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 June 30, 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
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(Exact name of registrant as specified in its charter)
New Jersey 22-3475473
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(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 August 1, 2002 there were 1,661,083 shares of common stock, no
par value, outstanding.
SUSSEX BANCORP
FORM 10-QSB
INDEX
Part I - Financial Information Page(s)
Item 1 Financial Statements and Notes to Consolidated 1
Financial Statements (Unaudited)
Item 2 Management's Discussion and Analysis of 9
Financial condition and Results of Operations
Part II - Other Information
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 14
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(in Thousands, Except Share Data)
(Unaudited)
ASSETS June 30, 2002 December 31, 2001
------ ------------- -----------------
Cash and Due from Banks $10,481 $6,150
Federal Funds Sold 21,215 34,885
------- --------
Total Cash and Cash Equivalents 31,696 41,035
Time Deposits in Other Banks 6,100 3,100
Securities Available for Sale, at Fair Value 55,639 42,712
Loans (Net of Unearned Income) 107,616 106,148
Less: Allowance for Loan Losses 1,292 1,143
------- --------
Net Loans 106,324 105,005
Other Real Estate Owned 197 187
Premises and Equipment, Net 4,814 4,925
Federal Home Loan Bank Stock, at Cost 667 685
Intangible Assets, Net 677 743
Goodwill 1,757 1,712
Accrued Interest Receivable 1,190 964
Other Assets 2,156 2,275
------- --------
Total Assets 211,217 $203,343
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Noninterest-Bearing Demand $27,900 $26,252
Savings, Club and Interest-Bearing Demand 99,964 89,317
Time of Less than $100 43,610 48,776
Time of $100 and Over 14,392 14,209
------- --------
Total Deposits 185,866 178,554
Long-Term Debt 10,000 10,000
Other Liabilities 2,548 2,552
------- --------
Total Liabilities 198,414 191,106
Stockholders' Equity:
Common Stock, No Par Value; Authorized 5,000,000
Shares; Issued 1,683,262 in 2002 and 1,672,765 in
2001; Outstanding 1,659,550 in 2002 and
1,659,057 in 2001 7,817 7,732
Retained Earnings 4,871 4,509
Treasury Stock, at cost; 23,712 Shares in 2002 13,708
Shares in 2001 (232) (127)
Accumulated Other Comprehensive Income, Net of Income
Tax 347 123
------- --------
Total Stockholders' Equity 12,803 12,237
------- --------
Total Liabilities and Stockholders' Equity 211,217 $203,343
======== ========
See Notes to Consolidated Financial Statements
1
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Interest and Fees on Loans $1,900 $2,037 $3,817 $4,111
Interest on Securities:
Taxable 499 595 947 1,170
Exempt from Federal Income Tax 116 66 216 133
Interest on Federal Funds Sold 112 220 237 436
Interest on Time Deposits 33 46 50 59
------ ------ ------ ------
Total Interest Income 2,660 2,964 5,267 5,909
INTEREST EXPENSE
Interest on Deposits 710 1,356 1,539 2,716
Interest on Borrowings 125 125 249 249
------ ------ ------ ------
Total Interest Expense 835 1,481 1,788 2,965
Net Interest Income 1,825 1,483 3,479 2,944
Provision for Loan Losses 75 63 150 126
------ ------ ------ ------
Net Interest Income After Provision for Loan Losses
1,750 1,420 3,329 2,818
NON-INTEREST INCOME
Service charges on Deposit Accounts 174 139 315 261
Gain on Sale of Loans Held for Sale 6 5 24 6
Investment Brokerage Fees 76 52 148 86
Insurance Commissions and Fees 434 0 862 0
Other Income 142 149 248 241
------ ------ ------ ------
Total Non-Interest Income 832 345 1,597 594
NON-INTEREST EXPENSE
Salaries and Employee Benefits 1,138 755 2,229 1,494
Occupancy, Net 149 112 296 247
Furniture and Equipment 214 158 430 310
Stationary and Supplies 41 28 79 54
Advertising and Promotion 131 57 242 100
Audit and Exams 30 32 66 63
Amortization of Intangibles 32 21 65 42
Other Expenses 372 255 720 463
------ ------ ------ ------
Total Non-Interest Expense 2,107 1,418 4,127 2,773
Income Before Provision for Income Taxes 475 347 799 639
Provision for Income Taxes 144 107 237 189
------ ------ ------ ------
Net Income $ 331 $ 240 $ 562 $ 450
====== ====== ====== ======
Net Income Per Common Share-Basic $ 0.20 $ 0.15 $ 0.34 $ 0.28
====== ====== ====== ======
Net Income Per Common Share-Diluted $ 0.19 $ 0.14 $ 0.33 $ 0.27
====== ====== ====== ======
See Notes to Consolidated Financial Statements
2
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
Net Income $331 $240 $562 $450
Other comprehensive income, net of tax
