SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________________
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 March 31, 2002
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
----------------
------------------------------------------------------------------------------
(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 April 30, 2002 there were 1,653,637 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 12
Signatures 12
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(in Thousands, Except Share Data)
(Unaudited)
ASSETS March 31, 2002 December 31, 2001
------ -------------- -----------------
Cash and Due from Banks $7,644 $6,150
Federal Funds Sold 27,195 34,885
-------- --------
Total Cash and Cash Equivalents 34,839 41,035
Time Deposits in Other Banks 7,100 3,100
Securities available for sale, at estimated fair value 48,045 42,712
Loans (Net of Unearned Income) 104,656 106,148
Less: Allowance for Possible Loan Losses 1,217 1,143
-------- --------
Net Loans 103,439 105,005
Other Real Estate Owned 190 187
Premises and Equipment, Net 4,851 4,925
Federal Home Loan Bank Stock 685 685
Goodwill and Intangible Assets 2,437 2,455
Accrued Interest Receivable 1,038 964
Other Assets 2,455 2,275
-------- --------
Total Assets $205,079 $203,343
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Demand $26,222 $26,252
Savings 92,703 89,317
Time 45,240 48,776
Time of $100,000 and over 16,201 14,209
-------- --------
Total Deposits 180,366 178,554
Federal Home Loan Bank Advances 10,000 10,000
Other Liabilities 2,528 2,552
-------- --------
Total Liabilities 192,894 191,106
-------- --------
Stockholders' Equity:
Common Stock, No Par Value
Authorized 5,000,000 Shares, Issued
1,677,374 in 2002 and 1,672,765 in 2001 7,771 7,732
Retained Earnings 4,639 4,509
Treasury Stock, 23,708 Shares in 2002 13,708 Shares in 2001 (232) (127)
Accumulated other comprehensive income, net of income tax 7 123
-------- --------
Total Stockholders' Equity 12,185 12,237
-------- --------
Total Liabilities and Stockholders' Equity $205,079 $203,343
======== ========
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED
STATEMENTS OF INCOME
(In Thousands Except Share Data)
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
INTEREST INCOME
Interest and Fees on Loans $1,917 $2,074
Interest on Time Deposits 17 13
Interest on Securities:
Taxable 448 575
Exempt from Federal Income Tax 100 67
Interest on Federal Funds Sold 125 216
----- -----
Total Interest Income 2,607 2,945
----- -----
INTEREST EXPENSE
Interest on Deposits: 829 1,360
Interest Expense on Federal Funds Purchased 124 124
----- -----
Total Interest Expense 953 1,484
----- -----
Net Interest Income 1,654 1,461
Provision for Possible Loan Losses 75 63
----- -----
Net Interest Income After Provision for Loan Losses 1,579 1,398
----- -----
NON-INTEREST INCOME
Service charges on Deposit Accounts 141 122
Gain on Sale of Loans Held for Sale 18 1
Investment Brokerage Fees 72 34
Insurance Commissions and Fees 428 0
Other Income 106 92
----- -----
Total Non-Interest Income 765 249
----- -----
NON-INTEREST EXPENSE
Salaries and Employee Benefits 1,091 739
Occupancy Expense, Net 147 135
Furniture and Equipment Expense 216 152
Stationary and Supplies 38 26
Advertising and Promotion 111 43
Audit and Exams 36 31
Amortization of Intangibles 33 21
Other Expenses 348 208
----- -----
Total Non-Interest Expense 2,020 1,355
----- -----
Income Before Provision for Income Taxes 324 292
Provision for Income Taxes 93 82
----- -----
Net Income $231 $210
==== ====
Net Income Per Common Share-Basic $0.14 $0.13
===== =====
Net Income Per Common Share-Diluted $0.13 $0.13
===== =====
Weighted Average Shares Outstanding-Basic 1,658,741 1,617,571
Weighted Average Shares Outstanding-Diluted 1,733,057 1,635,683
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
---- ----
Net Income $231 $210
Other Comprehensive Income, Net of Tax
Unrealized Gain (Loss) on Available for Sale Securities (116) 266
--------------
Comprehensive Income $115 $476
==============
See Notes to Consolidated Financial Statements
3
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Accumulated
Other Total
Common Retained Treasury Comprehensive Stockholders
Stock Earnings Stock Income Equity
----- -------- ----- ------ ------
Balance December 31, 2001 $7,732 $4,509 ($127) $123 $12,237
Net Income for the Period 231 231
Cash Dividend (101) (101)
Purchase of Treasury Shares (105) (105)
Stock Options Exercized 10 10
