timely-basis. Sources of liquidity include deposits, liquidation or maturity of loans and investments and short-term borrowings.
It is management's intent to fund future loan demand with deposit growth and maturities and paydowns on investments. In addition, the Bank is a member of Federal Home Loan Bank of New York and has the ability to borrow $18.5 million against its one to four family mortgages and selected investment securities as collateral for long-term advances. The Company also has available an $11 million overnight line of credit and an $11 million one-month overnight repricing line of credit at the Federal Home Loan Bank, and an overnight line of credit in the amount of $4 million at the Atlantic Central Bankers Bank. The borrowings at year-end 2003 and 2002 were $11.0 million and $15.0 million in long-term advances, respectively. Borrowed funds were used as part of the Company's strategy to leverage its balance sheet. The $4 million reduction in borrowings from $15.0 million at year-end 2002 to $11.0 million at year-end 2003 was do to the maturing of borrowings initially purchased as a cost recovery strategy to cover the investment in the trust preferred securities. Those borrowings have been replaced with lower cost deposits.
Management believes that the combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand, deposit withdrawals and the repayment of borrowings in the near term.
The following table represents the Company's contractual obligations to make future payments.
Payments due by period
---------------------------------------------------------
Less than More than
(dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- ---------
Borrowings $11,000 $ 1,000 $ -- $ -- $10,000
Operating lease obligations 944 236 399 177 132
Purchase obligations 746 746 -- -- --
Time deposits 56,481 40,325 13,499 2,287 370
Mandatory redeemable capital debentures 5,000 -- -- -- 5,000
--------- --------- --------- --------- ---------
Total $74,171 $42,307 $13,898 $ 2,464 $15,502
========= ========= ========= ========= =========
|
The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.
The Company is not aware of any known trends or any known demands, commitments, events or uncertainties, which would result in any material increase or decrease in liquidity.
Off-Balance Sheet Arrangements
The Company's financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business. These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. These unused commitments, at December 31, 2003 totaled $34,106,000. This consisted of $10,449,000 in commercial construction lines of credit, $7,337,000 in commercial lines of credit, $7,181,000 in home equity lines of credit, $6,211,000 in commitments to grant commercial and residential loans and the remainder in other unused commitments. These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company.
Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.
Capital Resources
Stockholders' equity inclusive of accumulated other comprehensive income, net of income taxes, was $14.9 million at December 31, 2003, an increase of $1.2 million over 2002. The growth in stockholders' equity was generated through earnings retention and the reinvesting of dividends by its participants in the Company's dividend reinvestment plan.
The Company's and the Bank's regulators have classified and defined bank holding company capital Tier I capital which includes tangible stockholders' equity for common stock and certain stock and other hybrid instruments, and Tier II capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify for Tier I capital.
The Company's and the Bank's regulators have implemented risk-based guidelines which require banks and bank holding companies to maintain certain minimum capital as a percent of such assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). Banks and bank holding companies are required to maintain Tier I capital as a percent of risk-adjusted assets of 4.0% and Tier II capital as of risk-adjusted assets of 8.0%, at a minimum. At December 31, 2003, the Company's Tier I and Tier II capital ratios were 11.14% and 12.37%, respectively. The Bank's Tier I and Tier II capital ratios were 10.96% and 12.11%, respectively.
In addition to the risk-based guidelines discussed above, the Company's and the Bank's regulators require that banks and bank holding companies which meet the regulator's highest performance and operational standards maintain a minimum leverage ratio (Tier I capital as a percent of tangible assets) of 4.0%. For those banks and bank holding companies with higher levels of risk or that are experiencing or anticipating growth, the minimum will be proportionately increased. Minimum leverage ratios for each bank and bank holding company are established and updated through the ongoing regulatory examination process. As of December 31, 2003, the Company had a leverage ratio of 7.15% and the Bank had a leverage ratio of 7.02%.
Effect of Inflation
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, the level of interest rates has a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or change with the same magnitude as the price of goods and services, which prices are affected by inflation. Accordingly, the liquidity, interest rate sensitivity and maturity characteristics of the Company's asset and liabilities are more indicative of its ability to acceptable performance levels. Management of the Company monitors and seeks to mitigate the impact if interest rate changes by attempting to match the maturities of assets and liabilities to gap, thus seeking to minimize the potential effects of inflation.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Sussex Bancorp
Franklin, New Jersey
We have audited the accompanying consolidated balance sheets of Sussex Bancorp and its subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sussex Bancorp and its subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Beard Miller Company LLP
----------------------------
Allentown, Pennsylvania
January 9, 2004
|
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks $ 11,301 $ 9,186
Federal funds sold 4,195 16,910
-------- --------
Cash and cash equivalents 15,496 26,096
Interest bearing time deposits with other banks 3,500 3,600
Securities available for sale 76,545 72,720
Federal Home Loan Bank stock, at cost 760 750
Loans receivable, net of allowance for loan losses 2003
$1,734; 2002 $1,386 132,640 112,069
Bank premises and equipment, net 4,650 4,634
Accrued interest receivable 1,241 1,144
Goodwill 2,124 1,932
Other assets 3,661 2,959
-------- --------
Total Assets $240,617 $225,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 31,715 $ 26,514
Interest bearing 175,942 163,344
-------- --------
Total Deposits 207,657 189,858
Borrowings 11,000 15,000
Accrued interest payable and other liabilities 2,056 2,366
Mandatory redeemable capital debentures 5,000 5,000
-------- --------
Total Liabilities 225,713 212,224
-------- --------
Stockholders' equity:
Common stock, no par value; authorized 5,000,000
shares; issued and outstanding 1,811,460 shares
in 2003 and 1,688,130 shares in 2002 9,616 7,869
Retained earnings 5,040 5,249
Accumulated other comprehensive income 248 562
-------- --------
Total Stockholders' Equity 14,904 13,680
-------- --------
Total Liabilities and Stockholders' Equity $240,617 $225,904
======== ========
|
See notes to consolidated financial statements.
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
INTEREST INCOME
Loans receivable, including fees $ 8,093 $ 7,734
Securities:
Taxable 1,783 2,127
Tax-exempt 739 494
Federal funds sold 110 395
Interest-bearing deposits 46 110
------- -------
Total Interest Income 10,771 10,860
------- -------
INTEREST EXPENSE
Deposits 2,039 2,851
Borrowings 573 553
Mandatory redeemable capital debentures 248 132
------- -------
Total Interest Expense 2,860 3,536
------- -------
Net Interest Income 7,911 7,324
PROVISION FOR LOAN LOSSES 405 300
------- -------
Net Interest Income after Provision
for Loan Losses 7,506 7,024
------- -------
OTHER INCOME
Service fees on deposit accounts 769 659
ATM and debit card fees 332 262
Insurance commissions and fees 2,063 1,689
Investment brokerage fees 244 249
Mortgage banking fees 213 14
Net realized gain on sale of securities 133 --
Net gain on sale of loans 42 24
Net gain on sale of foreclosed real estate 63 --
Other 244 395
------- -------
Total Other Income 4,103 3,292
------- -------
OTHER EXPENSES
Salaries and employee benefits 5,478 4,640
Occupancy, net 642 601
Furniture, equipment and data processing 837 833
Stationery and supplies 181 194
Professional fees 376 319
Advertising and promotion 416 464
Postage and freight 174 154
Amortization of intangible assets 162 131
Other 1,397 1,298
------- -------
Total Other Expenses 9,663 8,634
------- -------
Income before Income Taxes 1,946 1,682
PROVISION FOR INCOME TAXES 505 526
------- -------
Net Income $ 1,441 $ 1,156
======= =======
EARNINGS PER SHARE
Basic $ 0.80 $ 0.66
======= =======
Diluted $ 0.78 $ 0.64
======= =======
|
See notes to consolidated financial statements.