Unrealized gain on available for sale securities 340 54 224 320
---- ---- ---- ----
Comprehensive income $671 $294 $786 $770
==== ==== ==== ====
See Notes to Consolidated Financial Statements
3
SUSSEX BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)
(Unaudited)
Accumulated
Number of Other Total
Shares Common Retained Treasury Comprehensive Stockholders
Outstanding Stock Earnings Stock Income Equity
----------- ----- -------- ----- ------ ------
Balance December 31, 2000 1,498,351 $ 6,385 $ 4,027 ($ 122) ($ 180) $ 10,110
Net Income for the Period 450 450
Cash Dividends, at $.07 per share (115) (115)
Sale of Common Stock 139,906 1,160 1,160
Stock Options Exercised 2,616 24 24
Shares Issued Through Dividend Reinvestment Plan 8,807 71 71
Treasury Shares Purchased (471) (4) (4)
Change in Unrealized Gain on Securities,
Available for Sale 320 320
--------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 2001 1,649,209 $ 7,640 $ 4,362 ($ 126) $ 140 $ 12,016
========= ========== ========== ========== ========== ==========
Balance December 31, 2001 1,659,057 $ 7,732 $ 4,509 ($ 127) $ 123 $ 12,237
Net Income for the Period 562 562
Cash Dividends, at $.06 per share (200) (200)
Stock Options Exercised 4,090 25 25
Shares Issued Through Dividend Reinvestment Plan 6,407 60 60
Treasury Shares Purchased (10,004) (105) (105)
Change in Unrealized Gain on Securities,
Available for Sale 224 224
--------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 2002 1,659,550 $7,817 $4,871 ($232) $347 $12,803
========= ========== ========== ========== ========== ==========
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
Cash Flows from Operating Activities:
Net Income $ 562 $ 450
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Net Loan Origination and Commitment Fees (13) (24)
Depreciation and Amortization of Premises and Equipment 290 217
Amortization of Intangible Assets 65 42
Net Amortization of Securities 228 92
Provision for Loan Losses 150 126
Gain on Sale of Loans Held for Sale (24) (6)
Origination of Loans Held for Sale (1,196) (1,146)
Proceeds of Sales of Loans held for Sale 1,220 1,313
Increase in Accrued Interest Receivable (226) (64)
Increase in Cash Value of Life Insurance Policy (28) (27)
Decrease (Increase) in Other Assets and Goodwill (49) (186)
(Decrease) Increase in Other Liabilities (4) 151
--------- ------
Net Cash Provided by Operating Activities 975 938
-------- ------
Cash Flow from Investing Activities:
Securities Available for Sale:
Proceeds from Maturities and Paydowns 10,849 6,786
Proceeds from Sales/Calls Prior to Maturity 1,000 6,271
Purchases (24,628) (22,205)
Securities Held to Maturity:
Proceeds from Maturities 0 1,215
Purchases 0 (532)
Net Purchases of Time Deposits in Other Banks (3,000) (7,000)
Net (Increase) Decrease in Loans Outstanding (1,456) 555
Redemption of FHLB Stock 18 0
Purchase of Premises and Equipment (179) (479)
Net Increase in Other Real Estate (10) (185)
--------- ------
Net Cash Used In Investing Activities (17,406) (15,574)
--------- ------
Cash Flows from Financing Activities:
Net Increase in Total Deposits 7,312 21,600
Purchase of Treasury Stock (105) (4)
Sale of Common Stock 0 1,160
Exercise of Stock Options 25 24
Payment of Dividends Net of Reinvestment (140) (44)
--------- ------
Net Cash Provided by Financing Activities 7,092 22,736
--------- ------
Net (Decrease) Increase in Cash and Cash Equivalents ($ 9,339) $ 8,100
Cash and Cash Equivalents, Beginning of Period 41,035 12,920
--------- ------
Cash and Cash Equivalents, End of Period $ 31,696 $ 21,020
========= ========
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 Sussex Bank,
("the Bank"). The Bank is the only active subsidiary of the Company at June 30,
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. Operating
results for the six months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002. 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. Securities
The amortized cost and approximate market value of securities are
summarized as follows (in thousands):
June 30, 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 $34,673 $35,063 $29,292 $29,571
Corporate Bonds 7,626 7,799 4,605 4,661
Obligations of State and Political
Subdivisions 11,804 11,903 7,714 7,626
Equity Securities 899 874 899 854
------- ------- ------- -------
Total Available for Sale Securities $55,060 $55,639 $42,510 $42,712
======= ======= ======= =======
3. 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 dilutive effect of potential
common shares.
