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, 2004
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
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
(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 May 11, 2004 there were 1,831,846 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 3
Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 9
Results of Operations and Financial Condition
Item 3. Controls and Procedures 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity 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 15
Exhibits 15
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
ASSETS March 31, 2004 December 31, 2003
------ -------------- -----------------
Cash and due from banks $ 10,027 $ 11,301
Federal funds sold 5,965 4,195
-------- --------
Cash and cash equivalents 15,992 15,496
Interest bearing time deposits with other banks 3,500 3,500
Securities available for sale 76,056 76,545
Federal Home Loan Bank Stock, at cost 760 760
Loans receivable, net of unearned income 138,945 134,374
Less: allowance for loan losses 1,853 1,734
-------- --------
Net loans receivable 137,092 132,640
Premises and equipment, net 4,970 4,650
Accrued interest receivable 1,221 1,241
Goodwill 2,124 2,124
Other assets 5,511 3,661
-------- --------
Total Assets $247,226 $240,617
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 32,376 $ 31,715
Interest bearing demand 180,469 175,942
-------- --------
Total Deposits 212,845 207,657
Borrowings 11,000 11,000
Accrued interest payable and other liabilities 2,435 2,056
Junior redeemable debentures 5,155 --
Mandatory redeemable capital debentures -- 5,000
-------- --------
Total Liabilities 231,435 225,713
Stockholders' Equity:
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding 1,829,888 in 2004 and 1,811,460 in 2003 9,844 9,616
Retained earnings 5,284 5,040
Accumulated other comprehensive income 663 248
-------- --------
Total Stockholders' Equity 15,791 14,904
-------- --------
Total Liabilities and Stockholders' Equity $247,226 $240,617
======== ========
See Notes to Consolidated Financial Statements
-3-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended March 31,
2004 2003
------ ------
INTEREST INCOME
Loans receivable, including fees $2,101 $1,939
Securities:
Taxable 466 523
Tax-exempt 208 165
Federal funds sold 14 45
Interest bearing deposits 10 13
------ ------
Total Interest Income 2,799 2,685
------ ------
INTEREST EXPENSE
Deposits 474 560
Borrowings 133 149
Junior subordinated debentures 60 63
------ ------
Total Interest Expense 667 772
------ ------
Net Interest Income 2,132 1,913
Provision for Loan Losses 148 125
------ ------
Net Interest Income after Provision for Loan Losses 1,984 1,788
------ ------
NON-INTEREST INCOME
Service fees on deposit accounts 191 183
ATM and debit card fees 72 74
Insurance commissions and fees 566 564
Investment brokerage fees 73 63
Mortgage banking fees 165 44
Other 83 67
------ ------
Total Non-Interest Income 1,150 995
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,576 1,286
Occupancy, net 206 175
Furniture, equipment and data processing 202 206
Stationary and supplies 37 47
Professional fees 83 129
Advertising and promotion 87 81
Postage and freight 43 44
Amortization of intangible assets 46 38
Other 348 351
------ ------
Total Non-Interest Expense 2,628 2,357
------ ------
Income before Income Taxes 506 426
Provision for Income Taxes 135 113
------ ------
Net Income $ 371 $ 313
====== ======
Earnings per share
------ ------
Basic $ 0.20 $ 0.18
====== ======
------ ------
Diluted $ 0.19 $ 0.17
====== ======
See Notes to Consolidated Financial Statements
-4-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2004 and 2003
(Unaudited)
Accumulated
Number of Other Total
Shares Common Retained Comprehensive Treasury Stockholders
Outstanding Stock Earnings Income Stock Equity
----------- ----- -------- ------ ----- ------
(Dollars in thousands, except share amounts)
Balance December 31, 2002 1,688,130 $ 7,869 $ 5,249 $ 562 $ -- $ 13,680
Comprehensive income:
Net income -- -- 313 -- -- 313
Change in unrealized gains on securities available
for sale, net of tax -- -- -- (172) -- (172)
--------
Total Comprehensive Income 141