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003 and 2002
Accumulated
Number of Other
Shares Common Retained Comprehensive Treasury
Outstanding Stock Earnings Income Stock Total
----------- ------ -------- ------------- -------- -------
(Dollars in Thousands, Except Per Share Amounts)
BALANCE - DECEMBER 31, 2001 1,659,057 $7,732 $4,509 $123 $ (127) $12,237
-------
Comprehensive income:
Net income -- -- 1,156 -- -- 1,156
Change in unrealized gains on securities
available for sale -- -- -- 439 -- 439
-------
Total Comprehensive Income 1,595
-------
Treasury stock purchased (14,554) -- -- -- (156) (156)
Treasury stock retired -- (283) -- -- 283 --
Issuance of common stock and exercise of stock
options 31,280 302 -- -- -- 302
Issuance of common stock
through dividend reinvestment plan 12,347 118 -- -- -- 118
Dividends on common stock ($.24 per share) -- -- (416) -- -- (416)
----------- ------ -------- ------------- -------- -------
BALANCE - DECEMBER 31, 2002 1,688,130 7,869 5,249 562 -- 13,680
-------
Comprehensive income:
Net income -- -- 1,441 -- -- 1,441
Change in unrealized gains on securities
available for sale -- -- -- (314) -- (314)
-------
Total Comprehensive Income 1,127
-------
Treasury stock purchased (2,400) -- -- -- (25) (25)
Treasury stock retired -- (25) -- -- 25 --
Issuance of common stock and exercise of stock
options 28,264 354 -- -- -- 354
Issuance of common stock through dividend
reinvestment plan 11,478 128 -- -- -- 128
Dividends on common stock ($.20 per share) -- -- (356) -- -- (356)
5% stock dividend 85,988 1,290 (1,294) -- -- (4)
----------- ------ -------- ------------- -------- -------
BALANCE - DECEMBER 31, 2003 1,811,460 $9,616 $5,040 $248 $ -- $14,904
=========== ====== ======== ============= ======== =======
|
See notes to consolidated financial statements.
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
-------------------
2003 2002
-------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,441 $ 1,156
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 405 300
Provision for depreciation and amortization 672 695
Realized gain on sale of securities (133) --
Realized gain on sale of foreclosed real estate (63) --
Deferred income taxes (203) (170)
Net amortization of securities premiums and discounts 1,095 569
Proceeds from sale of loans 2,446 1,220
Net gains on sale of loans (42) (24)
Loans originated for sale (2,404) (1,196)
Earnings on investment in life insurance (49) (55)
Increase in assets:
Accrued interest receivable (97) (180)
Other assets (358) (53)
Decrease in accrued interest payable and other
liabilities (73) (56)
-------- --------
Net Cash Provided by Operating Activities 2,637 2,206
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (56,128) (60,109)
Maturities, calls and principal repayments 45,876 30,267
Proceeds from sale of securities 4,942 --
Net increase in loans (21,199) (7,364)
Purchases of bank premises and equipment (526) (273)
Acquisition of insurance agency (131) --
Increase in FHLB stock (10) (65)
Net (increase) decrease in interest bearing time
deposits with other banks 100 (500)
Proceeds from sale of foreclosed real estate 250 --
-------- --------
Net Cash Used in Investing Activities (26,826) (38,044)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,799 11,304
Repayments of borrowings (4,000) --
Proceeds from borrowings -- 5,000
Proceeds from the issuance of capital debentures -- 5,000
Proceeds from the exercise of stock options 47 49
Purchase of treasury stock (25) (156)
Dividends paid, net of reinvestments (228) (298)
Cash paid in lieu of fractional shares (4) --
-------- --------
Net Cash Provided by Financing Activities 13,589 20,899
-------- --------
Net Decrease in Cash and Cash Equivalents (10,600) (14,939)
CASH AND CASH EQUIVALENTS - BEGINNING 26,096 41,035
-------- --------
CASH AND CASH EQUIVALENTS - ENDING $15,496 $26,096
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 2,935 $ 3,670
======== ========
Income taxes paid $ 798 $ 525
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Foreclosed real estate acquired in settlement of loans $ 223 $ --
======== ========
|
See notes to consolidated financial statements.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sussex Bancorp (the "Company") and its wholly-owned subsidiaries, Sussex Bank (the "Bank") and Sussex Capital Trust I. The Bank's wholly-owned subsidiaries are Sussex Bancorp Mortgage Company, SCB Investment Company and Tri-State Insurance Agency, Inc. All intercompany transactions and balances have been eliminated in consolidation.
Organization and Nature of Operations
Sussex Bancorp's business is conducted principally through the Bank. Sussex Bank is a New Jersey state chartered bank and provides full banking services. The Bank generates commercial, mortgage and consumer loans and receives deposits from customers at its eight branches located in Sussex County, New Jersey. As a state bank, the Bank is subject to regulation of the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation. Sussex Bancorp is subject to regulation by the Federal Reserve Board. Sussex Capital Trust I is a trust formed in 2002 for the purpose of issuing the mandatory redeemable capital debentures on behalf of the Company. Sussex Bancorp Mortgage Company brokers mortgage loans for the Bank and third parties. SCB Investment Company holds investments. Tri-State Insurance Agency, Inc. provides insurance agency services mostly through the sale of property and casualty insurance policies.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Group Concentrations of Credit Risk
Most of the Company's activities are with customers located within Sussex County, New Jersey. Note 4 discusses the types of securities that the Company invests in. Note 5 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations in any one industry or customer.
Presentation of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
Securities classified as available for sale are those securities that the Bank intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Bank's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Unrealized gains or losses are reported as increases or decreases in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Equity securities are comprised of stock in various companies and mutual funds.
Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district FHLB according to a predetermined formula. The restricted stock is recorded at cost.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the contractual life of the loan.
The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management's periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value for that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer, residential and home equity loans for impairment disclosures.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Foreclosed Assets
Foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Foreclosed assets initially are recorded at fair value, net of estimated selling costs, at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other expenses. Foreclosed assets are included in other assets on the balance sheets.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the following estimated useful lives of the related assets:
Years
-------
Buildings and building
improvements 20 - 40
Leasehold improvements 5 - 10
Furniture, fixtures and
equipment 5 - 10
Computer equipment and
software 3 - 5
|
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. The Company has recorded goodwill of $2,124,000 and $1,932,000 at December 31, 2003 and 2002, respectively, related to the acquisition of an insurance agency on October 1, 2001 as described in Note 2. The $192,000 and $220,000 increase in goodwill in 2003 and 2002, respectively, was due to contingent payments made to the sellers in accordance with the purchase agreement and other acquisition costs incurred. In accordance with current accounting standards, goodwill is not amortized, but evaluated at least annually for impairment. Any impairment of goodwill results in a charge to income. Goodwill was tested for impairment during 2003. The estimated fair value of the reporting segment exceeded its book value, therefore, no write-down of goodwill was required. The goodwill is not deductible for tax purposes.