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, 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
The following table sets forth the computations of basic and diluted
earnings per share (dollars in thousands, except per share data):
Six Months Ended, June 30, 2002 Six Months Ended, June 30, 2001
---------------------------------- ---------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------- ----------------------------------
Basic earnings per share:
Net income applicable to common
stockholders $ 562 1,657 $ 0.34 $ 450 1,632 $ 0.28
====== ======
Effect of dilutive securities:
Stock options -- 18 -- 18
Deferred common stock payments for
purchase of insurance agency 3 57 -- --
----- ----- ----- ------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $ 565 1,732 $ 0.33 $ 450 $ 1,650 $ 0.27
===== ===== ====== ===== ======= ======
Three Months Ended, June 30, 2002 Three Months Ended, June 30, 2001
------------------------------------ ---------------------------------
Per Per
Income Shares Shares Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ----------------------------------
Basic earnings per share:
Net income applicable to common
stockholders $ 331 1,655 0.20 $ 240 1,645 $ 0.15
===== ======
Effect of dilutive securities:
Stock options 18 18
Deferred common stock payments for
purchase of insurance agency 1 57
----- ----- ----- -----
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $ 332 1,730 $ 0.19 $ 240 1,663 $ 0.14
===== ===== ====== ===== ===== ======
4. Comprehensive Income
The components of other comprehensive income and related tax effects for
the six months ended June 30, 2002 and 2001 are as follows:
Six Months Ended
June 30
2002 2001
---- ----
Unrealized holding gains on available for sale securities $377 $538
Less: reclassification adjustments for gains included in net income -- --
---- ----
Net unrealized gains 377 538
Tax effect 153 218
---- ----
Other comprehensive income, net of tax $224 $320
==== ====
5. New Accounting Standards
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
7
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.
In June 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations," which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
This Statement will become effective for the Company on January 3, 2003 and is
not expected to have a significant impact on the Company's financial condition
or results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment of or Disposal of Long-Lived Assets."
This Statement supercedes FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business." This Statement also
amends ARB No. 51, " Consolidated Financial Statements." The provisions of this
Statement were effective for the Company on January 1, 2002, and did not have a
significant impact on financial condition or results of operations.
6. Segment Information
The Company's insurance operations are managed separately from the
traditional banking and related financial services that the Company also offers.
The insurance operation provides commercial, individual, and group benefit plans
and personal coverage. Insurance operations commenced on October 1, 2001 when
the Company acquired Tri-State Insurance Agency, Inc. Accordingly, segment
information for 2001 is not applicable.
Banking
and
Financial Insurance
Services Services Total
-------- -------- -----
(Amounts in thousands)
Three months ended June 30, 2002
Revenues from external sources $2,223 $ 434 $2,657
Income before income taxes $ 413 $ 62 $ 475
Six months ended June 30, 2002
Revenues from external sources $4,214 $ 862 $5,076
Income before income taxes $ 691 $ 108 $ 799
7. Subsequent Event
On July 11, 2002 Sussex Capital Trust I, a Delaware statutory business
trust and a wholly-owned subsidiary of the Company, issued $5 million of
variable rate capital trust pass-through securities to investors. Sussex Capital
Trust I purchased $5.1 million of variable rate junior subordinated deferrable
interest debentures from Sussex Bancorp. The debentures are the sole asset of
the Trust. The terms of the junior subordinated debentures are the same as the
terms of the capital securities. Sussex Bancorp has also fully and
unconditionally guaranteed the obligations of the Trust under the capital
securities. The capital securities are redeemable by Sussex Bancorp on or after
October 7, 2007, at par or earlier if the deduction of related interest for
federal income taxes is prohibited, classification as Tier I Capital is no
longer allowed, or certain other contingencies arise. The capital securities
must be redeemed upon final maturity of the subordinated debentures on October
7, 2032. Proceeds totaling approximately $4.8 million were moved to paid in
capital at Sussex Bank. Financing costs related to the Company's issuance of
mandatory redeemable capital debentures will be amortized over a five-year
period and will be included in other assets.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three and Six Months ended June 30, 2002 and June 30, 2001
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies included in
Note 2 to the consolidated financial statements of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2001. Some of these policies are
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained on
pages 11 and 15 of this Form 10-QSB for the provision and allowance for loan
losses.
