SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3475473
---------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Route 23, Franklin, New Jersey 07416
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code) (973) 827-2914
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
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___
As of November 9, 2001 there were 1,656,004 shares of common stock, no par
value, outstanding.
SUSSEX BANCORP
FORM 10-QSB
INDEX
Part I - Financial Information Page(s)
Item I. Financial Statements and Notes to Consolidated 1
Financial Statements
Item 2. Management's Discussion and Analysis of 7
Financial condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(in Thousands, Except Share Data)
(Unaudited)
ASSETS September 30, 2001 December 31, 2000
------ ------------------ -----------------
Cash and Due from Banks $ 5,784 $ 4,835
Federal Funds Sold 25,270 8,030
Interest Bearing Deposits 0 55
--------- ---------
Total Cash and Cash Equivalents 31,054 12,920
Time Deposits in Other Banks 6,100 100
Securities available for sale, at estimated fair value 50,288 33,186
Securities held to maturity, estimated fair value of
$6,393,000 in 2000 0 6,431
--------- ---------
Total Securities 50,288 39,617
Loans Held for Sale 0 297
Loans (Net of Unearned Income) 102,497 101,166
Less: Allowance for Possible Loan Losses 1,081 973
--------- ---------
Net Loans 101,416 100,193
Other Real Estate Owned 185 0
Premises and Equipment, Net 4,867 4,516
Federal Home Loan Bank Stock 685 693
Intangible Assets 472 535
Accrued Interest Receivable 1,085 981
Other Assets 1,798 1,777
--------- ---------
Total Assets $ 197,950 $ 161,629
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Demand $ 24,546 $ 24,458
Savings 82,274 63,705
Time 50,306 42,714
Time of $100,000 and over 17,634 9,984
--------- ---------
Total Deposits 174,760 140,861
Federal Home Loan Bank Advances 10,000 10,000
Other Liabilities 873 658
--------- ---------
Total Liabilities 185,633 151,519
Stockholders' Equity:
Common Stock, No Par Value Authorized 5,000,000 Shares,
Issued 1,669,712 in 2001 and 1,511,567 in 2000 7,703 6,385
Retained Earnings 4,421 4,027
Treasury Stock, 13,708 Shares in 2001 and 13,166 Shares
in 2000 (127) (122)
Accumulated Other Comprehensive Income, Net of Income Tax 320 (180)
--------- ---------
Total Stockholders' Equity 12,317 10,110
Total Liabilities and Stockholders' Equity $ 197,950 $ 161,629
========= =========
See Notes to Consolidated Financial Statements
1
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Interest and Fees on Loans $ 1,986 $ 1,946 $ 6,097 $ 5,506
Interest on Time Deposits 61 16 120 69
Interest on Securities:
Taxable 574 530 1744 1645
Exempt from Federal Income Tax 65 75 198 237
Interest on Federal Funds Sold 219 81 655 192
----------- ----------- ----------- -----------
Total Interest Income 2,905 2,648 8,814 7,649
INTEREST EXPENSE
Interest on Deposits: 1,335 1,186 4,051 3,333
Interest Expense on Federal Funds Purchased 0 71 0 187
Interest Expense on FHLB Advances 127 0 376 0
----------- ----------- ----------- -----------
Total Interest Expense 1,462 1,257 4,427 3,520
Net Interest Income 1,443 1,391 4,387 4,129
Provision for Possible Loan Losses 63 63 189 174
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan
Losses 1,380 1,328 4,198 3,955
NON-INTEREST INCOME
Service charges on Deposit Accounts 142 114 403 338
Gain (loss) on Sale of Securities,
Available for Sale 8 (6) 8 (14)
Other Income 184 112 517 295
----------- ----------- ----------- -----------
Total Non-Interest Income 334 220 928 619
NON-INTEREST EXPENSE
Salaries and Employee Benefits 766 705 2260 2050
Occupancy Expense, Net 124 111 371 332
Furniture and Equipment Expense 140 130 394 400
Data Processing Expense 31 23 87 65
Stationary and Supplies 21 23 75 73
Advertising and Promotion 51 61 151 145
Audit and Exams 32 21 95 72
Amortization of Intangibles 21 21 63 63
Other Expenses 286 200 749 623
----------- ----------- ----------- -----------
Total Non-Interest Expense 1,472 1,295 4,245 3,823
Income Before Provision for Income Taxes 242 253 881 751
Provision for Income Taxes 68 61 257 175
----------- ----------- ----------- -----------
Net Income $ 174 $ 192 $ 624 $ 576
=========== =========== =========== ===========
Net Income Per Common Share-Basic $ 0.11 $ 0.13 $ 0.38 $ 0.39
=========== =========== =========== ===========