The Company also has amortizable intangible assets resulting from the acquisition of both insurance agencies described in Note 2, which include the value of executive employment contracts and the value of the acquired book of businesses, which are being amortized on a straight-line basis over 3 to 7 years. The total net amortizable intangible assets were $297,000 and $245,000 net of accumulated amortization of $137,000 and $58,000 at December 31, 2003 and 2002, respectively.
The Company has an amortizable core deposit intangible asset related to the premiums paid on the acquisition of deposits, which is being amortized on a straight-line basis over 15 years. This core deposit intangible was $284,000 and $367,000, net of accumulated amortization of $974,000 and $891,000 as of December 31, 2003 and 2002, respectively.
Other intangible assets are included in other assets on the balance sheets for December 31, 2003 and 2002.
Amortization expense on intangible assets was $162,000 and $131,000 for the years ended December 31, 2003 and 2002, respectively. Amortization expense is estimated to be $175,000 per year for years ending December 31, 2004 and 2005; $139,000 for the year ending December 31, 2006; $67,000 for the year ending December 31, 2007 and $25,000 for the year ending December 31, 2008.
Advertising Costs
The Bank follows the policy of charging the costs of advertising to expense as incurred.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Sussex Bancorp and its subsidiaries file a consolidated federal income tax return.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet when they are funded.
Stock-Based Compensation
The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation for the years ended December 31, 2003 and 2002. Earnings per share has been adjusted for the 5% stock dividend granted in 2003.
2003 2002
------ ------
(In Thousands)
Net income, as reported $1,441 $1,156
Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax
effects (47) (23)
------ ------
Pro forma net income $1,394 $1,133
====== ======
Basic earnings per share:
As reported $ 0.80 $ 0.66
Pro forma $ 0.78 $ 0.65
Diluted earnings per share:
As reported $ 0.78 $ 0.64
Pro forma $ 0.75 $ 0.63
|
The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model. The following represents the weighted average fair values and weighted average assumptions used to determine such fair values for options granted for the years ended December 31, 2003 and 2002:
2003 2002
------- -------
Grant date fair value, as adjusted for 5% stock
dividend $2.05 $1.64
Expected option lives 7 years 5 years
Dividend yield 2.44% 2.50%
Risk-free interest rate 3.62% 4.45%
Expected volatility rate 15.18% 14.43%
|
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
Basic earnings per share represents net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and guaranteed and contingently issuable shares from the acquisition of Tri-State. Potential common shares related to stock options are determined using the treasury stock method.
Segment Reporting
The Company acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine networks, the Bank offers a full array of commercial and retail financial services, including taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. The Bank also performs fiduciary services through its Trust Department. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations of the Bank. As such, discrete financial information is not available and segment reporting would not be meaningful. The Company's insurance agency is managed separately from the traditional banking and related financial services that the Company offers. The insurance operations provides primarily property and casualty coverage. See Note 3 for segment reporting of insurance operations.
Insurance Agency Operations
Tri-State Insurance Agency, Inc. is a retail insurance broker operating in the State of New Jersey. The insurance agency's primary source of revenue is commission income, which is earned by placing insurance coverage for its customers with various insurance underwriters. The insurance agency places basic property and casualty, life and health coverage with about fifteen different insurance carriers. There are two main billing processes, direct billing (currently accounts for approximately 90% of revenues) and agency billing.
Under the direct billing arrangement, the insurance carrier bills and collects from the customer directly and remits the brokers' commission to the broker on a monthly basis. For direct bill policies, Tri-State records commissions as revenue when the data necessary to reasonably determine such amounts is obtained. On a monthly basis, Tri-State receives notification from each insurance carrier of total premiums written and collected during the month, and the broker's net commission due for their share of business produced by them.
Under the agency billing arrangement, the broker bills and collects from the customer directly, retains their commission, and remits the net premium amount to the insurance carrier. Virtually all agency-billed policies are billed and collected on an installment basis (the number of payments varies by policy). Although Tri-State typically bills customers 60 days prior to the effective date of a policy, revenues for the first installment are recorded at the policy effective date. Revenues from subsequent installments are recorded at the installment due date. Tri-State records its commission as a percentage of each installment due.
Trust Operations
Trust income is recorded on a cash basis, which approximates the accrual basis. Securities and other property held by the Company in a fiduciary or agency capacity for customers of the trust department are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements.
Reclassifications
Certain amounts in the 2002 financial statements have been reclassified to conform with the 2003 presentation format. These reclassifications had no effect on net income.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under certain specified guarantees. Under FIN 45, the Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit, as discussed in Note 18. Adoption of FIN 45 did not have a significant impact on the Company's financial condition or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 was revised in December 2003. This Interpretation provides new guidance for the consolidation of variable interest entities (VIEs) and requires such entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved. The Interpretation also adds disclosure requirements for investors that are involved with unconsolidated VIEs. The disclosure requirements apply to all financial statements issued after December 31, 2003. The consolidation requirements apply to companies that have interests in special purpose entities for periods ending after December 15, 2003. Consolidation of other types of VIEs is required in financial statements for periods ending after December 15, 2004.
The Company has evaluated the impact of FIN 46 on Sussex Capital Trust I, a variable interest entity, currently consolidated by the Company. Management has determined that the provisions of FIN 46 will require de-consolidation of the subsidiary trust, which issued mandatorily redeemable preferred capital securities to third-party investors. Upon adoption of FIN 46 as of March 31, 2004, the Trust will be de-consolidated and the junior subordinated debentures of the Company will be reported in the Consolidated Balance Sheets as "long-term debt," rather than the mandatory redeemable capital debentures line item that represents the preferred shares in the Trust. The Company's equity interest in the Trust, which is not significant, will be reported in "Other assets." For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. Additional information on the Trust is summarized in Note 10. The adoption of this Interpretation did not have and is not expected to have a significant impact on the Company's results of operations or liquidity.
In April 2003, the Financial Accounting Standards Board issued Statement No. 149, "Amendment of Statement No. 133, Accounting for Derivative Instruments and Hedging Activities." This Statement clarifies the definition of a derivative and incorporates certain decisions made by the Board as part of the Derivatives Implementation Group process. This Statement is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003 and should be applied prospectively. The provisions of the Statement that relate to implementation issues addressed by the Derivatives Implementation Group that have been effective should continue to be applied in accordance with their respective dates. Adoption of this standard did not have an impact on the Company's financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of these instruments were previously classified as equity. This Statement was effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective beginning July 1, 2003. The adoption of this standard did not have an impact on the Company's financial condition or results of operations.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS
On October 1, 2001, the Company, through its Sussex Bank subsidiary, acquired 100% of the stock of Tri-State Insurance Agency, Inc. for guaranteed consideration, including transaction costs totaling $2,021,000. The purchase price paid by the Company for Tri-State was comprised of an upfront cash payment of $350,000 at closing, and deferred payments on the first, second and third anniversaries of the closing. These deferred payments will be satisfied through a combination of cash and common stock of the Company, with the number of shares issued based, in part, upon the then-current market price of the Company's current stock. The deferred payments have been included in other liabilities at their net present value.
The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based upon fair value at the date of acquisition, including identifiable intangible assets of $243,000 and $60,000 representing the fair value of the acquired book of business and executive employment contracts, respectively. The excess of the purchase price over the fair value of the identifiable net assets acquired was $1,757,000 and has been recorded as goodwill. In October 2003 and 2002, additional contingent payments were paid to the sellers in the amount of $192,000 and $175,000, respectively, based on targeted profits of the insurance agency, resulting in additional goodwill.