OVERVIEW
The Company realized net income of $331 thousand for the second quarter of
2002, an increase of $91 thousand from the $240 thousand reported for the same
period in 2001. Basic earnings per share increased from $0.15 in the second
quarter of 2001 to $0.20 for the second quarter of 2002. Diluted earnings per
share were $0.14 in the second quarter of 2001 and increased to $0.19 in the
second quarter of 2002.
For the six months ended June 30, 2002, net income was $562 thousand, an
increase of $112 thousand from the $450 thousand reported for the same period in
2001. Basic earnings per share were $0.34 for the six months ended June 30, 2002
compared to basic earnings per share of $0.28 for the six-month period ended
June 30, 2001. Diluted earnings per share of $0.33 for the six months ended June
30, 2002 an increase from $0.27 from the first six months of 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 six
months ended June 30, 2001.
RESULTS OF OPERATIONS
Interest Income. Total interest income decreased $304 thousand, or 10.3%,
to $2.7 million for the quarter ended June 30, 2002 from $3.0 million for the
same period in 2001. This decrease was primarily attributable to a 126 basis
point decrease in average rate earned, on a fully taxable equivalent basis, from
6.94% during the second quarter of 2001 to 5.68% in the second quarter of 2002.
Offsetting the rate decrease was an increase of $16.7 million in average second
quarter interest earning balances from $174.2 million in 2001 to $190.9 million
in 2002. The effect of the rate decline exceeded the volume increases in average
balances. The decline in rates had the greatest effect on federal funds sold.
The average rate earned on federal funds sold decreased to 1.77% in the second
quarter of 2002 from 4.23% during the second quarter of 2001, while the average
balance increased 21.7% to $25.0 million from $20.6 million during the same
periods. As the inflow of deposits exceeded loan demand during the second three
months of 2002, excess funds were invested in federal funds sold and investment
securities. The same scenario exits in the loan portfolio where the average rate
earned on loans decreased 80 basis points to 7.18% for the second quarter of
2002 from 7.98% in the second quarter of 2001 and average loan balance increased
3.7% from $102.4 million to $106.1 million from second quarter 2001 to second
quarter 2002. Taxable investment securities average balances increased by $335
thousand and the average rate earned declined by 97 basis points, lowering
income by $93 thousand. The average balance of tax-exempt securities increased
by $5.3 million from $6.6 million for the second quarter 2001 to $11.9 million
during the second quarter of 2002. The average rate earned on tax exempt
securities increased by 25 basis points and interest income on a tax equivalent
basis increased by $76 thousand in the current quarter compared to the year ago
period. As the result of both market changes in interest rates and larger
average balances in lower yielding assets, interest income for the second
quarter of 2002 declined compared to the second quarter if 2001.
For the six months ended June 30, 2002, interest income, on a fully taxable
equivalent basis, decreased $597 thousand, or 10.0%, to $5.3 million from the
$5.9 million reported for the same period in 2001. While market rates of
interest were falling during the first six months of 2002, average interest
earning assets increased $20.2 million to $188.8 million from $168.6 million
during the same period in 2001. The average balance in the loan portfolio
increased $3.6 million, tax exempt securities increased $4.5 million and federal
funds sold increased $9.5 million during the first six months of 2002 over the
same period in 2001. The effects of both changing market rates and larger
average balances in lower yielding assets, the average yield on interest earning
assets on a fully taxable equivalent basis decreased 140 basis points from 7.11%
from the first half of 2001 to 5.71% for the same period of 2002.
Interest Expense. The Company's interest expense for the second quarter of
2002 decreased $646 thousand, or 43.6% to $835 thousand from $1.5 million in the
second quarter of 2001, as the average balance of interest bearing liabilities
increased $18.1 million, or 12.2% to $166.3 million during the second quarter of
2002 from $148.2 million in the same period of 2001. The increase in the average
balance of interest bearing liabilities was more than offset by the reduction in
rates, as the average cost of funds declined to 2.01% for the second quarter of
2002 from 4.01% in the second quarter of 2001. Interest expense on time
deposits, the largest component of the decrease, declined $444 thousand, or
50.2% to $441 thousand as the average balance in time deposits decreased $7.2
million, or 10.9% in the second 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 $16.7 million, or 110.9%, from $15.0 million during the second quarter
2001 to $31.7 million in the second quarter of 2002. The interest expense on NOW
deposits increased $10 thousand from the second quarter of 2001, while the
average interest rate paid decreased 56 basis points from 1.31% to 0.75% during
the same periods. Average savings deposits reflect an increase of $13.1 million,
or 27.0%, in average balances while the average rate paid declined 170 basis
points from 3.01% in the second quarter of 2001 to 1.31% in the second quarter
of 2002. Average borrowed funds remained constant at $10 million from second
quarter of 2001. The Company entered into three ten year callable Federal Home
Loan Bank advances totaling $10 million in December 2000 at an average rate of
4.95% and quarterly interest expense of $125 thousand. The FHLB advances were an
investment strategy used to payoff short-term borrowings and to have liquidity
available to purchase investments.