Treasury shares purchased (2,400) -- -- -- (25) (25)
Treasury shares retired -- (25) -- -- 25 --
Exercise of stock options 4,186 35 -- -- -- 35
Shares issued through dividend reinvestment plan 5,546 57 -- -- -- 57
Dividends on common stock ($.07 per share) -- -- (118) -- -- (118)
-------------------------------------------------------------------------
Balance March 31, 2003 1,695,462 $ 7,936 $ 5,444 $ 390 $ -- $ 13,770
=========================================================================
Balance December 31, 2003 1,811,460 $ 9,616 $ 5,040 $ 248 $ -- $ 14,904
Comprehensive income:
Net income -- -- 371 -- -- 371
Change in unrealized gains on securities available
for sale, net of tax -- -- -- 415 -- 415
--------
Total Comprehensive Income 786
Treasury shares purchased (96) -- -- -- (2) (2)
Treasury shares retired -- (2) -- -- 2 --
Exercise of stock options 15,225 140 -- -- -- 140
Income tax benefit of stock options exercised -- 35 -- -- -- 35
Shares issued through dividend reinvestment plan 3,299 55 -- -- -- 55
Dividends on common stock ($.07 per share) -- -- (127) -- -- (127)
-------------------------------------------------------------------------
Balance March 31, 2004 1,829,888 $ 9,844 $ 5,284 $ 663 $ -- 15,791
=========================================================================
See Notes to Consolidated Financial Statements
-5-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
-------- --------
Cash Flows from Operating Activities
Net income $ 371 $ 313
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 148 125
Provision for depreciation and amortization 126 135
Net amortization of securities premiums and discounts 164 277
Earnings on investment in life insurance (27) (13)
(Increase) decrease in assets:
Accrued interest receivable 20 (84)
Other assets (444) (274)
Increase in accrued interest payable and other liabilities 414 232
-------- --------
Net Cash Provided by Operating Activities 772 711
-------- --------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (5,795) (17,381)
Maturities, calls and principal repayments 6,811 13,971
Net increase in loans (4,600) (5,091)
Purchases of bank premises and equipment (446) (76)
Increase in FHLB stock -- 50
Purchase of investment in life insurance (1,500) --
-------- --------
Net Cash Used in Investing Activities (5,530) (8,527)
-------- --------
Cash Flows from Financing Activities
Net increase in deposits 5,188 5,492
Repayment of borrowings -- (1,000)
Proceeds from the exercise of stock options 140 35
Purchase of treasury stock (2) (25)
Dividends paid, net of reinvestments (72) (61)
-------- --------
Net Cash Provided by Financing Activities 5,254 4,441
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents 496 (3,375)
Cash and Cash Equivalents - Beginning 15,496 26,096
-------- --------
Cash and Cash Equivalents - Ending $ 15,992 $ 22,721
======== ========
Supplementary Cash Flows Information
Interest paid $ 667 $ 786
======== ========
Income taxes paid $ -- $ --
======== ========
See Notes to Consolidated Financial Statements
-6-
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The consolidated financial statements include the accounts of Sussex
Bancorp (the "Company") and its wholly-owned subsidiary Sussex Bank (the
"Bank"). The Bank's wholly-owned subsidiaries are Sussex Bancorp Mortgage
Company, Inc., SCB Investment Company, Inc., and Tri-State Insurance Agency,
Inc., ("Tri-State") a full service insurance agency located in Sussex County,
New Jersey. Sussex Bank is also a 49% limited partner of Sussex Settlement
Services, L.P, a title insurance agency whose registered office is located in
King of Prussia, Pennsylvania. All inter-company transactions and balances have
been eliminated in consolidation. The Bank operates eight banking offices all
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") and the operations of Tri-State are subject to the
supervision and regulation by the Department.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for full year
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the three-month period ended March 31,
2004, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2004. 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, 2003.