Shares Issued Through Dividend Reinvestment Plan 29 29
Change in Unrealized Loss in Securities, Available
for Sale (116) (116)
-------------------------------------------------------------
Balance March 31, 2002 $7,771 $4,639 ($232) $7 $12,185
=============================================================
See Notes to Consolidated Financial Statements
4
SUSSEX BANCORP
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Cash Flows from Operating Activities:
Net Income $ 231 $ 210
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Depreciation and Amortization of Premises and Equipment 150 112
Amortization of Intangible Assets 33 21
Premium Amortization of Securities, net 117 16
Provision for Possible Loan Losses 75 63
Amortization of Loan Origination and Commitment Fees, net (10) (17)
Deferred Federal Income Tax (Increase) (171) (1)
Increase in Accrued Interest Receivable (74) (16)
Increase in Cash Value of Life Insurance Policy (14) (13)
Decrease in Other Assets 74 21
Increase (Decrease) in Accrued Interest and Other Liabilities (24) 121
-------- --------
Net Cash Provided by Operating Activities 387 517
-------- --------
Cash Flow from Investing Activities:
Securities Available for Sale:
Proceeds from Maturities and Paydowns 6,142 1,188
Proceeds from Sales/Calls Prior to Maturity 1,000 5,745
Purchases (12,786) (14,494)
Securities Held to Maturity:
Proceeds from Maturities 0 1,215
Purchases 0 (532)
Net Purchases of Time Deposits in Other Banks (4,000) (1,000)
Net Decrease (Increase) in Loans Outstanding 1,501 (1,602)
Capital Expenditures (82) (317)
Net Increase in Other Real Estate (3) 0
-------- --------
Net Cash (Used In) Investing Activities (8,228) (9,797)
-------- --------
Cash Flows from Financing Activities:
Net Increase in Total Deposits 1,812 20,121
Purchase of Treasury Stock (105) 0
Sale of Common Stock 0 1,144
Exercise of Stock Options 10 16
Payment of Dividends Net of Reinvestment (72) 40
-------- --------
Net Cash Provided by Financing Activities 1,645 21,321
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ($ 6,196) $ 12,041
Cash and Cash Equivalents, Beginning of Period 41,035 12,920
-------- --------
Cash and Cash Equivalents, End of Period $ 34,839 $ 24,961
======== ========
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 March 31, 2002. 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,
2001.
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):
March 31, 2002 December 31, 2001
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Available For Sale:
US Treasury securities and Obligations of
US Government Corporations and Agencies $30,339 $30,450 $29,292 $29,571
Corporate Bonds 6,702 6,678 4,605 4,661
Obligations of State and Political subdivisions 10,096 10,065 7,714 7,626
Equity Securities 899 852 899 854
--- --- --- ---
Total Available for Sale Securities $48,036 48,045 $42,510 $42,712
===================== ====================
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.
On October 1, 2001, the Company, through its Sussex Bank subsidiary, acquired
Tri-State Insurance Agency, Inc. The purchase price paid by the Company for
Tri-State was comprised of an upfront cash payment at closing, and deferred
payments on the first, second and third anniversaries of the closing. These
deferred payments will be satisfied through a mix 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 common stock. The deferred payments
are subject to downward adjustment based upon the net income of Tri-State as a
subsidiary of Sussex Bank. 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.
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months ended March 31.2002 and March 31,2001
OVERVIEW
The Company realized net income of $231 thousand for the first quarter of 2002,
an increase of $21 thousand from the $210 thousand reported for the same period
in 2001. Basic earnings per share increased from $0.13 in the first quarter of
2001 to $0.14 for the first quarter of 2002. Diluted earnings per share were
$0.13 in the first quarter of both 2002 and 2001. The results reflect a
substantial decrease in interest expense due to declining market rates of
interest, partially offset by a decrease in interest income, coupled with an
increase in non-interest income earned through Tri-State Insurance Agency, Inc.
("Tri-State"). The Company did not acquire Tri-State until October 1, 2001, and
so Tri-State's results are not included in the quarter ended March 31, 2001.
