SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2001 -----------------
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
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SUSSEX BANCORP
(Name of small business issuer as specified in its charter)
New Jersey 22-3475473
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(State of other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
399 Route 23, Franklin, New Jersey 07416 (973) 827-2914
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(Address of principal executive offices) (Zip Code) (Issuer's Telephone Number
Including Area Code)
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. (x )
The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of February 28, 2002 was $13,413,295. The number of shares of the
Issuer's Common Stock, no par value, outstanding as of February 28, 2002 was
1,660,147.
For the fiscal year ended December 31, 2001, the Issuer had total
revenues of $ 13,217,000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
10-KSB Item Document Incorporated
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Item 6. Management's Discussion and 2001 Annual Report to
Analysis or Plan of Operation Shareholders
Item 7. Financial Statements 2001 Annual report to
Shareholders
Item 9. Directors and Executive Proxy Statement for 2002
Officers of the Annual Meeting of
Company; Compliance Shareholders to be filed
with Section 16(a) of no later than April 29,
the Exchange Act. 2002.
Item 10. Executive Compensation Proxy Statement for 2002
Annual Meeting of
Shareholders to be filed no
later than April 29, 2002.
Item 11. Security Ownership of Proxy Statement for 2002
Certain Beneficial Annual Meeting of
Owners and Management Shareholders to be filed
no later than April 29, 2002.
Item 12. Certain Relationships Proxy Statement for 2002
and Related Annual Meeting of
Transactions Shareholders to be filed
no later than April 29, 2002.
2
PART I
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ITEM 1: Description of Business
General
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Sussex Bancorp (the "Company" or "Registrant") is a one-bank holding
company incorporated under the laws of the State of New Jersey in January, 1996
to serve as a holding company for 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. In the second half of 2001, the name of the Bank was
changed from The Sussex County State Bank to Sussex Bank.
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. After the initial five-year term, the
employment agreement will automatically renew for additional three-year periods
unless twelve months prior to the end of the initial term either party provides
notice of its intention not to renew.
The Company is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits. The operations of the Company and
the Bank are subject to the supervision and regulation of the FRB, FDIC and the
New Jersey Department of Banking and Insurance (the "Department"). The principal
executive offices of the Company are located at 399 Route 23, Franklin, New
Jersey 07416, and the telephone number is (973) 827-2914.
Business of the Company
-----------------------
The Company's primary business is ownership and supervision of the Bank 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. Tri-State, a subsidiary of the
Bank, is a full service general insurance agency, offering both commercial and
personal lines of insurance.
3
Service Area
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The Company's service area primarily consists of the Sussex County, New
Jersey market, although the Company makes loans throughout New Jersey. The
Company operates its main office in Franklin, New Jersey and seven branch
offices in Vernon, Montague, Sparta, Wantage, Newton, Andover and Augusta New
Jersey.
Competition
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The Company operates in a highly competitive environment competing for
deposits and loans with commercial banks, thrifts and other financial
institutions, many of which have greater financial resources than the Company.
Many large financial institutions in New York City and other parts of New Jersey
compete for the business of New Jersey residents located in he Company's service
area. Certain of theses institutions have significantly higher lending limits
than the Company and provide services to their customers which the Company does
not offer.
Management believes the Company is able to compete on a substantially equal
basis with its competitors because it provides responsive personalized services
through management's knowledge and awareness of the Company's service area,
customers and business.
Employees
At December 31, 2001, the Company employed 90 full-time employees and 20
part-time employees. None of these employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
SUPERVISION AND REGULATION
--------------------------
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. 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
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General
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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.
4
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
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The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items.
The risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more The minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least 4% of the total
capital is required to be "Tier 1", consisting of common stockholders' equity
and certain preferred stock, less certain goodwill items and other intangible
assets. The remainder, "Tier II Capital", may consist of (a) the allowance for
loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying
preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory
convertible securities, and (f) qualifying subordinated debt. Total capital is
the sum of Tier I and Tier II capital less reciprocal holdings of other banking
organizations' capital instruments, investments in unconsolidated subsidiaries
and any other deductions as determined by the FRB (determined on a case-by-case
basis or as a matter of policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting. Most investment securities (including, primarily,
general obligation claims of states or other political subdivisions of the
United States) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations are given 100% risk-weighing. Transaction
related contingencies such as bid bonds, standby letters of credit backing
non-financial obligations, and undrawn commitments (including commercial credit
lines with an initial maturity of more than one year) have a 50% risk-weighting.
Short term commercial letters of credit have a 20% risk-weighting and certain
short-term unconditionally cancelable commitments have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
Bank Regulation
---------------
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
Insurance of Deposits
---------------------
The Bank's deposits are insured up to a maximum of $100,000 per
depositor under the BIF. The FDIC has
5
established a risk-based insurance premium assessment system under which the
FDIC has developed a matrix that sets the assessment premium for a particular
institution in accordance with its capital level and overall regulatory rating
by the institutions' primary federal regulatory. Under the matrix that is
currently in effect, the assessment rate ranges from 0 to 27 basis points of
assessed deposits. In addition to the deposit insurance premium assessment,
under the deposit insurance funds act of 1996 (the "Deposit Act"), BIF insured
institutions like the Bank are required to contribute to the debt service and
principal repayment on bonds issued by the Federal Finance Corporation ("FICO")
in the mid-1980s to fund a portion of the thrift bailout. This assessment is
currently set at 1.3 basis points of assessed deposits. During the early 1990's,
the Bank acquired certain Savings 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 2000, the assessment on these SAIF
deposits totaled $ 27,590.
Dividend Rights
---------------
Under the Banking Act, a bank may declare and pay dividends only if,
after payment of the dividend, the capital stock of the bank will be unimpaired
and either the bank will have a surplus of not less than 50% of its capital
stock or the payment of the dividend will not reduce the bank's surplus.
ITEM 2. Description of Property
The Company conducts its business through its main office located at 399
Route 23, Franklin, New Jersey, and its seven branch offices. The following
table set forth certain information regarding the Company's properties as of
December 31, 2001.
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DATE OF
LOCATION LEASED OR OWNED LEASE EXPIRATION
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399 Route 23 Owned N/A
Franklin, New Jersey
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7 Church Street Owned N/A
Vernon, New Jersey
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266 Clove Road Leased April, 2002
Montague, New Jersey
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96 Route 206
Augusta, New Jersey Leased August, 2006
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455 Route 23 Owned(1) N/A
Wantage, New Jersey
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15 Trinity Street Owned N/A
Newton, New Jersey
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165 Route 206 Owned N/A
Andover, New Jersey
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100 Route 206 Owned N/A
Augusta, New Jersey
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33 Main Street Owned N/A
Sparta, New Jersey
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(1) The Company owns the building housing its Wantage branch. The land on which
the building is located is leased pursuant to a ground lease which runs until
December 31, 2020, and contains an option for the Company to extend the lease
for an additional 25 year term.
ITEM 3. Legal Proceedings
-----------------
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business, such as
claims to enforce liens, claims involving the making and servicing of real
property loans, and other issues incident to the Bank's business. Management
does not believe that there is any pending or threatened proceeding against the
Company of the Bank which, if determined adversely, would have a material effect
on the business, financial position or results of operation of the Company or
the Bank.
ITEM 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted for a vote of the registrant's shareholders
during the Fourth Quarter of fiscal 2001.
6
PART II
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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, 2001, the Company had approximately 712 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:
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DIVIDENDS
2001 HIGH LOW DECLARED
---- ---- --- --------
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4th Quarter $10.38 $ 9.72 $ 0.06
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3rd Quarter 11.25 10.37 0.05
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2nd Quarter 10.50 9.50 0.07
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1st Quarter 10.42 10.00 0.07
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DIVIDENDS
2000 HIGH LOW DECLARED
---- ---- --- --------
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4th Quarter $9 1/2 $8 1/2 $.07
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3rd Quarter 8 1/2 7 3/4 .06
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2nd Quarter 8 3/8 7 1/4 --
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1st Quarter 8 5/8 8 1/8 .06
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ITEM 6. Management's Discussion and Analysis or Plan of Operation
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The information required by this item is incorporated by reference from
the Registrant's 2001 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 2001 Annual Report to Shareholders under the caption
"Consolidated Financial Statements."