2. Earnings per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed issuance of
potential common shares that may be issued by the Company relating to
outstanding stock options and guaranteed and contingently issuable shares from
the acquisition of Tri-State. Potential common shares related to stock options
are determined using the treasury stock method.
The following table sets forth the computations of basic and diluted
earnings per share as retroactively adjusted for the 5% stock dividend declared
October 15, 2003 (dollars in thousands, except per share data):
Three Months Ended March 31, 2004 Three Months Ended March 31, 2003
---------------------------------------- ---------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------- ---------------------------------------
Basic earnings per share:
Net income applicable to common
stockholders $371 1,819 $ 0.20 $ 313 1,777 $ 0.18
====== ======
Effect of dilutive securities:
Stock options -- 90 -- 15
Deferred common stock payments for
purchase of insurance agency 1 12 2 41
-------------------- ---------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $372 1,921 $ 0.19 $ 315 1,833 $ 0.17
=================================== ===================================
3. Comprehensive Income
The components of other comprehensive income and related tax effects for
the three months ended March 31, 2004 and 2003 are as follows:
Three Months Ended
---------------------
March 31,
---------------------
2004 2003
----- -----
(In Thousands)
Unrealized holding gains (losses) on available for
sale securities $ 691 ($287)
Less: reclassification adjustments for gains included
in net income -- --
----- -----
Net unrealized gains (losses) 691 (287)
Tax effect (276) (115)
----- -----
Other comprehensive income (loss), net of tax $ 415 ($172)
===== =====
-7-
4. Segment Information
The Company's insurance agency operations are managed separately from the
traditional banking and related financial services that the Company also offers.
The insurance agency operation provides commercial, individual, and group
benefit plans and personal coverage.
Banking and Insurance
Financial Services Services Total
------------------ -------- -----
(In Thousands)
Three Months Ended March 31, 2004
Net interest income and other income $ 2,716 $ 566 $ 3,282
Income before income taxes 442 64 506
Total assets 244,053 3,173 247,226
Three Months Ended March 31, 2003
Net interest income and other income $ 2,344 $ 564 $ 2,908
Income before income taxes 371 55 426
Total assets 228,050 2,668 230,718
5. Stock Option Plans
The Company accounts for stock option plans under the recognition and
measurement principles of APB Opinion No. 25. "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the Company's
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation for the periods presented:
Three Months Ended
-------------------------
March 31,
-------------------------
2004 2003
------- -------
(In Thousands)
Net income, as reported $ 371 $ 313
Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects (29) (6)
------- -------
Pro forma net income $ 342 $ 307
======= =======
Basic earnings per share:
As reported $ 0.20 $ 0.18
Pro forma $ 0.19 $ 0.17
Diluted earnings per share:
As reported $ 0.19 $ 0.17
Pro forma $ 0.18 $ 0.17
6. Guarantees
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all letters
of credit, when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as those that are
involved in extending loan facilities to customers. The Company, generally,
holds collateral and/or personal guarantees supporting these commitments. The
Company had $914,000 of standby letters of credit as of March 31, 2004.
Management believes that the proceeds obtained through a liquidation of
collateral and the enforcement of guarantees would be sufficient to cover the
potential amount of future payment required under the corresponding guarantees.
The current amount of the liability as of March 31, 2004 for guarantees under
standby letters of credit issued is not material.
7. New Accounting Standard
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003. The
Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). Sussex capital Trust I qualifies as a variable interest entity
under FIN 46. Sussex Capital Trust issued mandatory redeemable preferred
securities (Trust Preferred Securities) to third-party investors and loaned the
proceeds to the Company. Sussex Capital Trust I holds, as it sole asset,
subordinated debentures issued by the Company.