Net Income Per Common Share-Diluted $ 0.10 $ 0.13 $ 0.38 $ 0.38
=========== =========== =========== ===========
Weighted Average Shares Outstanding-Basic 1,652,244 1,494,467 1,638,504 1,494,180
Weighted Average Shares Outstanding-Diluted 1,671,890 1,505,681 1,656,435 1,504,756
See Notes to Consolidated Financial Statements
2
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net Income $174 $192 $624 $576
Other Comprehensive Income, Net of Tax
Unrealized Gain On Available for Sale Securities 200 202 500 104
------------------------------------------------------------
Comprehensive Income $374 $394 $1,124 $680
============================================================
See Notes to Consolidated Financial Statements
3
SUSSEX BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Unrealized
Gain (Loss)
on Securities
Common Retained Treasury Available Stockholders
Stock Earnings Stock for Sale Equity
----- -------- ----- -------- ------
Balance December 31, 2000 $ 6,385 $ 4,027 ($ 122) ($ 180) $ 10,110
Net Income for the Period 0 624 0 0 624
Cash Dividend 0 (230) 0 0 (230)
Sale of Common Stock 1162 0 0 0 1162
Stock Options Exercized 43 0 0 0 43
Shares Issued Through Dividend Reinvestment Plan 113 0 0 0 113
Treasury Stock Purchased 0 0 (5) 0 (5)
Change in Unrealized Gain on Securities, Available for Sale 0 0 0 500 500
-------- -------- -------- -------- --------
Balance September 30, 2001 $ 7,703 $ 4,421 ($ 127) $ 320 $ 12,317
======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net Income $ 624 $ 576
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization of Premises and Equipment 350 356
Amortization of Intangible Assets 63 63
Premium Amortization of Securities, net 200 91
Provision for Possible Loan Losses 189 174
(Gain) Loss on Sale of Securities, Available for Sale (8) 14
(Amortization) of Loan Origination and Commitment Fees, net (17) (5)
Decrease in Loans Held for Sale 297 474
Deferred Federal Income Tax (Increase) 0 (92)
Decrease (Increase) in Accrued Interest Receivable (104) 11
(Increase) in Cash Value of Life Insurance Policy (41) (1,024)
(Increase) in Other Assets (306) (152)
Increase in Accrued Interest and Other Liabilities 215 245
-------- --------
Net Cash Provided by Operating Activities $ 1,462 $ 731
-------- --------
Cash Flow from Investing Activities:
Securities Available for Sale:
Proceeds from Maturities and Paydowns 9,767 4,714
Proceeds from Sales/Calls Prior to Maturity 14,232 3,487
Purchases (34,861) (3,115)
Transfer From Held to Maturity (5,583) 0
Securities Held to Maturity:
Proceeds from Maturities 1,365 2,113
Purchases (532) (650)
Transfer to Available for Sale 5,583 0
Net (Purchases) Maturities of Time Deposits in Other Banks (6,000) 1,188
Net (Increase) in Loans Outstanding (1,395) (12,955)
(Increase) in Other Real Estate Owned (185) 0
Capital Expenditures (701) (943)
-------- --------
Net Cash (Used in) Investing Activities ($18,310) ($ 6,161)
-------- --------
Cash Flows from Financing Activities:
Net Increase in Total Deposits 33,899 3,556
Net Increase in Federal Funds Purchased 0 2,010
Exercise of Stock Options 43 0
Purchase of Treasury Stock (5) (50)
Sale of Common Stock 1,162 0
Payment of Dividends Net of Reinvestment (117) (129)
-------- --------
Net Cash Provided by Financing Activities $ 34,982 $ 5,387
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents $ 18,134 ($ 43)
Cash and Cash Equivalents, Beginning of Period 12,920 9,753
-------- --------
Cash and Cash Equivalents, End of Period $ 31,054 $ 9,710
======== ========
See Notes to Consolidated Financial Statements
5
SUSSEX BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Sussex Bancorp ("the Company"), a one-bank holding company, was
incorporated in January, 1996 to serve as the holding company for the Sussex
Bank, formerly Sussex County State Bank ("the Bank"). The Bank is the only
active subsidiary of the Company at September 30, 2001. The Bank operates eight
banking offices all located in Sussex County and pursuant to an acquisition
which was consummated on October 1, 2001, is the parent of Tri-State Insurance
Agency, Inc., a full service insurance agency located in Sussex County, New
Jersey. The Company is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits. The operations of the Company and
the Bank are subject to the supervision and regulation of the FRB, FDIC and the
New Jersey Department of Banking and Insurance (the "Department").