9
For the six months ended June 30, 2002 interest expense decreased $1.2
million, or 39.7%, to $1.8 million from $3.0 million for the same period last
year. This decrease was largely due to a decrease in interest expense on time
deposits of $756 thousand, or 43.4%, from $1.7 million for the first half of
2001 to $984 thousand during the first six months of 2002, as the average
balance in time deposit accounts decreased $4.6 million, or 7.2%, over the same
six-month periods. As market rates of interest declined during the first six
months of 2002, the Company shifted it's focus from drawing time deposits on the
basis of rate to attracting customers through its new marketing promotion of
lower costing NOW and savings accounts. The average balance of NOW deposits
increased $16.6 million, or 109.8%, from $15.1 million during the first half of
2001 to $ 31.7 million in the first half of 2002. For the first six months of
2002, the Company's average cost of time deposits was 3.36%, while the average
cost of NOW accounts was 0.83%. Savings deposits increased $12.7 million, or
27.0%, from $47.2 million during the first six months of 2001 to $ 59.9 million
during the same period of 2002. The Company's borrowed funds remained constant
at $10.0 million during the first six months of 2001 and 2002. The average rate
paid on total interest bearing liabilities decreased 198 basis points from 4.17%
in the first six months of 2001 to 2.19% during the same period in 2002. This
decrease in the average cost of funds was the combination of the Company
decreasing its rates of interest paid on interest bearing deposits due to the
decline in market rates and the Company's strategy of attracting lower cost
deposits and repricing its higher costing time deposit portfolio.
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 six months
ended June 30, 2002 and 2001. The average balance of loans includes non-accrual
loans, and associated yields include loan fees, which are considered adjustment
to yields.
Comparative Average
Balance Sheets
Six Months Ended June 30,
2002 2001
Interest Average Rates Interest Average 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) $ 106,113 $ 3,817 7.25% $ 102,519 $ 4,111 8.09%
Tax Exempt Securities 11,061 298 5.43% 6,596 170 5.20%
Taxable Investment Securities 38,158 932 4.93% 38,155 1134 5.99%
Federal Funds Sold 27,629 237 1.71% 18,157 436 4.78%
Time Deposits in Other Banks 5,078 50 1.99% 2,323 57 4.95%
Other (1) 728 15 4.16% 798 38 9.60%
--------- --------- ----------- ---------
Total Earning Assets $ 188,767 $ 5,349 5.71% $ 168,548 $ 5,946 7.11%
Non-Interest Earning Assets $ 18,496 $ 13,119
Allowance for Loan Losses ($ 1,219) ($ 1,010)
--------- -----------
Total Assets $ 206,044 $ 180,657
========= ===========
Liabilities and Shareholders' Equity
Interest Bearing Liabilities:
NOW Deposits $ 31,700 $ 131 0.83% $ 15,113 $ 104 1.39%
Savings Deposits 59,908 406 1.37% 47,178 754 3.22%
Money Market Deposits 3,642 18 1.00% 7,542 118 3.16%
Time Deposits 59,093 984 3.36% 63,683 1,740 5.51%
--------- --------- --------- ---------
Total Interest-Bearing Deposits 154,343 1,539 2.01% 133,516 2,716 4.10%
Borrowed Funds 10,000 249 4.95% 10,000 249 4.95%
--------- --------- --------- ---------
Total Interest Bearing Liabilities $ 164,343 $ 1,788 2.19% $ 143,516 $ 2,965 4.17%
Non-Interest Bearing Liabilities:
Demand Deposits $ 26,865 $ 24,832
Other Liabilities 2,435 819
--------- ---------
Total Non-Interest Bearing Liabilities $ 29,300 $ 25,651
Shareholders' Equity $ 12,401 $ 11,490
--------- ---------
Total Liabilities and Shareholders' Equity $ 206,044 $ 180,657
========= =========
Net Interest Differential $ 3,561 $ 2,981
Net Interest Spread 3.52% 2.95%
Net Yield on Interest-Earning Assets 3.80% 3.57%
(1) Includes FHLB stock and interest-bearing deposits
10
Net-Interest Income. The net interest income for the second quarter of 2002
increased $342 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 shift it's
average balances to lower costing interest bearing liabilities, thereby further
reducing its cost of funds. The net interest spread increased, on a fully
taxable equivalent basis, by 73 basis points to 3.67% and the net yield on
interest-bearing assets increased 47 basis points to 3.97% in the second quarter
of 2002 compared to the year ago period.