In January 2003, the Company acquired certain assets of another insurance agency, primarily a book of business. The guaranteed purchase price was $56,000. The acquisition was accounted for using the purchase method of accounting. In 2003, additional contingent payments were paid to the seller in the amount of $75,000 based on targeted goals. The total purchase price of $131,000 has been allocated to amortizable intangible assets.
NOTE 3 - SEGMENT REPORTING
Segment information for 2003 and 2002 is as follows:
Banking and
Financial Insurance
Services Services Total
----------- --------- --------
(In Thousands)
Year Ended December 31, 2003:
Net interest income and other income from
external sources $9,951 $2,063 $12,014
Income before income taxes 1,813 133 1,946
Total assets 237,617 3,000 240,617
Year Ended December 31, 2002:
Net interest income and other income from
external sources $8,927 $1,689 $10,616
Income before income taxes 1,602 80 1,682
Total assets 223,351 2,553 225,904
|
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of securities available for sale as of December 31, 2003 and 2002 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
December 31, 2003:
U.S. Government agencies $ 14,651 $ 54 $ (47) $14,658
State and political
subdivisions 21,214 506 (178) 21,542
Mortgage-backed securities 35,056 179 (263) 34,972
Corporate securities 4,311 168 -- 4,479
Equity securities 899 11 (16) 894
--------- ---------- ---------- -------
$ 76,131 $ 918 $ (504) $76,545
========= ========== ========== =======
December 31, 2002:
U.S. Government agencies $ 13,397 $ 215 $ -- $13,612
State and political
subdivisions 15,605 215 (35) 15,785
Mortgage-backed securities 35,235 354 (35) 35,554
Corporate securities 6,648 238 -- 6,886
Equity securities 898 6 (21) 883
--------- ---------- ---------- -------
$ 71,783 $ 1,028 $ (91) $72,720
========= ========== ========== =======
|
The following table shows the Company's investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2003.
Less than 12 Months 12 Months or More Total
-------------------- ------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ---------- ------ ---------- ------- ----------
(In Thousands)
U.S. Government
agencies $ 5,465 $ (47) -- $ -- $ 5,465 $ (47)
State and political
subdivisions 7,422 (178) -- -- 7,422 (178)
Mortgage-backed
securities 16,621 (260) 235 (3) 16,856 (263)
Equity securities -- -- 833 (16) 833 (16)
------- ---------- ------ ---------- ------- ----------
Total Temporarily
Impaired
Securities $29,508 $ (485) $1,068 $ (19) $30,576 $ (504)
======= ========== ====== ========== ======= ==========
|
At December 31, 2003, the Company has 51 securities in an unrealized loss position. Unrealized losses detailed above relate primarily to U.S. Government agency debt and mortgage-backed securities and municipal debt securities. The decline in fair value is due only to interest rate fluctuations. The Company has the intent and ability to hold such investments until maturity or market price recovery. None of the individual unrealized losses are significant.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES AVAILABLE FOR SALE (CONTINUED)
The amortized cost and carrying value of securities available for sale at December 31, 2003 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------- -------
(In Thousands)
Due in one year or less $ 4,010 $ 4,069
Due after one year through five years 13,925 14,045
Due after five years through ten years 4,647 4,737
Due after ten years 17,594 17,828
--------- -------
40,176 40,679
Mortgage-backed securities 35,056 34,972
Equity securities 899 894
--------- -------
$ 76,131 $76,545
========= =======
|
Gross gains on sales of securities were $133,000 and gross losses were $-0- for the year ended December 31, 2003. There were no sales of securities in the year ended December 31, 2002.
Securities with a carrying value of approximately $12,432,000 and $12,458,000 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits and for other purposes required or permitted by applicable laws and regulations.
NOTE 5 - LOANS RECEIVABLE
The composition of net loans receivable at December 31, 2003 and 2002 is as follows:
2003 2002
-------- --------
(In Thousands)
Loans secured by one to four family residential
properties $ 46,587 $ 49,517
Loans secured by nonresidential properties 59,182 41,035
Loans secured by construction and land
development 8,656 8,310
Loans secured by farmland 5,827 774
Commercial and industrial loans 12,392 10,985
Consumer 1,430 2,189
Other loans 287 561
-------- --------
134,361 113,371
Unearned loan origination costs, net 13 84
Allowance for loan losses (1,734) (1,386)
-------- --------
Net Loans Receivable $132,640 $112,069
======== ========
|
Mortgage loans serviced for others are not included in the accompanying balance sheets. The total amount of loans serviced for the benefit of others was approximately $4,104,000 and $3,585,000 at December 31, 2003 and 2002, respectively.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
The following table presents changes in the allowance for loan losses for the years ended December 31, 2003 and 2002:
2003 2002
------- -------
(In Thousands)
Balance, beginning $ 1,386 $ 1,143
Provision for loan losses 405 300
Loans charged off (62) (59)
Recoveries 5 2
------- -------
Balance, ending $ 1,734 $ 1,386
======= =======
|
Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $1,177,000 and $1,258,000 at December 31, 2003 and 2002, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $-0- and $36,000 at December 31, 2003 and 2002, respectively.
The total recorded investment in impaired loans was $1,897,000 and $1,148,000 at December 31, 2003 and 2002, respectively. Impaired loans not requiring an allowance for loan losses was $969,000 and $476,000 at December 31, 2003 and 2002, respectively. Impaired loans requiring an allowance for loan losses was $928,000 and $672,000 at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the related allowance for loan losses associated with those loans was $244,000 and $211,000, respectively. For the years ended December 31, 2003 and 2002, the average recorded investment in impaired loans was $1,255,000 and $1,384,000, respectively. Interest income recognized on such loans during the time each was impaired was $33,000 and $26,000, respectively. The Company recognizes income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will record all payments as a reduction of principal on such loans.
NOTE 7 - BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment at December 31, 2003 and 2002 are as follows:
2003 2002
------- -------
(In Thousands)
Land $ 577 $ 577
Building and building improvements 4,253 4,243
Leasehold improvements 95 96
Furniture, fixtures and equipment 4,267 3,918
Assets in progress 182 42
------- -------
9,374 8,876
Accumulated depreciation (4,724) (4,242)
------- -------
$ 4,650 $ 4,634
======= =======
|
During the years ended December 31, 2003 and 2002, depreciation expense totaled $510,000 and $564,000, respectively.
As of December 31, 2003, the Company has outstanding commitments of approximately $746,000 for computer upgrades and branch construction and renovations.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEPOSITS
The components of deposits at December 31, 2003 and 2002 are as follows:
2003 2002
-------- --------
(In Thousands)
Demand, non-interest bearing $ 31,715 $ 26,514
Savings, club and interest-bearing demand 119,461 110,729
Time, $100,000 and over 12,021 9,145
Time, other 44,460 43,470
-------- --------
$207,657 $189,858
======== ========
|
At December 31, 2003 and 2002, time deposits included $3,177,000 and $3,102,000, respectively, owned by local municipalities scheduled to mature within 30 days.
At December 31, 2003, the scheduled maturities of time deposits are as follows (in thousands):
2004 $40,325
2005 10,467
2006 3,032
2007 971
2008 1,316
Thereafter 370
-------
$56,481
=======
|
NOTE 9 - BORROWINGS
At December 31, 2003, the Bank has a line of credit commitment from the Federal Home Loan Bank of New York for borrowings up to $22,584,000. There were no borrowings under this line of credit at December 31, 2003.