The consolidated financial statements included herein have been prepared
without audit in accordance with the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results for interim
periods. All adjustments made were of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto that are included in the
Company's Annual Report on Form 10-KSB for the fiscal period ended December 31,
2000.
2. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold. Generally, federal funds are
sold for a one day period.
3. Securities
The amortized cost and approximate market value of securities are
summarized as follows (in thousands):
September 30, 2001 December 31, 2000
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Available For Sale
US Treasury securities $ 1,508 $ 1,540 $ 4,043 $ 4,033
Mortgage Backed Securities 34,888 35,270 25,116 24,880
Corporate Bonds 5,215 5,306 3,477 3,469
Obligations of State and Political subdivisions 7,293 7,357 0 0
Equity Securities 850 815 850 804
------- ------- ------- -------
Total $49,754 $50,288 $33,486 $33,186
======= ======= ======= =======
Held to maturity
Obligations of State and
Political subdivisions $ 0 $ 0 $ 6,431 $ 6,393
------- ------- ------- -------
Total $ 0 $ 0 $ 6,431 $ 6,393
======= ======= ======= =======
------- ------- ------- -------
Total Securities $49,754 $50,288 $39,917 $39,579
======= ======= ======= =======
4. Net Income Per Common Share
Basic net income per share of common stock is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted net income per share is calculated by dividing
net income by the weighted average number of shares of common stock
outstanding during the period plus the potential dilutive effect of
outstanding stock options.
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 2001 and September 30, 2000.
OVERVIEW
The Company realized net income of $174 thousand for the third quarter of 2001,
a decrease of $18 thousand from the $192 thousand reported for the same period
in 2000. Basic earnings per share decreased from $0.13 in the third quarter of
2000 to $0.11 for the third quarter of 2001. Diluted earnings per share
decreased from $0.13 in the third quarter of 2000 to $0.10 per share in the
quarter ended September 30, 2001. These decreases in earnings per share are
reflective of both the increase in the weighted average shares outstanding in
2001 resulting from the Lakeland Bancorp stock purchase in January 2001 and the
slight decline in earnings.
For the nine months ended September 30, 2001, net income was $624 thousand, an
increase of $48 thousand from the $576 thousand reported for the same period in
2000. Basic and diluted earnings per share were $0.38 for the nine months ended
September 30, 2001 compared to basic earnings per share of $0.39 and diluted
earnings per share of $0.38 for the nine months ended September 30, 2000.
RESULTS OF OPERATIONS
Interest Income. Total interest income increased $257 thousand, or 9.7%, to $2.9
million for the quarter ended September 30, 2001 from $2.6 million for the same
period in 2000. This increase was primarily attributable to an increase in
average interest earning assets of $35.6 million, or 24.6%, from $144.7 million
for the third quarter of 2000 to $180.3 million in the third quarter of 2001,
partially offset by a decline in average yield. An increase of $183 thousand in
interest earned on federal funds sold and time deposits and an increase of $44
thousand in interest earned on taxable investment securities were the largest
components of the increase in interest income. The yield on average
interest-earning assets on a fully taxable equivalent basis decreased 91 basis
points from 7.35% for the third quarter of 2000 to 6.44% for the third quarter
of 2001, reflecting both market changes in interest rates and larger average
balances in lower yielding federal funds sold and time deposits in other banks.
For the nine months ended September 30, 2001, interest income increased $1.2
million, or 15.2%, to $8.8 million from the $7.6 million reported for the same
period in 2000. This growth in interest income is the result of a $30.8 million,
or 21.7% increase in the average balance of interest-earning assets over the
comparable period last year. The average balance in other interest bearing
assets increased $18.5 million and the loan portfolio increased $10.4 million
during the first nine months of 2001 over the same period in 2000. As the result
of declining market rates and growth in lower yielding earning assets, the
average yield on interest earning assets on a fully taxable equivalent basis
decreased 40 basis points from 7.27% from the first nine months of 2000 to 6.87%
for the same period of 2001.