Net interest income for the six months ended June 30, 2002 increased $535
thousand, or 18.2%, over the same period last year. The net interest spread
increased, on a fully taxable equivalent basis, 57 basis points and the net
yield on interest-bearing assets improved by 23 basis points between the first
six-month periods of 2001 and 2002. This comparison displays the effect of
declining market rates of interest repricing deposit liabilities faster than
earning assets during the first six-month periods of 2002 compared to the first
six months of 2001.
Provision for Loan Losses. For the three months ended June 30, 2002 the
provision for possible loan losses was $75 thousand compared to $63 thousand for
the second quarter ended June 30, 2001. The provision for possible loan losses
was $150 thousand for the six months ended June 30, 2002 as compared to $126
thousand for the same period last year. 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 second quarter of 2002, total non-interest
income increased $487 thousand, or 141.2%, from the same period in 2001. On
October 1, 2001 the Company acquired Tri-State and in the second quarter of 2002
the subsidiary contributed $434 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 $24 thousand, or 46.2%, to $76
thousand for the period ending June 30, 2002 compared to $52 thousand earned
during the second quarter of 2001. Service charges on deposit accounts increased
$35 thousand to $174 thousand and other income decreased $7 thousand to $142
thousand for the quarter ended June 30, 2002. This increase in service charges
on deposit accounts is credited to the growth in the Company's deposits as a
result of the marketing promotion.
For the six months ended June 30, 2002, non-interest income increased $1.0
million, or 168.9%, from the same period in 2001. Insurance commissions and fees
income for the first six months of 2002 resulted in an additional $862 thousand
in non-interest income. Service charges on deposit accounts increased $54
thousand for the six-month period ending June 30, 2002 over the same period in
2001. This increase was due to increased fees charged on deposit accounts that
became effective on April 1, 2001 and growth in deposit account activity during
the first six months of 2002 over the first six months of 2001. Investment
brokerage fees increased $62 thousand, or 72.1%, from June 30, 2001 to June 30,
2002. In the first six months of 2002, a $24 thousand gain on the sale of loans
held for sale was recorded compared to a $6 thousand gain on the sale of loans
held for sale during the first six months of 2001.
Non-Interest Expense. For the quarter ended June 30, 2002, non-interest
expense increased $689 thousand from the same period last year. The additional
non-interest expense in the second quarter 2002 attributed to Tri-State totaled
$388 thousand. Net of Tri-State's salaries and employee benefits, the Company's
salaries and employee benefits increased $119 thousand, or 15.8%, from the
addition of three full time equivalent employees and normal salary increases
since the quarter ended June 30, 2001. Other non-interest expense increases from
second quarter 2001 to second quarter 2002, net of Tri-State's expenses, were
advertising and promotion expenses of $65 thousand due to the deposit promotion
which began in the fourth quarter of 2001, furniture and equipment expense of
$43 thousand from computer network upgrades and costs associated with the Bank
subsidiary name change from The Sussex County State Bank to Sussex Bank during
fourth quarter 2001, and other expenses of $46 thousand relative to normal
expenditures attributed to the growth of the Company.
For the six months ended June 30, 2002, non-interest expense increased $1.4
million, to $4.1 million, of which $754 thousand is attributable to Tri-State
and which was not present during the first six months of 2001. Net of Tri-State,
non-interest expenses increased $600 thousand, or 21.6% to $3.4 million for the
first half of 2002 from $ 2.8 million from the first half of 2001. Salaries and
employee benefits increased $242 thousand, or 16.2%, furniture and fixture
expense increased $85 thousand, or 27.4%, and advertising and promotions
increased $124 thousand, or 124.0% during the first six month of 2002 as
compared to the first six months of 2001. As described in the second quarter
analysis above, the same explanations for these increases carry forward for the
first six months of 2002.
Income Taxes. Income tax expense increased $37 thousand to $144 thousand
for the three months ended June 30, 2002 as compared to $107 thousand for the
same period in 2001. Income taxes also increased for the six months ended June
30, 2002 to $237 thousand as compared to $189 thousand for the six months ended
June 30, 2001. The increase in income taxes resulted from a higher level of
income before income taxes in 2002 compared to 2001.