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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In 2001 the Registrant made the decision to change independent auditors.
The Registrant has retained Arthur Andersen to serve as its independent auditors
for the fiscal year ended December 31, 2001, and to replace Radics & Co., LLC,
which had acted as the Company's independent auditors for the years ended
December 31, 1999 and 2000. The decision to change auditors was recommended by
the Registrant's Audit Committee. There have been no disagreements with Radics &
Co., LLC on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Radics & Co., LLC, would have caused it to make reference to
the subject matter of the disagreement in connection with their reports. The
independent auditor's report on the consolidated financial statements for the
fiscal years ended December 31, 2000 and 1999 did not contain an adverse opinion
or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or auditing principles.
ITEM 9. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a)
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Information concerning directors and executive officers is included in
the definitive Proxy Statement for the Company's 2002 Annual Meeting under the
captions "ELECTION OF DIRECTORS" and information
7
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, 2002.
The following table sets forth certain information about each executive
officer of the Company who is not also a director.
Principal Occupation
Name, Age and Position Officer Since (1) During Past Five Years
---------------------- ---------------- -------------------------
Candace A. Leatham, 47 1984 Senior Vice President and
Senior Vice President Treasurer of the Bank
and Treasurer
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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 2002
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, 2002.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is included in the definitive Proxy statement for the Company's
2002 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, 2002.
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 2002 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, 2002.
ITEM 13. Exhibits, List and Reports on Form 8-K
--------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibits
2 Stock Purchase Agreement, dated as of September 28, 2001 (1)
3(i) Certificate of Incorporation of the Company (2)
3(ii) Bylaws of the Company(2)
10(i) 1995 Incentive Stock Option Plan(2)
10(ii) 1995 Stock Option Plan for Non-Employee Directors(2)
10(iii)1988 Non-Qualified Stock Option(2)
10(iv) Employment Agreement with Donald Kovach (2)
8
10(v) Employment Agreement of George Lista (1)
10(vi) Employment Agreement of George Harper (1)
13 Annual Report to Shareholders for the year ended December 31,2001
21 Subsidiaries of the Registrant
23(i) Consent of Arthur Andersen LLP
23(ii) Consent of Radics & Co., LLP
99 Letter Pursuant to Temporary Note 3T.
--------------------------
(1) Incorporated by reference from Exhibits 2, 10(a) and 10(b) of the
Registrant's Current Report on Form 8-K filed October 4, 2001.
(2) Incorporated by reference from Exhibits 5(B)(1) to 5(B)(27) from the
Company's Registration Statement on form 8-B, Registration No. 1-12569.
(b) Reports on form 8-K
Date Filed Item
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October 4, 2001 Item 5 - Announcing the acquisition
of Tri-State Insurance Agency, Inc.
October 25, 2001 Item 5 - Announcing the third quarter
results.
SIGNATURES
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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
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By: /s/ Donald L. Kovach
----------------
Donald L. Kovach
Chairman of the Board and
Dated: March 20, 2002 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/_Donald L. Kovach Chairman of the Board and March 20,2002
----------------
Donald L. Kovach Chief Executive Officer
/s/_Candace A. Leatham Treasurer (Principal Financial March 20,2002
------------------
Candace A. Leatham Officer and Principal
Accounting Officer)
/s/_Irvin Ackerson Director March 20,2002
--------------
Irvin Ackerson
/s/__William E. Kulsar Secretary and Director March 20,2002
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William E. Kulsar
/s/__Joel D. Marvil Director March 20,2002
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Joel D. Marvil
/s/__Richard Scott Director March 20,2002
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Richard Scott
/s/__Terry H. Thompson Director March 20,2002
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Terry H. Thompson
/s/__Joseph Zitone Director March 20,2002
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Joseph Zitone