Interest Expense. The Company's interest expense for the third quarter of 2001
increased $205 thousand, or 16.3% to $1.5 million from $1.3 million for the
third quarter of 2000, as the average balance of interest bearing liabilities
increased $34.2 million, or 28.5% from the same period last year. Interest on
time deposits, the largest component of the increase, increased $198 thousand,
or 29.6% to $867 thousand in interest expense as the average balance in time
deposits increased $18.2 million, or 37.1% in the third quarter of 2001 compared
to the same period in 2000. NOW, savings and money market deposits combined
showed an aggregate increase of $10.0 million, or 15.0%, in average balances
during the third quarter of 2001 from the third quarter of 2000 and a net
decrease in interest expense of $49 thousand to $468 thousand from $517 thousand
during the same third quarter periods. These decreases in interest expense
reflect the decrease in the market rates of interest between the two periods. As
the average borrowed funds increased $7.0 million from third quarter 2000
compared to the third quarter of 2001, the Company's interest expense on
borrowed funds increased $56 thousand, to $127 thousand for the quarter ended
September 30, 2001 from $71 thousand for the third quarter ended September 30,
2000. The Company entered into three ten year callable Federal Home Loan Bank
advances totaling $10 million in December 2000 compared to short term borrowed
funds of $4.0 million in the third quarter of 2000. The FHLB advances were an
investment strategy used to payoff short term borrowings and to have liquidity
available to purchase investments. The Company's average cost of funds decreased
40 basis points to 3.76% for the third quarter of 2001 from 4.16% for the third
quarter in 2000. This decrease in the average cost of funds was the result of
the Company decreasing its rates of interest paid on all deposit accounts as
market rates of interest fell during the third quarter of 2001 compared to the
average rates paid in the third quarter of 2000 and the lower average rate paid
on the average balance of $10 million in FHLB advances of 4.97% in 2001 compared
to the 6.87% paid on an average third quarter balance of $4.0 million in short
term borrowings during the third quarter of 2000.
For the nine months ended September 30, 2001 interest expense increased $907
thousand, or 25.8%, to $4.4 million from $3.5 million for the same period last
year as the average balance of total interest bearing liabilities increased
$29.3 million, or 24.8%, to $147.2 million during the comparative nine month
periods and the Company's average rate paid on interest bearing deposits
increased by 3 basis points. This increase in interest expense was largely due
to an increase of $802 thousand, or 44.4%, in interest expense on time deposits
from $1.8 million for the nine months of 2000 to $2.6 million during the same
period in 2001. In the first nine months of 2001, the average balance in time
deposit accounts increased $18.3 million, or 39.3%, over the average balance for
the nine months ended September 30, 2000 and the average rate paid increased to
5.37% in the current period from 5.18% in the prior year period. The Company's
borrowed funds increased $6.2 million from $3.8 million during the first nine
months of 2000 to $10 million in the first nine months of 2001. As the Company
moved from short term funding to long term funding, the average rate paid on
these borrowed funds decreased 143 basis points. The average rate paid on total
interest bearing liabilities increased 3 basis points from 3.99% in the first
nine months of 2000 to 4.02% during the same period in 2001. The average balance
of non-interest bearing demand deposits increased $1.7 million to $25.2 million
for the first nine months of 2001 from $23.5 million for the same period in
2000.
The following table presents, on a tax equivalent basis, a summary of the
Company's interest-earning assets and their average yields, and interest-bearing
liabilities and their average costs and shareholders' equity for the nine months
ended September 30, 2001 and 2000. The average balance of loans includes
non-accrual loans, and associated yields include loan fees, which are considered
adjustment to yields.
7
Comparative Average
Balance Sheets
Nine Months Ended September 30,
2001 2000
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in Thousands)
Assets
Interest Earning Assets:
Taxable Loans (net of unearned income) $101,928 $6,097 8.00% $ 91,564 $5,506 8.03%
Tax Exempt Securities 6,495 253 5.21% 7,836 307 5.23%
Taxable Investment Securities 38,952 1,698 5.83% 35,719 1,610 6.02%
Other (1) 25,118 821 4.37% 6,617 296 5.98%
-------- ------ -------- ------
Total Earning Assets $172,493 $8,869 6.87% $141,736 $7,719 7.27%
Non-Interest Earning Assets $ 13,376 $ 10,363
Allowance for Possible Loan Losses ($1,026) ($898)
-------- --------
Total Assets $184,843 $151,201
======== ========
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
NOW Deposits $ 16,144 $ 162 1.34% $ 14,185 $ 134 1.26%
Savings Deposits 49,048 1,125 3.07% 46,496 1,197 3.44%
Money Market Deposits 7,092 156 2.94% 6,774 196 3.86%
Time Deposits 64,879 2,608 5.37% 46,588 1,806 5.18%
Borrowed Funds 10,000 376 4.96% 3,843 187 6.39%
-------- ------ -------- ------
Total Interest Bearing Liabilities $147,163 $4,427 4.02% $117,886 $3,520 3.99%
Non-Interest Bearing Liabilities:
Demand Deposits $25,193 $23,507
Other Liabilities 807 622
-------- --------
Total Non-Interest Bearing Liabilities $26,000 $24,129
Shareholders' Equity $11,680 $9,186
-------- --------
Total Liabilities and Shareholders' Equity $184,843 $151,201
======== ========
Net Interest Differential $4,442 $4,199
Net Interest Margin 2.85% 3.28%
Net Yield on Interest-Earning Assets 3.44% 3.96%
(1) Includes FHLB stock, federal funds sold, interest-bearing deposits, and
time deposits
8
Net-Interest Income. The net interest income for the third quarter of 2001
increased $52 thousand over the same period last year. The net interest spread
decreased, on a fully taxable equivalent basis, by 51 basis points to 2.68% and
the net yield on interest-bearing assets declined by 63 basis points to 3.26% in
the current quarter compared to the third quarter of 2000. These results show
the effects of an increase in the average balance in lower yielding federal
funds brought in through an increase in the average balance in time deposits.