FIN 46 required the Company to deconsolidate Sussex Capital Trust I from
the consolidated financial statements as of March 31, 2004. There has been no
restatement of prior periods. The impact of this deconsolidation was to increase
junior subordinated debentures or long-term debt by $5,155,000 and reduce the
mandatory capital debentures line item by $5,000,000 which had represented the
trust preferred securities of the trust. The Company's equity interest in the
trust subsidiary of $155,000, which had previously been eliminated in
consolidation, is now reported in "Other assets" as of March 31, 2004. For
regulatory reporting purposes, the Federal Reserve Board has indicated that the
preferred securities will continue
-8-
to qualify as Tier I Capital subject to previously specified limitations, until
further notice. If regulators make a determination that Trust Preferred
Securities can no longer be considered in regulatory capital, the securities
become callable and the Company may redeem them. The adoption of FIN 46 did not
have an impact on the Company's results of operations or liquidity.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months ended March 31, 2004 and March 31, 2003
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies is included in
Note 1 to the consolidated financial statements of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2003. Some of these policies are
particularly sensitive, requiring significant judgments, estimates and
assumptions to be made by management, most particularly in connection with
determining the provision for loan losses and the appropriate level of the
allowance for loan losses. Additional information is contained on pages 10 and
12 of this Form 10-QSB for the provision and allowance for loan losses.
FORWARD LOOKING STATEMENTS
When used in this discussion, the words "believes", "anticipates",
"contemplated", "expects", or similar expressions are intended to identify
forward looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Those risks and uncertainties include changes in interest rates, the
ability to control costs and expenses, general economic conditions and economic
conditions in the Company's Sussex, New Jersey marketplace. The Company
undertakes no obligation to update those forward looking statements to reflect
the occurrence of unanticipated events or otherwise.
OVERVIEW
The Company realized net income of $371 thousand for the first quarter of
2004, an increase of $58 thousand from the $313 thousand reported for the same
period in 2003. Basic earnings per share, as retroactively adjusted for the 5%
stock dividend declared October 15, 2003, increased from $0.18 in the first
quarter of 2003 to $0.20 for the first quarter of 2004. Diluted earnings per
share were $0.17 in the first quarter of 2003 and increased to $0.19 in the
first quarter of 2004.
The results reflect an increase in net interest income, primarily a result
of decreasing interest expense due to declining market rates of interest,
coupled with increases in non-interest income, primarily due to an increase in
mortgage banking fees from our residential lending division, partially offset by
increases in non-interest expenses associated with additions to staff and higher
related salary and benefit expenses.
RESULTS OF OPERATIONS
Interest Income. Total interest income increased $114 thousand, or 4.2%,
to $2.8 million for the quarter ended March 31, 2004 from the same period in
2003. This increase was primarily attributable to an increase of $11.3 million,
or 5.4%, in the average earning assets to $219.5 million in the first quarter of
2004 from $208.2 million in the same quarter of 2003. The average yield on
earning assets decreased 8 basis points, on a fully taxable equivalent basis, to
5.29% during the first quarter of 2004 from 5.37% in the first quarter of 2003.
Interest income on loans increased $162 thousand from $1.9 million in the first
quarter 2003 to $2.1 million during the same period in 2004, while the average
balance of total loans receivable increased $20.4 million, or 17.7%, from $115.0
million during the first quarter of 2003 to $135.3 million for the same quarter
in 2004. The interest earned on other interest bearing assets declined $41
thousand while the average balance in other interest earning assets decreased by
$9.1 million, or 47.2%, to $10.2 million from $19.3 million from the first
quarter of 2003, primarily reflecting a decline in federal funds sold. The
volume increases in average balances exceeded the impact of market declines in
interest rates, resulting in an increase in interest income for the first
quarter of 2004 compared to the first quarter if 2003.