11
FINANCIAL CONDITION
June 30, 2002 as compared to December 31, 2001
Total assets increased to $211.2 million at June 30, 2002, a $7.9 million
increase from total assets of $203.3 million at December 31, 2001. Increases in
total assets include net purchases of $12.9 million in securities available for
sale and $3.0 million in time deposits in other banks. These asset increases
were financed through a reduction in federal funds sold of $13.7 million and an
increase in total deposits of $7.3 million from $178.6 million at year-end 2001
to $185.9 million on June 30, 2002. Total stockholder's equity increased $600
thousand from $12.2 million at December 31, 2001 to $12.8 million at June 30,
2002.
Total loans at June 30, 2002 increased $1.5 million to $107.6 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 non-residential real estate loans increased
$3.7 million from $34.8 million at December 31, 2001 to $38.5 million on June
30, 2002 and commercial and industrial loans increased $1.1 million over the
same six-month period. Construction loans have decreased $2.5 million from $8.5
million at December 31, 2001 to $ 6.0 million on June 30, 2002. 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:
June 30, 2002 December 31, 2001
------------------------------ -----------------------------
Amount Percent Amount Percent
------------------------------ -----------------------------
(Dollars In Thousands)
Commercial and Industrial $ 9,137 8.49% $ 8,065 7.60%
Real Estate-Non Residential Properties 38,479 35.76% 34,811 32.79%
Residential Properties (1-4 Family) 51,230 47.60% 51,433 48.45%
Construction 6,046 5.62% 8,515 8.02%
Loans to Individuals 2,091 1.94% 2,245 2.12%
Other Loans 633 0.59% 1,079 1.02%
-------- ------ -------- ------
Total Loans $107,616 100.00% $106,148 100.00%
======== ====== ======== ======
Federal funds sold decreased by $13.7 million to $21.2 million at June 30,
2001 from $34.9 million on December 31, 2001. Despite the decline in the period
end balances for federal funds sold, the average balance in federal funds sold
for the first half of 2002 was $27.6 million, an increase of $9.5 million over
the average balance of federal funds sold for the first half 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.
These funds were used to purchase investment securities and time deposits in
other banks during the first six months of 2002.
Securities, available for sale, at market value, increased $12.9 million,
or 30.3%, from $42.7 million at year-end 2001 to $55.6 million on June 30, 2002.
The Company purchased $24.6 million in new securities in the first six months of
2002 and $11.8 million in available for sale securities matured, were called and
were repaid. There were $377 thousand in recorded unrealized gains in the
available of sale portfolio and $228 thousand in net amortization expenses
during the first six months of 2002. There were no held to maturity securities
at June 30, 2002 or at year-end 2001.
Total year to date average deposits increased $15.1 million, or 9.1%, to
$181.2 million during the first six 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 $9.6 million, and demand
deposits increased by $1.5 million. Offsetting these increases were decreases in
money market deposits of $3.4 million and time deposits of $6.4 million. As
discussed earlier, the increase in demand, NOW and savings deposits was due to
an ongoing deposit promotion since the forth quarter of 2001. After aggressively
pricing time deposits in the first quarter of 2001, many of those deposits have
since repriced in the first six months of 2002 at lower market rates of interest
and the decrease in the average balance of time deposits reflects the withdrawal
of some of the matured, higher priced 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.
Six Months Ended Twelve Months Ended
June 30, 2002 December 31, 2001
------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
Deposits:
NOW Deposits $ 31,700 17.49% $ 17,885 10.76%
Savings Deposits 59,908 33.06% 50,334 30.30%
Money Market Deposits 3,642 2.01% 7,029 4.23%
Time Deposits 59,093 32.61% 65,486 39.42%
Demand Deposits 26,865 14.83% 25,412 15.29%
------ ----- ------ -----
Total Deposits $181,208 100.00% $166,146 100.00%
======== ====== ======== ======
12
ASSET QUALITY
At June 30, 2002, non-performing loans decreased $935 thousand to $1.6
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 June 30, 2002 the
construction credit has paid down and has a remaining balance of $302 thousand.
Management believes the Bank is adequately collateralized regarding this credit
and does not anticipate a loss.
The following table provides information regarding risk elements in the
loan portfolio:
June 30, 2002 December 31, 2001
------------- -----------------
Non-accrual loans $ 1,559 $ 2,494
Non-accrual loans to total loans 1.45% 2.35%
Non-performing loans to total assets 0.83% 1.32%
Allowance for loan losses as a
percentage of non-performing loans 82.87% 45.83%
Allowance for loan losses to total
loans 1.20% 1.08%
ALLOWANCE FOR LOAN LOSSES
The allowance for 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 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 loan losses.