Due to the declining market rates of interest during the first nine months of
2001, the Company's anticipated increase in loan average balances has slowed as
new loan originations have not kept the pace with loan payoffs.
Net interest income for the nine months ended September 30, 2001 increased $258
thousand, or 6.2%, compared to the third quarter of 2000. The net interest
margin, on a fully taxable equivalent basis, decreased 43 basis points to 2.85%
and the net yield on interest earning assets decreased 52 basis points to 3.44%
in the current nine month period compared to the same period last year. This
decrease was mostly due to a decrease in the average yield earned on interest
earning assets. The funds brought in from the highly successful time deposit
promotion were not immediately needed to fund loan demand, and are presently
invested in lower yielding, more liquid, federal funds until invested in new
loan demand or investment securities.
Provision for Loan Losses. For the three months ended September 30, 2001 and
2000, the provision for possible loan losses was $63 thousand. The provision for
possible loan losses was $189 thousand for the nine months ended September 30,
2001 as compared to $174 thousand for the same period last year. The
provision for loan losses over the three and nine month periods reflects
management's judgment concerning the risks inherent in the Company's existing
loan portfolio and the size of the allowance necessary to absorb the risks, as
well as in the average balance of the portfolio over both periods. Management
reviews the adequacy of its allowance on an ongoing basis and will provide for
additional provision in future periods, as management may deem necessary.
Non-Interest Income. For the third quarter of 2001, total non-interest income
increased $114 thousand, or 51.8%, from the same period in 2000. Service charges
on deposit accounts increased $28 thousand in the third quarter of 2001 compared
to the three months ended September 30, 2000. Other income increased $72
thousand, or 64.3%, in the third quarter of 2001 from the same period in 2000.
This increase was mostly the result of an increase of $40 thousand in fees
generated by the non-deposit investment products offered by our third party
provider, IBFS, and an increase of $15 thousand in ATM/Debit card fee income in
the third quarter of 2001 over the third quarter of 2000.
For the nine months ended September 30, 2001, non-interest income increased $309
thousand, or 49.9%, from the same period in 2000. Service charges on deposit
accounts increased $64 thousand for the nine month period ending September 30,
2001 over the same period in 2000. This increase was largely due to increased
fees charged on deposit accounts which became effective on April 1, 2001. Other
income increased $222 thousand, or 75.3%, from September 30, 2000 to September
30, 2001. The components of this increase were an $89 thousand increase in the
fees generated from non-deposit investment products offered through IBFS, a $50
thousand increase in commission income from Sussex Bancorp Mortgage Company, a
$36 thousand increase in ATM/Debit card income due to the new debit card program
which started late in 2000 and an increase of $30 thousand earned on an
executive life insurance policy. In the first nine months of 2001, an $8
thousand gain on the sale of available for sale securities was recorded compared
to a $14 thousand loss in available for sale securities during the first nine
months of 2000.
Non-Interest Expense. For the quarter ended September 30, 2001, non-interest
expense increased $177 thousand from the same period last year. Salaries and
employee benefits increased $61 thousand, or 8.7%, as salaries increased $64
thousand and employee benefits decreased $3 thousand. This decrease in employee
benefits was the result of a $25 thousand refund in medical claim expenses.
Other increases from third quarter 2000 to third quarter 2001 were non-deposit
investment department consulting fees of $24 thousand, legal and professional
fees of $14 thousand, net occupancy expense of $13 thousand and director and
committee fees of $13 thousand.
For the nine months ended September 30, 2001, non-interest expense increased
$422 thousand, or 11.0%, from the same period last year. Salaries and employee
benefits increased $210 thousand, or 10.2% and occupancy expense increased $39
thousand. Data processing expenses have increased $22 thousand, audits and exams
increased $23 thousand and legal fees have increased $22 thousand during the
first nine months of 2001 as compared to the first nine months of 2000. The
addition of a non-deposit investment consultant in the second quarter of 2001
has increased other expenses by $28 thousand. Other increases in operating
expenses reflect normal expenditures relative to the growth of the Company.