Interest Expense. The Company's interest expense for the first quarter of
2004 decreased $105 thousand, or 13.6%, to $667 thousand from $772 thousand in
the first quarter of 2003. Despite the decline in interest expense, the average
balance of interest bearing liabilities increased $9.9 million, or 5.4% to
$193.7 million during the first quarter of 2004 from $183.7 million in the same
period of 2003. 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 1.39% for the first quarter of 2004 from 1.70% in the first
quarter of 2003. NOW deposit average balances grew $7.1 million, or 16.5%, from
$42.8 million during the first quarter 2003 to $49.8 million in the first
quarter of 2004. However, the interest expense on NOW deposits decreased $9
thousand from the first quarter of 2003, as the average interest rate paid
decreased 17 basis points from 0.65% to 0.48% during the same period. Average
savings deposits increased $2.2 million, or 3.5%, while the average rate paid
declined 26 basis points from 0.91% in the first quarter of 2003 to 0.65% in the
first quarter of 2004. The average balance in time deposits increased $4.6
million or 8.6%, in the first quarter of 2004 compared to the same period in
2003, with the largest portion of the increase, $2.5 million in personal time
deposits of $100,000 and over. The interest expense on time deposits declined
$37 thousand, or 10.9% to $303 thousand between the first quarter of 2004 and
the first quarter of 2003 due to the average rate paid falling 48 basis points
to 2.10% for the first quarter of 2004 from 2.58% during the same period in
2003. The increase in NOW and savings account average balances reflects
management's continued efforts to promote low cost transaction accounts. Time
deposit account balances increased due to the Company's competitive pricing to
lengthen their liability portfolio maturities. Average borrowed funds and
debenture balances decreased $3.3 million to $16.0 million in the first quarter
of 2004 from $19.3 million in the first quarter of 2003, due to the maturity of
short-term advances from
-9-
the Federal Home Loan Bank. At March 31, 2004, the Company's borrowed funds
consisted of one $1.0 million short-tem FHLB advance and three convertible notes
from the FHLB totaling $10.0 million. In the third quarter of 2002, the Company
issued $5.2 million in junior subordinated debentures. The debentures bear a
floating rate of interest, which averaged 4.83% in the first quarter of 2004,
down 28 basis points from 5.11% in the first quarter of 2003.
The following table presents, on a fully taxable 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, 2004 and 2003. The average balance of loans
includes non-accrual loans, and associated yields include loan fees, which are
considered adjustment to yields.
Three Months Ended March 31,
(dollars in thousands) 2004 2003
---------------------------------------------------------------------------------------------------------------
Average Average Average Average
Earning Assets: Balance Interest(1) Rate (2) Balance Interest(1) Rate (2)
---------------------------------------------------------------------------------------------------------------
Securities:
Tax exempt (3) $ 22,262 $ 296 5.35% $ 15,777 $ 234 6.02%
Taxable 51,680 460 3.58% 58,073 509 3.55%
-------------------------------------------------------------------------------------------------------------
Total securities 73,942 756 4.11% 73,850 743 4.08%
Taxable loans: (net of unearned income)
Mortgage and construction 87,224 1,394 6.43% 68,089 1,196 7.12%
Commercial 21,615 300 5.58% 16,261 228 5.69%
Consumer 26,496 407 6.18% 30,634 515 6.82%
-------------------------------------------------------------------------------------------------------------
Total loans receivable (4) 135,335 2,101 6.24% 114,984 1,939 6.84%
Other interest-earning assets 10,211 31 1.22% 19,345 72 1.51%
-------------------------------------------------------------------------------------------------------------
Total earning assets 219,488 $2,887 5.29% 208,179 $2,754 5.37%
Non-interest earning assets 24,031 20,864
Allowance for loan losses (1,777) (1,419)
--------------------------------------------------- --------
Total Assets $241,742 $227,624
=================================================== ========
Sources of Funds:
Interest bearing deposits:
NOW $ 49,813 $ 59 0.48% $42,756 $ 68 0.65%
Money market 4,211 6 0.57% 4,859 10 0.83%
Savings 65,636 106 0.65% 63,410 142 0.91%
Time 58,003 303 2.10% 53,399 340 2.58%
-------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 177,663 474 1.07% 164,424 560 1.38%
Borrowed funds 11,000 133 4.86% 14,300 149 4.23%
Junior subordinated debentures 5,000 60 4.83% 5,000 63 5.11%
-------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 193,663 $ 667 1.39% 183,724 $ 772 1.70%