At December 31, 2003 and 2002, the Bank had the following borrowings from the Federal Home Loan Bank:
Balance at December 31,
Initial Interest -------------------------
Maturity Date Conversion Date Rate 2003 2002
-------------------- ----------------- -------- ----------- -----------
January 27, 2003 N/A 1.96% $ -- $ 1,000,000
April 25, 2003 N/A 2.03% -- 1,000,000
July 25, 2003 N/A 2.23% -- 1,000,000
October 27, 2003 N/A 2.43% -- 1,000,000
July 26, 2004 N/A 3.01% 1,000,000 1,000,000
December 21, 2010 December 21, 2001 4.77% 3,000,000 3,000,000
December 21, 2010 December 21, 2002 4.90% 3,000,000 3,000,000
December 21, 2010 December 21, 2003 5.14% 4,000,000 4,000,000
----------- -----------
$11,000,000 $15,000,000
=========== ===========
|
The above three convertible notes contain a convertible option which allows the Federal Home Loan Bank (FHLB), at quarterly intervals commencing after each initial conversion date, to convert the fixed convertible advance into replacement funding for the same or lesser principal amount based on any advance then offered by the FHLB at their current market rates. The Bank has the option to repay these advances, if converted, without penalty.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - BORROWINGS (CONTINUED)
At December 31, 2003, the above borrowings are secured by a pledge of qualifying one-to-four family mortgage loans and selected investment securities, having an aggregate unpaid principal balance of approximately $18,510,000 of which the Bank has borrowing capacity of 75%.
NOTE 10 - MANDATORY REDEEMABLE CAPITAL DEBENTURES
On July 11, 2002, Sussex Capital Trust I, a Delaware statutory business trust and a wholly-owned subsidiary of the Company, issued $5 million of variable rate capital trust pass-through securities to investors. The variable interest rate reprices quarterly at the three month LIBOR plus 3.65% and was 4.80% and 5.43% at December 31, 2003 and 2002, respectively. Sussex Capital Trust I purchased $5.0 million of variable rate junior subordinated deferrable interest debentures from Sussex Bancorp. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. Sussex Bancorp has also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by Sussex Bancorp on or after October 7, 2007, at par or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final maturity of the subordinated debentures on October 7, 2032. Proceeds totaling approximately $4.8 million were contributed to paid-in capital at Sussex Bank. Financing costs related to the Company's issuance of mandatory redeemable capital debentures will be amortized over a five-year period and is included in other assets.
NOTE 11 - LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company has operating lease agreements expiring in various years through 2020. The Company has the option to extend the lease agreements for additional lease terms. In December 2003, the Company entered into a five-year operating lease agreement for administration and operations office space which will commence January 2004. The Bank is responsible to pay all real estate taxes, insurance, utilities and maintenance and repairs on its leased facilities.
Included in other income for the year ended December 31, 2002 is a $160,000 contract settlement related to a land lease of a branch facility.
Future minimum lease payments by year are as follows (in thousands):
2004 $236
2005 216
2006 183
2007 91
2008 86
Thereafter 132
----
$944
====
|
Rent expense was $175,000 and $171,000 for the years ended December 31, 2003 and 2002, respectively.
In addition, the Company has plans to increase the leased space for the insurance agency. If the additional space is leased, rent expense will increase $67,000 per year for a ten year term.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Profit Sharing Plan and Trust for its employees. Employees may contribute up to the statutory limit or 75% of their salary to the Plan. The Company provides a 50% match of the employee's contribution up to 6% of the employee's annual salary. The amount charged to expense related to this Plan for the years ended December 31, 2003 and 2002 was $89,000 and $66,000, respectively.
The Company also has a nonqualified Supplemental Salary Continuation Plan for an executive officer. Under the provisions of the Plan, the Company has executed agreements providing the officer a retirement benefit. The Plan is funded by life insurance carried on the life of the participant. For the years ended December 31, 2003 and 2002, $143,000 and $118,000, respectively, was charged to expense in connection with this Plan. At December 31, 2003 and 2002, the Bank had an investment in life insurance of $1,195,000 and $1,146,000, respectively, related to this Plan which is included in other assets. Earnings on the investment in life insurance were $49,000 and $55,000 for the years ended December 31, 2003 and 2002, respectively.
The Company has an Employee Stock Ownership Plan for the benefit of all employees who meet the eligibility requirements set forth in the Plan. The amount of employer contributions to the Plan is at the discretion of the Board of Directors. The contributions charged to expense for both the years ended December 31, 2003 and 2002 were $25,000. At December 31, 2003 and 2002, 40,084 and 35,072 shares, respectively, of the Company's common stock were held in the Plan. In the event a terminated Plan participant desires to sell his or her shares of the Company's stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair market value.
NOTE 13 - COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects for the years ended December 31, 2003 and 2002 are as follows:
2003 2002
----- ----
(In Thousands)
Unrealized gains (losses) on available for
sale securities $(390) $735
Less reclassification adjustment for gains
included in net income 133 --
----- ----
Net Unrealized Gains (Losses) (523) 735
Tax effect (209) 296
----- ----
Net of Tax Amount $(314) $439
===== ====
|
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share (as adjusted for the 5% stock dividend declared in 2003):
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In Thousands, Except per Share Amounts)
Year Ended December 31, 2003:
Basic earnings per share:
Net income applicable to common
stockholders $1,441 1,790 $0.80
=========
Effect of dilutive securities:
Stock options -- 37
Deferred common stock payments for
purchase of insurance agency 6 32
----------- -------------
Diluted earnings per share:
Net income applicable to common
stockholders and assumed
conversions $1,447 1,859 $0.78
=========== ============= =========
Year Ended December 31, 2002:
Basic earnings per share:
Net income applicable to common
stockholders $1,156 1,748 $0.66
=========
Effect of dilutive securities:
Stock options -- 19
Deferred common stock payments for
purchase of insurance agency 10 54
----------- -------------
Diluted earnings per share:
Net income applicable to common
stockholders and assumed
conversions $1,166 1,821 $0.64
=========== ============= =========
|
NOTE 15 - STOCK OPTION PLANS
The following data have been adjusted to give retroactive effect to stock dividends declared subsequent to option authorizations, grants and exercises.
During 1995, the stockholders approved a stock option plan for nonemployee directors (the "Director Plan"). Options granted under the Plan are non-qualified stock options. As of December 31, 2003, there were 2,344 authorized shares of the Company's common stock to be granted. 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 ten years. As of December 31, 2003, 44,732 options were outstanding under this plan.
During 1995, the stockholders approved an incentive stock option plan for executives of the Company (the "Executive Plan"). The options granted under the Plan are incentive stock options, subject to limitations under Section 422 of the Internal Revenue Code. As of December 31, 2003, there were 51,164 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. The options may have a term not longer than ten years from the date of grant. As of December 31, 2003, 89,020 options were outstanding under this plan.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
During 2001, the stockholders approved the 2001 Stock Option Plan established to provide equity incentives to selected persons. As of December 31, 2003, there were 98,175 authorized shares of the Company's common stock to be granted. Options may be granted to employees, officers and directors of the Company or subsidiary. Options granted under the Plan may be either incentive stock options or non-qualified stock options as designated at the time of grant. The shares granted under the Plan to directors are non-qualified stock options. The shares granted under the Plan to officers and other employees are incentive stock options and are subject to limitations under Section 422 of the Internal Revenue Code. The option price under each grant shall not be less than the fair market value on the date of the 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. As of December 31, 2003, 74,025 options were outstanding under this Plan.