Income Taxes. Income tax expense increased $7 thousand to $68 thousand for the
three months ended September 30, 2001 as compared to $61 thousand for the same
period in 2000, due to a lower benefit from tax exempt income. Income taxes also
increased for the nine months ended September 30, 2001 to $257 thousand as
compared to $175 thousand for the nine months ended September 30, 2000. The
increase in income taxes for the nine month periods resulted from a higher level
of income before income taxes in combination with a reduced level of tax-exempt
income in 2001 compared to 2000.
9
FINANCIAL CONDITION
September 30, 2001 as compared to December 31, 2000
Total assets increased to $198.0 million at September 30, 2001, a $36.4 million
increase from total assets of $161.6 million at December 31, 2000. Increases in
total assets included increases of $18.1 million in cash and cash equivalents,
$10.7 million in total securities and $6.0 million in time deposits in other
banks and $1.3 million in total loans, net of unearned income. This net increase
in assets was funded by an increase in total deposits of $33.9 million from
$140.9 million at year-end 2000 to $174.8 million on September 30, 2001 and an
increase in total stockholder's equity of $2.2 million from $10.1 million at
December 31, 2000 to $12.3 million at September 30, 2001, reflecting both the
Company's retained earnings for the first nine months of 2001 and the investment
of $1.1 million in the Company's common stock by Lakeland Bancorp in January
2001.
Total loans at September 30, 2001 increased $1.3 million to $102.5 million from
$101.2 million at year-end 2000. The Company is emphasizing the origination of
commercial, industrial, and non-residential real estate loans to increase the
yield in its loan portfolio and reduce its dependence on loans secured by 1-4
family properties. These factors are evident in the loan portfolio balances at
September 30, 2001 compared to December 31, 2000. Residential real estate loans
decreased $2.1million, construction loans decreased $2.3 million and consumer
loans and other loans decreased $1.0 million, while commercial and industrial
loans increased $2.9 million and non-residential real estate loans increased
$3.8 million.
The following schedule presents the components of loans, net of unearned income,
for each period presented:
September 30 December 31
2001 2000
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Commercial and industrial $ 7,847 7.66% $ 4,968 4.91%
Real Estate-Non Residential 31,309 30.55% 27,529 27.21%
Residential Properties (1-4 Family) 53,158 51.86% 55,229 54.59%
Construction 6,695 6.53% 8,960 8.86%
Consumer 2,547 2.48% 2,780 2.75%
Other Loans 941 0.92% 1,700 1.68%
-------- ------ -------- ------
Total Loans, Net of Unearned Income $102,497 100.00% $101,166 100.00%
======== ====== ======== ======
Federal funds sold increased by $17.3 million to $25.3 million at September 30,
2001 from $8 million on December 31, 2000 and time deposits in other banks
increased $6 million from $100 thousand at year-end 2000 to $6.1 million on
September 30, 2001. Time deposits at September 30, 2001 increased $15.2 million
from year end 2000, due primarily to the promotion of time deposits during the
first quarter of 2001. Management desired to enhance its market share on
deposits, and believed that additional funds would be needed to satisfy new loan
demand. As deposits increased faster than investment opportunities in a
declining rate environment, the excess funds were invested in short-term federal
funds and time deposits in other banks. These funds will be used to fund future
loan demand, with excess liquidity used to purchase investment securities.
Total investment securities increased $10.7 million, or 26.9%, from $39.6
million at year-end 2000 to $50.3 million on September 30, 2001. Securities,
available for sale, at market value, increased $17.1 million, or 51.5%, from
$33.2 million on December 31, 2000 to $50.3 million at September 30, 2001. The
Company purchased $34.9 million in new securities in the first nine months of
2001 and $24.0 million in available for sale securities matured, were called and
were repaid. In addition, the Company transferred its held to maturity portfolio
of $5.6 million to available for sale during the third quarter of 2001. There
were $834 thousand in recorded unrealized gains in the available of sale
portfolio during the first nine months of 2001. With the transfer of the held to
maturity portfolio in July of 2001, there were no held to maturity securities at
September 30, 2001 compared to $6.4 million at year-end 2000. There were $532
thousand in held to maturity purchases and $1.4 million in maturing securities
in the held to maturity portfolio during the first nine months of 2001.