Non-interest bearing liabilities:
Demand deposits 30,865 27,838
Other liabilities 2,087 2,273
--------------------------------------------------- --------
Total non-interest bearing liabilities 32,952 30,111
Stockholders' equity 15,127 13,789
--------------------------------------------------- --------
Total Liabilities and Stockholders'
Equity $241,742 $227,624
=================================================== ========
---------------------------------------- ---------------- ----------------
Net Interest Income and Margin (5) $2,220 4.07% $1,982 3.86%
======================================== ================ ================
(1) Includes loan fee income
(2) Average rates on securities are calculated on amortized costs
(3) Full taxable equivalent basis, using a 39% effective tax rate and adjusted
for "TEFRA" disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid,
divided by average total interest-earning assets
Net-Interest Income. On a fully taxable equivalent basis, the net interest
income for the first quarter of 2004 increased $238 thousand over the same
period last year. This increase was largely the result of the rate for total
interest bearing liabilities decreasing 31 basis points to 1.39% in the first
three month of 2004 from 1.70% in the same period of 2003, as the yield on total
earning assets decreased only 8 basis points during the same two first quarter
periods. The increase in the volume of earning assets also exceeded the increase
in the volume of interest bearing liabilities by $370 thousand. The net interest
margin increased, on a fully taxable equivalent basis, by 21 basis points to
4.07% in the first quarter of 2004 compared to 3.86% the year earlier.
Provision for Loan Losses. For the three months ended March 31, 2004 the
provision for loan losses was $148 thousand compared to $125 thousand for the
quarter ended March 31, 2003. The Company's loan portfolio has shifted from
loans secured by residential properties toward loans secured by non-residential
properties from the first quarter of 2003 to the same period in 2004. 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 additional provisions, as management may deem
necessary.
-10-
Non-Interest Income. For the first quarter of 2004, total non-interest
income increased $155 thousand, or 15.6%, from the same period in 2003. The
majority of this increase is attributed to the Company's new residential lending
division which began operation in the third quarter of 2003. In the first
quarter of 2004 mortgage banking fees increased $121 thousand, or 275.0%, from
$44 thousand reported in the first quarter of 2003 to $165 thousand for the
quarter ended March 31, 2004. Investment brokerage fee income increased $10
thousand, or 15.9%, from $63 thousand in the first quarter of 2003 to $73
thousand the quarter ended March 31, 2004.
Non-Interest Expense. For the quarter ended March 31, 2004, non-interest
expense increased $271 thousand from the same period last year. This increase is
attributed to the increase of the Company's salaries and employee benefits of
$290 thousand, or 22.6%, for the addition of eight full time equivalent
employees and commissions paid on the residential mortgage banking activity.
Professional fees decreased from first quarter 2003 to first quarter 2004 by $46
thousand. In the first quarter of 2003, $36 thousand had been expensed for
reviewing the expansion of our insurance operations. Occupancy expense has
increased $31 thousand in the first quarter of 2004 over the same period in 2003
due to a new lease agreement for office space at Sterling Plaza, Franklin, New
Jersey, which is being rented to accommodate the Company's growth and expansion
needs.
Income Taxes. Income tax expense increased $22 thousand to $135 thousand
for the three months ended March 31, 2004 as compared to $113 thousand for the
same period in 2003. This increase in income taxes resulted from an increase in
income before taxes of $80 thousand from the quarter ended March 31, 2003 to the
first quarter in 2004.
FINANCIAL CONDITION
March 31, 2004 as compared to December 31, 2003
Total assets increased to $247.2 million at March 31, 2004, a $6.6 million
increase from total assets of $240.6 million at December 31, 2003. Increases in
total assets include increases of $4.5 million in net loans, $1.8 million in
federal funds sold and $1.7 million in other assets, partially offset by a $489
thousand reduction in securities available for sale and a $1.3 million decline
in cash and due from banks. Asset increases were financed through an increase in
total deposits of $5.2 million from $207.7 million at year-end 2003 to $212.8
million on March 31, 2004. Total stockholder's equity increased $887 thousand
from $14.9 million at December 31, 2003 to $15.8 million at March 31, 2004.