RESULTS OF OPERATIONS
Interest Income. Total interest income decreased $338 thousand, or 11.5%, to
$2.6 million for the quarter ended March 31, 2002 from $2.9 million for the same
period in 2001. This decrease was primarily attributable to a 163 basis point
decrease in average rate earned, on a fully taxable equivalent basis, from 7.38%
during the first quarter of 2001 to 5.75% in the first quarter of 2002.
Offsetting the rate decrease was an increase of $23.4 million in average first
quarter balances from $162.8 million in 2001 to $186.6 million in 2002. The
effect of the rate decline exceeded the volume increases in average balances.
The largest impact of the rate decline was in other assets, which include
federal funds sold, time deposits, and FHLB stock dividends. While the average
rate earned with other assets decreased to 1.76% in the first quarter of 2002
from 5.93% during the first quarter of 2001, its average balance increased 98.5%
to $34.3 million from $17.3 million during the same periods, resulting in a
decrease in interest earned on other assets of $104 from $253 thousand in the
first three months of 2001 to $149 thousand in the first quarter of 2002. The
same scenario exits in the loan portfolio where the average rate earned on loans
decreased 86 basis points to 7.33% from 8.19% and average loan balance increased
3.3% from $102.7 million to $106.1 million from first quarter 2001 to first
quarter 2002. Loan interest income declined by $157 thousand to $1.9 million in
the first quarter of 2002 from $2.1 million in the first three months of 2001.
Taxable investment securities average balances fell by $333 thousand and the
average rate earned dropped by 119 basis points, lowering income by $110
thousand. However the average balance of tax exempt securities increased by $3.6
million from $6.6 million for the first quarter 2001 to $10.2 million during the
first three months of 2002. The average rate earned increased by 22 basis points
and interest income increased by $52 thousand over the three-month periods. The
effects of both market changes in interest rates and larger average balances in
lower yielding other assets resulted in lower interest income for the first
quarter of 2002 compared to the first quarter if 2001.
Interest Expense. The Company's interest expense for the first quarter of 2002
decreased $531 thousand, or 35.8% to $1.0 million from $1.5 million in the first
quarter of 2001, as the average balance of interest bearing liabilities
increased $23.6 million, or 17.0% to $162.4 million during the first quarter of
2002 from $138.8 million in the same period of 2001. Interest expense on time
deposits, the largest component of the decrease, decreased $311 thousand, or
36.4% to $543 thousand as the average balance in time deposits decreased $1.9
million, or 3.2% in the first quarter of 2002 compared to the same period in
2001. As a result of a large scale marketing promotion for low cost deposits
which began in the fourth quarter of 2001, NOW deposit average balances have
grown $16.5 million, or 108.6%, from $15.2 million during the first quarter 2001
to $31.7 million in the first quarter of 2002. The interest expense on NOW
deposits increased $17 thousand from $55 thousand in the first quarter of 2001
to $72 thousand in the same period of 2002, while the average interest rate paid
decreased 55 basis points from 1.47% to 0.92% during the same periods. Year to
date average savings deposits reflect an increase of $12.3 million, or 26.9%, in
average balances during the first quarter of 2002 from the first quarter of 2001
and a decrease in interest expense of $185 thousand to $206 thousand from $391
thousand during the same first quarter periods. Money market deposits saw a
decline in average balances of $3.3 million, or 48.2%, from $6.8 million to $3.5
million from first quarter 2001 to first quarter 2002. Large municipal deposit
balances were transferred from money market sweep deposit accounts to NOW
deposit accounts during the first quarter of 2002, as the average rate paid on
money market deposit accounts fell during the first quarter of 2002. The
interest expense on money market deposits declined 265 basis points from 3.57%
during the first quarter of 2001 to 0.92% in the same period in 2002. Average
borrowed funds remained constant at $10 million from first quarter 2001 compared
to the first quarter of 2002. The Company entered into three ten year callable
Federal Home Loan Bank advances totaling $10 million in December 2000 at an
average rate of 4.96% and quarterly interest expense of $124 thousand. 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 196 basis points to 2.38% for the first quarter of 2002 from
4.34% for the first quarter in 2001. 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 first quarter of
2002 compared to the average rates paid in the first quarter of 2001.