Transactions under all stock option plans are summarized as follows as adjusted for the 5% stock dividend:
Weighted
Range of Average
Number of Exercise Price Exercise Price
Shares per Share per Share
--------- -------------- --------------
Outstanding, December 31, 2001 74,447 $4.84 - $10.63 $ 7.46
Options granted 26,854 9.95 - 10.43 10.12
Options exercised (6,954) 4.84 - 9.76 7.01
Options expired (2,104) 7.98 - 9.39 8.94
--------- -------------- --------------
Outstanding, December 31, 2002 92,243 4.84 - 10.63 8.17
Options granted 123,121 9.91 - 13.70 11.54
Options exercised (7,587) 4.84 - 10.00 5.60
--------- -------------- --------------
Outstanding December 31, 2003 207,777 $4.84 - $13.70 $10.27
========= ============== ==============
Exercisable, December 31, 2003 96,199 $4.84 - $10.63 $ 8.61
========= ============== ==============
|
The weighted-average remaining contractual life of the above options is approximately 10.2 years.
The following table summarizes information about stock options outstanding at December 31, 2003:
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------
$ 4.84 22,130 1.8 years 22,130
7.69 2,481 6.8 years 2,481
7.87 3,374 2.8 years 3,374
8.09 2,821 1.1 years 2,116
8.14 2,205 3.8 years 2,205
9.68 4,410 4.8 years 4,410
9.76 9,450 7.8 years 9,450
9.90 51,124 9.1 years 12,781
9.95 17,404 8.1 years 8,702
10.00 7,695 2.1 years 3,848
10.05 9,450 9.8 years 9,450
10.05 9,976 9.1 years 2,494
10.43 9,450 8.8 years 9,450
10.63 3,307 5.8 years 3,308
13.70 52,500 19.5 years --
----------- -----------
207,777 96,199
=========== ===========
|
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - INCOME TAXES
The components of income tax expense for the years ended December 31, 2003 and 2002 are as follows:
2003 2002
----- -----
(In Thousands)
Current:
Federal $ 509 $ 523
State 199 173
----- -----
708 696
----- -----
Deferred:
Federal (154) (129)
State (49) (41)
----- -----
(203) (170)
----- -----
$ 505 $ 526
===== =====
|
A reconciliation of the statutory federal income tax at a rate of 34% to the income tax expense included in the statements of income for the years ended December 31, 2003 and 2002 is as follows:
2003 2002
----------------- -----------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------ ------- ------ -------
(Dollar Amounts in Thousands)
Federal income tax at
statutory rate $ 662 34% $ 572 34%
Tax exempt interest (234) (12) (152) (9)
State income tax, net of
federal income tax
effect 99 5 87 5
Other (22) (1) 19 1
------ ------- ------ -------
$ 505 26% $ 526 31%
====== ======= ====== =======
|
The income tax provision includes $53,000 and $-0- in 2003 and 2002, respectively, of income tax expense related to net gains on sales of securities.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - INCOME TAXES (CONTINUED)
The components of the net deferred tax asset at December 31, 2003 and 2002 are as follows:
2003 2002
----- -----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 692 $ 554
Deferred compensation 158 101
Other 95 86
----- -----
Total Deferred Tax Assets 945 741
----- -----
Deferred tax liabilities:
Bank premises and equipment (106) (105)
Unrealized gains on securities available
for sale (166) (375)
----- -----
Total Deferred Tax Liabilities (272) (480)
----- -----
Net Deferred Tax Asset $ 673 $ 261
===== =====
|
NOTE 17 - TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The related party loan activity for the year ended December 31, 2003 is summarized as follows (in thousands):
Balance, beginning $ 3,798
Disbursements 1,688
Repayments (1,986)
-------
Balance, ending $ 3,500
=======
|
Certain directors of the Company are associated with legal, tax accounting, real estate and construction businesses that rendered various services to the Company. The Company paid these businesses professional fees and rent totaling $49,000 during both 2003 and 2002.
NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
A summary of the Company's financial instrument commitments at December 31, 2003 and 2002 is as follows:
2003 2002
------- -------
(In Thousands)
Commitments to grant loans $ 6,211 $ 3,379
Unfunded commitments under lines of credit 26,893 18,828
Outstanding standby letters of credit 1,002 597
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. These standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2003 for guarantees under standby letters of credit issued is not material.
NOTE 19 - CONCENTRATION OF CREDIT RISK
The Company grants commercial, residential and consumer loans to customers primarily located in Sussex County and adjacent counties in the states of Pennsylvania, New Jersey and New York. The concentration of credit by type of loan is set forth in Note 5. Although the Company has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy.
NOTE 20 - REGULATORY MATTERS
The Company is required to maintain cash reserve balances with the Federal Reserve Bank. The total of those reserve balances was approximately $4,441,000 at December 31, 2003.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification 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 Company and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - REGULATORY MATTERS (CONTINUED)
As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios at December 31, 2003 and 2002 are presented below:
To be Well Capitalized
under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- --------- ------- --------- --------
(Dollar Amounts in Thousands)
As of December 31, 2003:
Total capital (to risk-weighted assets):
Company $18,682 12.37% $>=12,086 >=8.00% N/A N/A
Bank 18,253 12.11 >=12,063 >=8.00 $>=15,078 >=10.00%
Tier 1 capital (to risk-weighted assets):
Company 16,832 11.14 >=6,043 >=4.00 N/A N/A
Bank 16,519 10.96 >=6,031 >=4.00 >=9,047 >=6.00
Tier 1 capital (to average assets):
Company 16,832 7.15 >=9,416 >=4.00 N/A N/A
Bank 16,519 7.02 >=9,411 >=4.00 >=11,764 >=5.00
As of December 31, 2002:
Total capital (to risk-weighted assets):
Company $16,951 13.36% $>=10,147 >=8.00% N/A N/A
Bank 16,595 13.12 >=10,117 >=8.00 $>=12,646 >=10.00%
Tier 1 capital (to risk-weighted assets):
Company 14,935 11.77 >=5,074 >=4.00 N/A N/A
Bank 15,209 12.03 >=5,058 >=4.00 >=7,588 >=6.00
Tier 1 capital (to average assets):
Company 14,935 6.66 >=8,976 >=4.00 N/A N/A
Bank 15,209 6.78 >=8,968 >=4.00 >=11,210 >=5.00
|
The Bank is subject to certain restrictions on the amount of dividends that it may declare due to regulatory considerations. The State of New Jersey banking laws specify that no dividend shall be paid by the Bank on its capital stock unless, following the payment of each such dividend, the capital stock of the Bank will be unimpaired and the Bank will have a surplus of not less than 50% of its capital stock or, if not, the payment of such dividend will not reduce the surplus of the Bank.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Company's financial instruments at December 31, 2003 and 2002:
Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate fair value.
Time Deposits with Other Banks
The fair value of time deposits with other banks is estimated by discounting future cash flows using the current rates available for time deposits with similar remaining maturities.
Securities and Federal Home Loan Bank Stock
The fair values for securities are based on quoted market prices or dealer prices, if available. If quoted market prices or dealers prices are not available, fair value is estimated using quoted market prices or dealer prices for similar securities. The Federal Home Loan Bank stock is restricted; accordingly, its carrying amount approximates its fair value.
Loans
The fair value of loans is estimated by discounting the future cash flows, using the current rates at which similar loans with similar remaining maturities would be made to borrowers with similar credit ratings.