Total loans at March 31, 2004 increased $4.6 million to $138.9 million
from $134.4 million at year-end 2003. During the three-month period ending March
31, 2004, new originations have exceeded payoffs both through scheduled
maturities and prepayments. The Company continues to see significant prepayment
activity as borrowers seek to refinance loans in the current low interest rate
environment. 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 Company has also increased its activity in the loan
participation market: originations, purchases and sold. The majority of the
originated and sold participations are commercial real estate related loans
which exceed the Company's legal lending limit. The balance in non-residential
real estate loans increased $3.2 million from $59.2 million at December 31, 2003
to $62.4 million on March 31, 2004, construction and land development loans
increased $2.5 million and commercial and industrial loans increased $805
thousand over the same three-month period. Residential 1-4 family real estate
loans have decreased $1.7 million from December 31, 2003 to March 31, 2004.
Federal funds sold increased by $1.8 million to $6.0 million at March 31,
2004 from $4.2 million on December 31, 2003. During the first three months of
2004, these funds were provided by the increase in total deposits and will be
used to fund increased loan demand.
Securities, available for sale, at market value, decreased $489 thousand
from $76.5 million at year-end 2003 to $76.1 million at March 31, 2004. The
Company purchased $5.8 million in new securities in the first three months of
2004 and $6.8 million in available for sale securities matured, were called and
were repaid. There was a $691 thousand increase in unrealized gains in the
available for sale portfolio and $164 thousand in net amortization expenses
recorded during the first three months of 2004. There were no held to maturity
securities at March 31, 2004 or at December 31, 2003.
Total deposits increased $5.2 million, or 2.5%, to $212.8 million during
the first three months of 2004 from $207.7 million at December 31, 2003.
Non-interest bearing deposits increased $660 thousand to $32.4 million at March
31, 2004 from $31.7 million at December 31, 2003, interest-bearing and savings
deposits increased $2.2 million, or 1.9%, and total time deposits increased $2.3
million, or 4.1%, from December 31, 2003 to March 31, 2004. Time deposits have
experienced the largest percentage of growth due to the Company competitively
pricing its time deposits and the majority of this growth was in the $100,000
and over time deposit category. Management continues to monitor the shift in
deposits through its Asset/Liability Committee.
LOAN AND ASSET QUALITY
Non-performing assets consist of non-accrual loans and all loans over
ninety days delinquent and foreclosed real estate owned ("OREO"). At March 31,
2004, non-accrual loans incurred a net increase of $553 thousand to $1.7
million, as compared to $1.2 million at December 31, 2003. The majority of this
net increase resulted from one borrower with two related loans secured by real
estate totaling $655 thousand moving into non-accrual status as another
commercial real estate loan for $242 thousand became current and was removed
from non-accrual during the first quarter of 2004. The $655 thousand that was
added to non-accrual during the first quarter was subsequently paid off on April
29, 2004. There were no loans ninety days past due and still accruing or
renegotiated loans at March 31, 2004. The Company had $223 thousand in OREO
properties at March 31, 2004 and at December 31, 2003. In addition to active
monitoring and collecting on delinquent loans management has an active loan
review process for customers with aggregate relationships of $250,000 or more if
the credit(s) are unsecured or secured, in whole or substantial part, by
collateral other than real estate and $1,000,000 or more if the credit(s) are
secured, in whole or substantial part, by real estate. Management continues to
monitor the Company's asset quality and believes that the non-accrual loans are
adequately collateralized or anticipated material losses have been adequately
reserved for in the allowance for loan losses.