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 three
months ended March 31, 2002 and 2001. 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
Three Months Ended March 31,
2002 2001
---- ----
Interest Average Rates Interest Average Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
Assets (Dollars in Thousands)
Interest Earning Assets:
Taxable Loans (net of unearned income) $106,084 $1,917 7.33% $102,668 $2,074 8.19%
Tax Exempt Securities 10,212 137 5.44% 6,605 85 5.22%
Taxable Investment Securities 35,913 441 4.98% 36,246 551 6.17%
Other (1) 34,340 149 1.76% 17,299 253 5.93%
---------------------- -----------------------
Total Earning Assets $186,549 $2,644 5.75% $162,818 $2,963 7.38%
Non-Interest Earning Assets $18,247 $13,064
Allowance for Possible Loan Losses ($1,181) ($1,005)
------------ -------------
Total Assets $203,615 $174,877
============ =============
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
NOW Deposits $31,712 $72 0.92% $15,203 $55 1.47%
Savings Deposits 58,090 206 1.44% 45,763 391 3.47%
Money Market Deposits 3,534 8 0.92% 6,825 60 3.57%
Time Deposits 59,064 543 3.73% 60,997 854 5.68%
Borrowed Funds 10,000 124 4.96% 10,000 124 4.96%
---------------------- -----------------------
Total Interest Bearing Liabilities $162,400 $953 2.38% $138,788 $1,484 4.34%
Non-Interest Bearing Liabilities:
Demand Deposits $26,465 $24,111
Other Liabilities 2,413 767
------------ -------------
Total Non-Interest Bearing Liabilities $28,878 $24,878
Shareholders' Equity $12,337 $11,211
------------ -------------
Total Liabilities and Shareholders' Equity $203,615 $174,877
============ =============
Net Interest Differential $1,691 $1,479
Net Interest Margin 3.37% 3.04%
Net Yield on Interest-Earning Assets 3.68% 3.68%
(1) Includes FHLB stock, federal funds sold, and time deposits
8
Net-Interest Income. The net interest income for the first quarter of 2002
increased $212 thousand over the same period last year. This increase was the
result of liabilities repricing faster and lower then earning assets in a
declining market rate environment and the Company's ability to increase it's
average balances of low cost interest bearing liabilities, thereby further
reducing its cost of funds. The net interest margin increased, on a fully
taxable equivalent basis, by 33 basis points to 3.37% and the net yield on
interest-bearing assets remained constant at 3.68% in both first quarter
periods.
Provision for Loan Losses. For the three months ended March 31, 2002 the
provision for possible loan losses was $75 thousand compared to $63 thousand for
the first quarter ended March 31, 2001. The provision for loan losses 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 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 first quarter of 2002, total non-interest income
increased $516 thousand, or 235.6%, from the same period in 2001. On October 1,
2001 the Company acquired Tri-State and in the first quarter of 2002 the
subsidiary contributed $428 thousand in insurance commission and fee income to
non-interest income that was not present in the first quarter of 2001.
Investment brokerage fee income increase by $38 thousand, or 111.8%, to $72
thousand for the period ending March 31, 2002 compared to $34 thousand earned
during the first quarter of 2001. Service charges on deposit accounts increased
$19 thousand to $141 thousand and other income increased $14 thousand to $106
thousand for the quarter ended March 31, 2002. These increases in service
charges on deposit accounts and other income are credited to the growth in the
Company as a result of the marketing promotion. The Company also earned $18
thousand on gains on the sale of loans held for sale during the first quarter of
2002 compared to a $1 thousand gain reported during the first three months of
2001.
Non-Interest Expense. For the quarter ended March 31, 2002, non-interest expense
increased $665 thousand from the same period last year. The additional
non-interest expense in the first quarter 2002 attributed to Tri-State totaled
$366 thousand. Net of Tri-State's salaries and employee benefits, the Company's
salaries and employee benefits increased $123 thousand, or 16.6%, as salaries
increased $113 thousand and employee benefits increased $10 thousand from the
addition of six full time and one part time position since the end of the
quarter ended March 31, 2001. Other non-interest expense increases from first
quarter 2001 to first quarter 2002, net of Tri-State's expenses, were
advertising and promotion expense increase of $59 thousand due to the aggressive
deposit promotion which began in the forth quarter of 2001, furniture and
equipment expense of $44 thousand from computer network upgrades and costs
associated with the Bank subsidiary name change from The Sussex County State
Bank to Sussex Bank during forth quarter 2001, and other expenses increase of
$60 thousand relative to normal expenditures attributed to the growth of the
Company.