At June 30, 2002, the allowance for possible loan losses was $1.3 million,
an increase of 13.0% 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 six
months of 2002. The allowance for loan losses as a percentage of total loans was
1.20% at June 30, 2002 compared to 1.08% on December 31, 2001.
LIQUIDITY MANAGEMENT
At June 30, 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 June 30, 2002, liquid investments totaled $31.7 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 June 30, 2002, had the ability to borrow a total of $23.0 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 4.95%, 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 to $12.8 million at June 30, 2002 from
$12.2 million at year-end 2001. Activity in stockholder's equity consisted of a
net increase in retained earnings of $362 thousand derived from $562 thousand in
net income earned during the first half of 2002, offset by $200 thousand in
payments for cash dividends. Unrealized gain on securities, available for sale
of $224 thousand, $25 thousand in stock options exercised and $60 thousand for
shares issued through the dividend reinvestment plan were increases to
stockholder's equity, offset by treasury stock purchases of $105 thousand.
Subsequent to June 30, 2002, the Company raised an additional $4.8 million,
net of offering costs, in tier 1 capital through the issuance of junior
subordinated debentures to a statutory trust subsidiary. The subsidiary in turn
issued $5.0 million in variable rate capital trust pass through securities to
investors in a private placement. The securities bear an initial rate of 5.51%,
which will be adjusted quarterly. The interest rate will be reset based on the
three month LIBOR rate plus 365 basis points. The rate is capped at 12.5%
through the first five years, and the securities may be called at par any time
after October 7, 2007.
At June 30, 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 June 30, 2002 for both the Company and the Bank as well as the
minimum regulatory requirements.
Amount Ratio Amount Minimum Ratio
------ ----- ------ -------------
The Company:
Leverage Capital $10,007 4.86% $ 8,234 4%
Tier 1 - Risk
Based 10,007 8.36% 4,788 4%
Total Risk-Based 11,299 9.44% 9,577 8%
The Bank:
Leverage Capital 9,670 4.70% 8,232 4%
Tier 1
Risk-Based 9,670 8.10% 4,778 4%
Total Risk-Based 10,962 9.18% 9,556 8%
13
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
---------------------------------------------------
On April 24, 2002, the Registrant held its annual meeting of shareholders
to elect members of the Company's Board of Directors whose terms expired.
Nominees for election to the Board of Directors received the following votes:
Nominees: For Withhold Authority
-------- --- ------------------
Richard Scott 1,387,015 4,125
Joseph Zitone 1,387,251 3,890
Item 5. Other Information
------------------
On July 11, 2002 Sussex Capital Trust I, a Delaware statutory business
trust and a wholly-owned subsidiary of the Company, issued $5 million of
variable rate capital trust pass-through securities to investors. Sussex Capital
Trust I purchased $5.1 million of variable rate junior subordinated deferrable
interest debentures from Sussex Bancorp. The debentures are the sole asset of
the Trust. The terms of the junior subordinated debentures are the same as the
terms of the capital securities. Sussex Bancorp has also fully and
unconditionally guaranteed the obligations of the Trust under the capital
securities. The capital securities are redeemable by Sussex Bancorp on or after
October 7, 2007, at par or earlier if the deduction of related interest for
federal income taxes is prohibited, classification as Tier I Capital is no
longer allowed, or certain other contingencies arise. The capital securities
must be redeemed upon final maturity of the subordinated debentures on October
7, 2032. Proceeds totaling approximately $4.8 million were moved to paid in
capital at Sussex Bank. Financing costs related to the Company's issuance of
mandatory redeemable capital debentures will be amortized over a five-year
period and will be included in other assets. After giving effect to the capital
contribution, on a pro forma basis, the Company would have had a leverage ratio
of 6.88%, a tier I risk based capital ratio of 11.82% and a total risk based
capital ratio of 13.62% and the Bank would have had a leverage ratio of 7.03%, a
tier I risk based capital ratio of 12.11% and a total risk based capital ratio
of 13.20%, all in excess of the ratio's required to be deemed "well capitalized"
for regulatory purposes.
Item 6. Exhibits and Report on form 8-K
-------------------------------
(a). Exhibits
Number Description
------ -----------
99 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
April 23, 2002 4 The Registrant announced that it
had replaced Arthur Andersen, LLP
as its independent auditors with
Beard Miller Company LLP.
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
14