Total year to date average deposits increased $23.9 million, or 17.3%, to $162.4
million during the first nine months of 2001 from the twelve-month average of
$138.4 million for the year ended December 31, 2000. Average time deposits
increased by $17.2 million, savings deposits increased by $3.2 million, NOW
deposits increased by $1.9 million, demand deposits increased by $1.2 million
and money market deposits increased by $463 thousand. As discussed earlier, the
increase in time deposits was due to an aggressive promotion of higher yielding
time deposits during the first quarter of 2001 and the Company's decision to
compete for the deposits on the basis of rate. Management continues to monitor
the shift in deposits through its Asset/Liability Committee.
The following schedule presents the components of deposits, for each period
presented.
Nine Months Ended Twelve Months Ended
September 30, 2001 December 31, 2000
------------------ -------------------
Average Percent Average Percent
Balance of Total Balance of Total
-------- -------- -------- --------
Total
Deposits:
NOW Deposits ........ $ 16,144 9.94% $ 14,261 10.30%
Savings Deposits .... 49,048 30.21% 45,853 33.13%
Money Market Deposits 7,092 4.37% 6,629 4.79%
Time Deposits ....... 64,879 39.96% 47,656 34.43%
Demand Deposits ..... 25,193 15.52% 24,015 17.35%
-------- ------ -------- ------
Total Deposits .... $162,356 100.00% $138,414 100.00%
======== ====== ======== ======
10
ASSET QUALITY
At September 30, 2001, non-performing loans increased $972 thousand to $1.5
million, as compared to $552 thousand at December 31, 2000. One construction
credit with a value of $1.2 million was transferred to non-accrual during the
third quarter of 2001. The credit represents a loan participation secured by
seventeen completed condominium units located in Piermont, New York. The Bank is
negotiating with the lead bank for the loan on the allocation of future
payments. Management believes the Bank is adequately collateralized regarding
this credit and does not anticipate a material loss.
The following table provides information regarding risk elements in the loan
portfolio:
September 30 December 31
2001 2000
---- ----
Non-accrual loans .................................... $ 1,524 $ 552
Non-accrual loans to total loans ..................... 1.49% 0.55%
Non-performing loans to total assets ................. 0.86% 0.34%
Allowance for possible loan losses as a
percentage of non-performing loans ................. 70.93% 176.27%
Allowance for possible loan losses to total loans .... 1.05% 0.96%
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The level of the allowance is
based on management's evaluation of potential losses in the portfolio, after
consideration of risk characteristics of the loans and prevailing and
anticipated economic conditions. The allowance for possible loan losses is
increased by provisions charged to expense and reduced by charge-offs, net of
recoveries. Although management strives to maintain an allowance it deems
adequate, future economic changes, deterioration of borrowers' credit
worthiness, and the impact of examinations by regulatory agencies all could
cause changes to the Company's allowance for possible loan losses.
At September 30, 2001, the allowance for possible loan losses was $1.1 million,
up 11.1% from the $973 thousand at year-end 2000. There were $81 thousand in
charge offs and $1 thousand in recoveries reported in the first nine months of
2001. The allowance for possible loan losses as a percentage of total loans was
1.05% at September 30, 2001 compared to 0.96% on December 31, 2000.
LIQUIDITY MANAGEMENT
At September 30, 2001, the amount of liquid assets remained at a level
management deemed adequate to ensure that contractual liabilities, depositors'
withdrawal requirements, and other operational and customer credit needs could
be satisfied.
At September 30, 2001, liquid investments totaled $31.1 million, and all mature
within 30 days.
It is management's intent to fund future loan demand primarily with deposits. In
addition, the Bank is a member of the Federal Home Loan Bank of New York and as
of September 30, 2001, had the ability to borrow a total of $24.2 million
against its one to four family mortgages as collateral for long term advances.
The Bank also has available an overnight line of credit in the amount of $7.8
million. In December of 2000 the Company borrowed against its one to four family
mortgages and entered into three long term FHLB advances totaling $10 million.
The three borrowings, which have an average interest rate of 4.96%, mature on
December 21, 2010, but are callable beginning in December 2001, 2002 and 2003,
respectively. These borrowings were used to restructure maturing short-term debt
of $4 million and make available funds to purchase higher yielding investments.
CAPITAL RESOURCES
Total stockholders' equity increased $2.2 million to $12.3 million at September
30, 2001 from the $10.1 million at year-end 2000. The increase was due to the
sale of common stock of $1.3 million, net income of $624 thousand, shares issued
through the dividend reinvestment plan of $113 thousand, stock options exercised
of $43 thousand and an increase in the net unrealized gain on securities
available for sale of $500 thousand. Decreases to stockholders' equity were cash
dividends of $230 thousand and purchases of $5 thousand in treasury stock. On
January 17, 2001 the Company sold 9.9% of its outstanding stock to Lakeland
Bancorp, a New Jersey based bank holding company, at a price of $8.50 per share.