Deposits
For demand, savings and club accounts, fair value is the carrying amount reported in the consolidated financial statements. For fixed-maturity certificates of deposit, fair value is estimated by discounting the future cash flows, using the rates currently offered for deposits of similar remaining maturities.
Borrowings and Mandatory Redeemable Capital Debentures
The fair values of these borrowings and debentures are estimated by discounting future cash flows, using rates currently available on borrowings with similar remaining maturities.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and payable approximate fair value.
Off-Balance Sheet Instruments
The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at December 31, 2003 and 2002 were as follows:
2003 2002
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 15,496 $ 15,496 $ 26,096 $ 26,096
Time deposits with other banks 3,500 3,500 3,600 3,600
Securities available for sale 76,545 76,545 72,720 72,720
Federal Home Loan Bank stock 760 760 750 750
Loans receivable, net of allowance 132,640 133,293 112,069 113,428
Accrued interest receivable 1,241 1,241 1,144 1,144
Financial liabilities:
Deposits 207,657 208,007 189,858 190,250
Borrowings 11,000 12,014 15,000 15,097
Mandatory redeemable capital
debentures 5,000 5,059 5,000 5,067
Accrued interest payable 228 228 303 303
Off-balance sheet financial instruments:
Commitments to extend credit -- -- -- --
Outstanding letters of credit -- -- -- --
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NOTE 22 - PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial statements of Sussex Bancorp (Parent Company only) follows:
BALANCE SHEETS
Cash $ 175 $ 45
Investment in subsidiaries 19,475 18,324
Other assets 311 376
------- -------
Total Assets $19,961 $18,745
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 57 $ 65
Junior subordinated debentures 5,000 5,000
------- -------
Total Liabilities 5,057 5,065
Stockholders' Equity 14,904 13,680
------- -------
Total Liabilities and Stockholders' Equity $19,961 $18,745
======= =======
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SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
Years Ended
December 31,
------------------
STATEMENTS OF INCOME 2003 2002
------- -------
(In Thousands)
Dividends from banking subsidiary $ 485 $ 416
Interest expense on junior subordinated debentures (248) (132)
Other expenses (88) (23)
------- -------
Income before Income Tax Benefit and Equity in
Undistributed Net Income of Banking Subsidiary 149 261
Income tax benefits 134 62
------- -------
Income before Equity in Undistributed Net
Income of Banking Subsidiary 283 323
Equity in undistributed net income of banking subsidiary 1,158 833
------- -------
Net Income $ 1,441 $ 1,156
======= =======
Years Ended
December 31,
------------------
STATEMENTS OF CASH FLOWS 2003 2002
------- -------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,441 $ 1,156
Adjustments to reconcile net income to net cash provided by
operating activities:
Net change in other assets and liabilities 57 111
Equity in undistributed net income of banking subsidiary (1,158) (833)
------- -------
Net Cash Provided by Operating Activities 340 434
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid, net of reinvestments (228) (298)
Capital contribution to subsidiary -- (5,255)
Proceeds from the issuance of capital debentures -- 5,000
Purchase of treasury stock (25) (156)
Proceeds from exercise of stock options 47 49
Cash paid in lieu of fractional shares (4) --
------- -------
Net Cash Used in Financing Activities (210) (660)
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 130 (226)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 45 271
------- -------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 175 $ 45
======= =======
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SENIOR MANAGEMENT
CODE OF ETHICS
POLICY
The directors and officers of the Company firmly believe that fair and ethical business practices are a fundamental part of business conduct. Further, the very nature of our business imposes special obligations that build a public trust. The Company is firmly committed to conducting business in a professional manner that clearly satisfies all moral and legal business obligations.
This Code of Ethics is designed to satisfy, and exceed, the requirements of
Section 406 of the Sarbanes-Oxley Act of 2002 and Securities and Exchanges
Commission ("SEC") regulations implementing those requirements. This code is
designed to promote:
o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
o Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with or submits to the SEC or the American Stock Exchange and in the Company's other public communications;
o Compliance with all applicable laws, rules and regulations;
o Prompt internal reporting of violations or apparent violations of the Code in accordance with the section entitled " Procedure and Reporting" below; and
o Accountability for adherence to this Code.
This Code shall apply to all members of the Company's senior management, including members of the Board (whether or not employees), the Company's Chief Executive Officer, Chief Financial Officer and other financial and senior officers including those officers listed on Exhibit A hereto (the "Company Officers").
Under this Code of Ethics, the actions of all Company Officers shall be governed by the highest standards of integrity and fairness. Strict compliance with all applicable laws and regulations is the policy of the Company, and all decisions
shall be made to honor the spirit and letter of all such laws and regulations. Business shall be conducted honestly and ethically to effectively use the technical expertise, business skills and sound judgments needed to benefit customers and shareholders alike.
PROCEDURE & REPORTING
When any individual associated with the Company, as an officer, Director, employee or otherwise, becomes aware of a known or suspected irregularity, illegality or violation of this Code of Ethics, that person is obligated to take action. This includes prompt reporting, which shall be in the form of an oral or written report to Candace Leatham, who is the Compliance Officer of the Company, and whose telephone number is (973) 827-2914 and whose address is: 399 Route 23, Franklin, New Jersey, or, in the alternative Donald L. Kovach, Chief Executive Officer. In addition, any questions regarding the interpretation of this Code of Ethics may be directed to Candace Leatham.
After reviewing any report of a known or suspected irregularity, illegality or violation of this Code of Ethics, Candace Leatham or Donald L. Kovach will report their findings to the Board of Directors of the Company for review and action, if appropriate. To the extent any such report involves the activities of a Board member, such Board member shall be excluded from the Board review and discussion. Failure to adhere to this Code of Ethics will result in disciplinary action, up to and including potential termination of employment for Company Officers who are employees. In addition, to the extent appropriate, the Board shall contact proper authorities to report any illegal conduct.
CONFIDENTIAL & NON-PUBLIC INFORMATION
o It is very important for all Company Officers to appropriately safeguard the Company's confidential and non-public information and to refuse any improper access or improper or untimely disclosure of confidential or non-public information.
o Confidential or non-public information is any information, which at the time it is known, is not generally available to the public and which is useful or helpful to the Company, which would be useful or helpful to competitors of the Company or which would be deemed important to investors in deciding whether or not to trade in the Company's securities. Confidential or non-public information can include customer,
employee, stockholder, supplier, financial or operational information and plans for stock splits, business acquisitions and mergers, or an important pending regulatory action.
o We should always be alert to inadvertent disclosures that may arise in either social conversations or in normal business relations with our suppliers and customers.
o Under SEC Regulation F-D, the Company may be subject to numerous requirements and obligations in the event that non-public information is selectively disclosed. Selective disclosure means disclosure to individuals or groups without a broad-based disclosure to the securities markets in general, either through the issuance of a press release or the filing of SEC Form 8-K. In order to limit the risk of an inadvertent disclosure and possible violation of SEC Regulation F-D, all inquires and discussions regarding the Company, its operations, performance and prospects will be referred to Candace Leatham, who will determine whether the Company will respond to any requests for information or interview requests from members of the media, financial annalists, stockholders or others and which Company official will respond to such request. Company Officers should not respond to any such requests on their own without reporting the request to Candace Leatham and receiving direction.