Income Taxes. Income tax expense increased $11 thousand to $93 thousand for the
three months ended March 31, 2002 as compared to $82 thousand for the same
period in 2001. The increase in income taxes resulted from a higher level of
income before income taxes in 2002 compared to 2001.
9
FINANCIAL CONDITION
March 31, 2002 as compared to December 31, 2001
Total assets increased to $205.1 million at March 31, 2002, a $1.8 million
increase from total assets of $203.3 million at December 31, 2001. Increases in
total assets include net purchases of $5.3 million in securities available for
sale and time deposits in other banks of $4.0 million. These asset increases
were financed through a reduction in federal funds sold of $7.7 million and a
decrease in net loans of $1.6 million. An increase in cash and due from banks of
$1.5 million was funded by an increase in total deposits of $1.8 million from
$178.6 million at year-end 2001 to $180.4 million on March 31, 2002. Total
stockholder's equity remained the same at $12.2 million from December 31, 2001
to March 31, 2002, as the Company's net income for the three month period of
$231 thousand was offset by payment of a cash dividend of $101 thousand and the
purchase of treasury stock of $105 thousand.
Total loans at March 31, 2002 decreased $1.5 million to $104.6 million from
$106.1 million at year-end 2001. 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. The balance in construction loans decreased $1.5 million from
$8.5 million at December 31, 2001 to $7.0 million on March 31, 2002 as a result
of a payoff of one construction loan with a balance of $1.4 million and which
did not roll over into permanent financing with the Company. Other minor shifts
in ending balances occurred between December 31, 2001 and March 31, 2002
according to loan demand.
The following schedule presents the components of loans, net of unearned income,
for each period presented:
March 31, 2002 December 31, 2001
------------------------------ -----------------------------
Amount Percent Amount Percent
------------------------------ -----------------------------
(Dollars In Thousands)
Commercial and Industrial $8,566 8.19% $8,065 7.60%
Real Estate-Non Residential Properties 34,477 32.94% 34,811 32.79%
Residential Properties (1-4 Family) 51,700 49.40% 51,433 48.45%
Construction 7,012 6.70% 8,515 8.02%
Loans to Individuals 2,253 2.15% 2,245 2.12%
Other Loans 648 0.62% 1,079 1.02%
Total Loans $104,656 100.00% $106,148 100.00%
============================ ==========================
Federal funds sold decreased by $7.7 million to $27.2 million at March 31, 2001
from $34.9 million on December 31, 2001 and time deposits on other banks
increased by $4 million at March 31, 2002 from December 31, 2001. Despite the
decline in the period end balances for federal funds sold, the average balance
in other earning assets, which includes federal funds sold and time deposits,
for the first quarter of 2002 was $34.3 million, an increase of $17.0 million,
an over the average balance of other earning assets for the first quarter of
2001. During 2001 in a declining rate environment, deposits increased faster
than investment opportunities and the excess funds were invested in short-term
federal funds and time deposits in other banks, raising our federal funds sold
to their present average level for the quarter. These funds will be used to fund
future loan demand, with excess liquidity used to purchase investment
securities. Four million dollars in federal funds sold was transferred to time
deposits in other banks during the first quarter of 2002, accounting for the
period end decline in federal funds sold and the increase in time deposits in
other banks.
Securities, available for sale, at market value, increased $5.3 million, or
12.5%, from $42.7 million at year-end 2001 to $48.0 million on March 31, 2002.
The Company purchased $12.8 million in new securities in the first three months
of 2002 and $7.1 million in available for sale securities matured, were called
and were repaid. There were $193 thousand in recorded unrealized losses in the
available of sale portfolio during the first three months of 2002. There were no
held to maturity securities at March 31, 2002 or at year-end 2001.
Total year to date average deposits increased $12.8 million, or 7.7%, to $178.9
million during the first three months of 2002 from the twelve-month average of
$166.1 million for the year ended December 31, 2001. NOW deposits increased by
$13.8 million, savings deposits increased by $7.8 million, and demand deposits
increased by $1.1 million. Offsetting these increases were decreases in money
market deposits of $3.5 million and time deposits of $6.4 million. As discussed
earlier, the increase in NOW and savings deposits was due to an ongoing
promotion of interest bearing deposits since the forth quarter of 2001. After
aggressively pricing time deposits in the first quarter of 2001, many of those
deposits repriced in the first quarter of 2002 at lower market rates of interest
and the decrease in the average balance of time deposits reflects the withdrawal
of matured time deposits. 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.