Lakeland purchased 139,906 shares for approximately $1.1 million. As of
September 30, 2001 Lakeland Bancorp's stock holdings represented 8.4% of the
Company's outstanding stock.
At September 30, 2001, each of the Company and the Bank exceeded each of the
regulatory capital requirements applicable to it. The table below presents the
capital ratios at September 30, 2001 for both the Company and the Bank as well
as the minimum regulatory requirements.
Amount Ratio Amount Minimum Ratio
------ ----- ------ -------------
The Company
Leverage Capital $11,504 5.98% $ 7,695 4%
Tier 1 - Risk Based 11,504 10.39% 4,430 4%
Total Risk-Based 12,585 11.36% 8,860 8%
The Bank
Leverage Capital 10,517 5.47% 7,693 4%
Tier 1 Risk-Based 10,517 9.51% 4,422 4%
Total Risk-Based 11,598 10.49% 8,843 8%
11
NEW ACCOUNTING PRONOUNCEMENTS
The adoption of SFAS No. 138 on January 1, 2001, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" did not have a material impact on the financial condition or
results of operations of the Company.
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, which supersedes APB Opinion No. 16, Business Combinations, and
FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. All business combinations in the scope of this Statement are to be
accounted for using the purchase method of accounting. The provisions of this
Statement apply to all business combinations initiated after June 30, 2001. The
Company will apply this new pronouncement on a prospective basis.
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This Statement supersedes APB Opinion No. 17, Intangible
Assets. Under the new standard goodwill will no longer be subject to
amortization over its estimated useful life. Rather goodwill will be subject to
at least an annual assessment for impairment by applying a fair value test. An
acquired intangible asset would be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged
regardless of the acquirers intent to do so. All of the provisions of this
Statement should be applied in fiscal years beginning after December 15, 2001,
to all goodwill and other intangible assets recognized in an entity's statement
of financial position at the beginning of that fiscal year, regardless of when
those previously recognized assets were initially recognized. The Company does
not expect that the adoption of this new pronouncement will have a material
impact on its financial position or results of operations.
Part II Other Information
-------------------------
Item 1. Legal Proceedings
-----------------
The Company and the Bank are periodically involved in various legal
proceedings as a normal incident to their businesses. In the opinion of
management, no material loss is expected from any such pending lawsuit.
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults Upon Served Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Effective October 1, 2001, the Company completed an acquisition of all of
the outstanding stock of Tri-State Insurance Agency, Inc. ("Tri-State"), a
full-service insurance agency located in Augusta, New Jersey. The Company
intends to operate Tri-State as a wholly owned subsidiary of Sussex Bank.
The purchase price paid by the Company for Tri-State is comprised of an
upfront payment of $350,000 at closing, and deferred payments on the first,
second and third anniversaries of the closing.
On each of the first, second, and third anniversaries of the closing, the
shareholders of Tri-State will be entitled to an aggregate payment of $700,000,
to be satisfied through a mix of cash and common stock of the Company. The
deferred payments are subject to adjustment based upon the net income of
Tri-State as a subsidiary of Sussex Bank. In Tri-State's first year of operation
after the acquisition, it must produce a minimum net pretax profit of $175,000,
or the shareholders of Tri-State will receive a dollar for dollar reduction in
their deferred payments (i.e., in Year 1, the aggregate payment may be reduced
to $525,000 in the event Tri-State produces no profit). In the second year, the
targeted net pretax profit is $192,500, and in Year 3 it is $210,000.
The estimated number of shares to be issued to the former principals of
Tri-State on the first three anniversaries of the acquisition will be deemed
outstanding for purposes of calculating the Company's diluted earnings per share
in future periods, although they will not be deemed outstanding until issued for
purposes of calculating the Company's basic earnings per share. The estimated
number of shares to be issued for purposes of the Company's diluted earnings per
share will be calculated based upon Tri-State's earnings to date at the time of
calculation and the Company's then current stock price. The actual number of
shares issued by the Company to the former principals of Tri-State may vary
significantly from these estimates, and will not be known until such time as the
shares are actually issued.
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.
12
Item 6. Exhibits and Report on form 8-K
-------------------------------
(a). Exhibits
None
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
July 21, 2001 Item 5 Reporting Company's second
quarter 2001 results
SIGNATURE
---------
Pursuant to the requirements 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
Date: By: /s/ Candace A. Leatham
-------------------------
CANDACE A. LEATHAM
Senior Vice President and
Chief Financial Officer
13