CONFLICTS OF INTEREST
o No Company Officer shall pursue or engage in any outside employment, business or other commercial activity, either during or outside of his Company work hours, which conflicts or competes directly or indirectly with his duties or responsibilities as a Company Officer, or with any business interests or activities of the Company. Engaging in activities that benefit family members or friends during Company work hours is also prohibited.
o We cannot illustrate every situation that may be considered a conflict of interest; however, we do expect each Company Officer to carefully consider if any of his or her actions during or outside of Company hours rise to the level of a conflict of interest. Even the appearance of a conflict of interest must be avoided.
o Company Officers have an affirmative obligation to disclose to Candace Leatham any interest, including but not limited to a financial interest, in any outside activities or business that may conflict or compete with those of the Company. This affirmative disclosure obligation extends to the immediate family member(s) of a Company Officer.
o At no time during Company working hours or on Company property shall any Company Officer engage in or pursue any non-company employment, business or commercial activity, or solicit Company customers or Company Officers for any profit-making purpose.
o No vendor or consultant shall be retained to perform services for the Company where a Company Officer is related to, lives with or is in a relationship with the consultant or vendor, without the express permission of the CEO. Any such existing relationships must be immediately disclosed to Candace Leatham.
GIFTS, MEALS AND ENTERTAINMENT
o Socializing is a normal and accepted component of conducting certain facets of the Company's business; however, Company Officers must not permit this to compromise a business judgment or give even the appearance of impropriety. Therefore, giving, accepting, soliciting or offering, or authorizing, directly or indirectly, gifts, favors or entertainment, or other consideration, of significant value, in transactions with customers, suppliers, vendors and all other organizations or individuals doing or seeking to do business with the Company, is prohibited. Any consideration is of significant value if it could or does result in any appearance of impropriety, if it could compromise the decision of any Company Officer in exercising a business judgment or if its acceptance is detrimental, in any way, to the Company.
o In addition, no transactions with any of the groups mentioned above shall involve:
- Monetary payments, gift certificates, or credit arrangements
- Receipt of any materials or services at less than actual cost, or
- Actions that result in a conflict of interest or the appearance thereof.
o Typically, this policy does not prohibit the occasional lunch or dinner, golf outing, sporting or fund-raising event, or vendor conference. However, if receipt of any of the above occurs on a regular basis, the Company would be concerned that the meals, events or outings could be provided for an improper purpose and/or could create the appearance of impropriety. Therefore, in order for us to provide guidance to those who may be unsure as to what is or is not acceptable and to monitor the actions of the individuals and groups mentioned above, Company Officers must report the receipt of any and all gifts or consideration received to determine what patterns, if any, may exist. All Company Officers must report to Candace Leatham as soon as practicable, the receipt of any and all consideration from any customer, supplier, vendor or anyone with whom we do business, or anyone who may be seeking to do business with the Company.
SECURITIES FRAUD AND INSIDER TRADING
o It is both illegal and against Company policy for any individual to profit from undisclosed information relating to the Company or any company with which we do business. Anyone who is in possession of any material nonpublic information ("inside information") that the Company has not yet disclosed to the public may not purchase or sell any of the Company's securities. Also, it is against Company policy for any Company Officer who may have inside or unpublished knowledge about any of our suppliers, customers, or any company we do business with to purchase or sell the securities of those companies.
o It is clearly against Company policy, and possibly illegal as well, to trade the Company's securities or the securities of any other company, in a way which attempts to hide the true identity of the trader or to mislead others as to exactly who is doing the trading. Any Company Officer trading in the Company's securities or the securities of other companies, using fictitious names, names of relatives or friends, or brokerage accounts under fictitious names located in foreign jurisdictions shall be subject to immediate disciplinary action. Should the Company discover any such trading, it will disclose it to the appropriate authorities.
SECURITIES AND EXCHANGE COMMISSION REPORTING
o As a publicly traded company subject to the Securities Exchange Act of 1934, the Company has an obligation to file various reports and documents with the SEC and the American Stock Exchange, and to generally make public material information about the Company. The Company is committed to providing full, fair, accurate, timely and understandable disclosure to the trading markets. In furtherance of this commitment, the Company has formed its Management Disclosure Committee to review the Company's periodic filings with the SEC. Any Company Officer who knows or believes that any of the Company's filings or proposed filings with the SEC contain inaccurate information, or omit to include information which is material to an investor's understanding of the Company, its operations and prospects, is required to notify the Management Disclosure Committee, or any member thereof, of the Corporate Officer's concerns.
WAIVERS FROM THE CODE OF CONDUCT
o Waivers from the requirements of this Code of Ethics may only be issued by the Audit Committee of the Board of Directors. The Corporate Officer wishing to request a waiver of any provision in this Code of Ethics must provide a detailed written statement to the Audit Committee explaining the anticipated facts and circumstances which the Corporate Officer believes make a waiver appropriate. It is expected that waivers will rarely, if ever, be issued, and only prospectively, not retroactively.
o In the unlikely event that the Audit Committee issues a waiver from the requirements of this Code of Ethics, or in the event this Code of Ethics is otherwise changed or amended, the Company shall promptly provide public notice of such waiver, change or amendment in accordance with the requirements of SEC Release 33-8177.
REPORT OF INTEREST/RECEIPT OF GIFT OR OTHER
CONSIDERATION
Name of Company Insider:________________________________________________________
(fill in each of the following sections which apply to this report)
Entity or Activity in Which You Have an
Interest:_______________________________________________________________________
Nature of
Interest:_______________________________________________________________________
Name of Vendor Providing Gift or
Consideration:__________________________________________________________________
SUBSIDIARIES OF THE REGISTRANT
Sussex Bancorp has three subsidiaries - - Sussex Bank, Sussex Bancorp Leasing Company and Sussex Capital Trust I. Sussex Bank has three subsidiaries, Sussex Bancorp Mortgage Company, SCB Investment Company and Tri-State Insurance Agency, Inc.
EXHIBIT 23.1
CONSENT OF BEARD MILLER COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the incorporation by reference, into the previously filed Registration Statements No. 333-20645 on Form S-3 and No. 333-20603 on Form S-8 of our report, dated January 9, 2004, relating to the consolidated financial statements of Sussex Bancorp included in its Annual Report (Form 10-KSB) for the year ended December 31, 2003.
/s/ Beard Miller Company LLP
----------------------------
Allentown, Pennsylvania
March 23, 2004
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Exhibit 31.1
CERTIFICATIONS
I, Donald L. Kovach, certify that:
1. I have reviewed this annual report on Form 10-KSB of Sussex Bancorp.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; and
4. The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
(b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls
By: /s/ Donald L. Kovach
--------------------
Donald L. Kovach
Chairman of the Board and
Dated: _______, 2004 Chief Executive Officer
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Exhibit 31.2
CERTIFICATIONS
I, Candace A. Leatham, certify that:
1. I have reviewed this annual report on Form 10-KSB of Sussex Bancorp.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; and
4. The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
(b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls
By: /s/ Candace A. Leatham
----------------------
Candace A. Leatham
Senior Vice-President and
Dated: March 23, 2004 Chief Financial Officer
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Exhibit 32
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Donald L. Kovach and Candace A. Leatham hereby jointly certify as follows:
They are the Chief Executive Officer and the Chief Financial Officer, respectively, of Sussex Bancorp (the "Company");
To the best of their knowledge, the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 (the "Report") complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
To the best of their knowledge, based upon a review of the Report, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ Donald L. Kovach
--------------------
DONALD L KOVACH
President and
Chief Executive Officer
Date: March 23, 2004
By: /s/ Candace A. Leatham
----------------------
CANDACE A LEATHAM
Senior Vice President and
Chief Financial Officer
Date: March 23, 2004
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