Three Months Ended Twelve Months Ended
March 31, 2002 December 31, 2001
-------------------- ---------------------
Average Percent Average Percent
Balance of Total Balance of Total
Deposits:
NOW Deposits ................ $ 31,712 17.73% $ 17,885 10.76%
Savings Deposits ............ 58,090 32.48% 50,334 30.30%
Money Market Deposits ....... 3,534 1.98% 7,029 4.23%
Time Deposits ............... 59,064 33.02% 65,486 39.42%
Demand Deposits ............. 26,465 14.79% 25,412 15.29%
------ ------ ------ ------
Total Deposits ................... $178,865 100.00% $166,146 100.00%
======== ====== ======== ======
10
ASSET QUALITY
At March 31, 2002, non-performing loans decreased $342 thousand to $2.2 million,
as compared to $2.5 million at December 31, 2001. One construction credit with a
value of $1.5 million at December 31, 2001 was transferred to non-accrual during
the third quarter of 2001. As of March 31, 2002 the construction credit has been
reduced by $586 thousand to a remaining balance of $900 thousand. The credit
represents a loan participation secured by seventeen completed condominium units
located in Piermont, New York. The Bank has been negotiating with the lead bank
for the loan on the allocation of payments. Management believes the Bank is
adequately collateralized regarding this credit and does not anticipate a
material loss.
The following table provides information regarding risk elements in the loan
portfolio:
March 31 December 31
2002 2001
---- ----
Non-accrual loans ..............................$ 2,152 $ 2,494
Non-accrual loans to total loans ............... 2.06% 2.35%
Non-performing loans to total assets ........... 1.14% 1.32%
Allowance for possible loan losses as a
percentage of non-performing loans ........... 56.55% 45.83%
Allowance for possible loan losses to
total loans................................... 1.16% 1.08%
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 March 31, 2002, the allowance for possible loan losses was $1.2 million, up
6.5% from the $1.1 million at year-end 2001. There were $2 thousand in charge
offs and $1 thousand in recoveries reported in the first three months of 2002.
The allowance for possible loan losses as a percentage of total loans was 1.16%
at March 31, 2002 compared to 1.08% on December 31, 2001.
LIQUIDITY MANAGEMENT
At March 31, 2002, 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 March 31, 2002, liquid investments totaled $34.8 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 March 31, 2002, had the ability to borrow a total of $22.6 million against
its one to four family mortgages as collateral for long term advances. The Bank
also has available an overnight line of credit in the amount of $7.9 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 remained constant at $12.2 million at March 31, 2002
and year-end 2001. Activity in stockholder's equity consisted of a net increase
in retained earnings of $130 thousand derived from $231 thousand in net income
earned during the first three months of 2002, offset by a $101 thousand payment
for cash dividends. Treasury stock purchases of $105 thousand and an unrealized
loss on securities, available for sale of $116 thousand were decreases to
stockholder's equity offset by $10 thousand in stock options exercised and $29
thousand for shares issued through the dividend reinvestment plan.
At March 31, 2002 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 March 31, 2002 for both, the Company and the Bank as well as
the minimum regulatory requirements.
Amount Ratio Amount Minimum Ratio
------ ----- ------ -------------
The Company:
Leverage Capital $9,711 4.83% $8,037 4%
Tier 1 - Risk Based 9,711 8.38% 4,637 4%
Total Risk-Based 10,928 9.43% 9,273 8%
The Bank:
Leverage Capital 9,381 4.67% 8,036 4%
Tier 1 Risk-Based 9,381 8.11% 4,627 4%
Total Risk-Based 10,598 9.16% 9,254 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 adoption of
this new pronouncement did not have a material impact on the Company's 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
-----------------
Not applicable
Item 6. Exhibits and Report on form 8-K
-------------------------------
(a). Exhibits
None
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
March 1, 2002 5 Reporting the registrant's year-end results
April 23, 2002 4 The Registrant announced that it had replaced Arthur Andersen, LLP
as its independent auditors with Beard Miller Company, LLC.
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
12