The following table provides information regarding risk elements in the loan
portfolio:
-11-
March 31, 2004 December 31, 2003
-------------- -----------------
(Dollars In Thousands)
Non-accrual loans $1,730 $1,177
Non-accrual loans to total loans 1.25% 0.88%
Non-performing assets to total assets 0.79% 0.63%
Allowance for loan losses
as a % of non-performing loans 107.11% 130.67%
Allowance for possible loan losses to total loans 1.33% 1.29%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. The allowance is allocated to specific
loan categories based upon management's classification of problem loans under
the bank's internal loan grading system and to pools of other loans that are not
individually analyzed. Management makes allocations to specific loans based on
the present value of expected future cash flows or the fair value of the
underlying collateral for impaired loans and to other classified loans based on
various credit risk factors. These factors include collateral values, the
financial condition of the borrower and industry and current economic trends.
Allocations to commercial loan pools are categorized by commercial loan
type and are based on management's judgment concerning historical loss trends
and other relevant factors. Installment and residential mortgage loan
allocations are made at a total portfolio level based on historical loss
experience adjusted for portfolio activity and current conditions. Additionally,
all other delinquent loans are grouped by the number of days delinquent with
this amount assigned a general reserve amount.
At March 31, 2004, the allowance for loan losses was $1.9 million, an
increase of 6.9% from the $1.7 million at year-end 2003. The provision for loan
losses was $148,000 and there were $29,000 in charge offs and no recoveries
reported in the first three months of 2004. The allowance for loan losses as a
percentage of total loans was 1.33% at March 31, 2004 compared to 1.29% on
December 31, 2003.
INTEREST RATE SENSITIVITY
An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. Interest rate sensitivity is the
volatility of a company's earnings from a movement in market interest rates.
Interest rate "gap" analysis is a common, though imperfect, measure of interest
rate risk. We do not employ gap analysis as a rate risk management tool, but
rather we rely upon earnings at risk analysis to forecast the impact on our net
interest income of instantaneous 100 and 200 basis point increases and decreases
in market rates. In assessing the impact on earnings, the rate shock analysis
assumes that no change occurs in our funding sources or types of assets in
response to the rate change.
Our financial modeling simulates our cash flows, interest income and
interest expense from earning assets and interest bearing liabilities in each of
the different interest rate environments, using actual individual deposit, loan
and investment maturities and rates in the model calculations. Assumptions
regarding the likelihood of prepayments on residential mortgage loans and
investments are made based on historical relationships between interest rates
and prepayments. Commercial loans with prepayment penalties are assumed to pay
on schedule to maturity. In actual practice, commercial borrowers may request
and be granted interest rate reductions during the life of a commercial loan due
to competition from financial institutions and declining interest rates. The
interest rate sensitivity of the Company's assets and liabilities, and the
impact on net interest income would vary substantially if different assumptions
were used or if actual experience differs from that indicated by the
assumptions.
The following table sets forth the Company's interest rate risk profile at
March 31, 2004 and 2003.
March 31, 2004 March 31, 2003
------------------------------------------------------------------------------------------------------
Change in Gap as a Change in Gap as a
Net Interest % of Net Interest % of
Dollars In Thousands Income Total Assets Income Total Assets
------------------------------------------------------------------------------------------------------
Down 200 basis points ($569) 11.53% ($198) 4.30%
Down 100 basis points (179) 7.26% (53) 2.31%
Up 100 basis points (206) -8.34% (182) -7.89%
Up 200 basis points (526) -10.67% (425) -9.22%
------------------------------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
It is management's intent to fund future loan demand primarily with
deposits and maturities and paydowns on investments. In addition, the Bank is a
member of the Federal Home Loan Bank of New York and as of March 31, 2004, had
the ability to borrow up to $17.1 million against its one to four family
mortgages and selected investment securities as collateral for borrowings. The
Bank also has available an overnight line of credit and a one-month overnight
repricing line of credit, each in the amount of $11.8 million at the Federal
Home Loan Bank and an overnight line of credit in the amount of $4 million at
the Atlantic Central Bankers Bank. The Company at March 31, 2004 had borrowings
totaling $11 million secured by the pledge of its one to four family mortgages
and selected securities. One short-term borrowing has a maturity in July of 2004
with an interest rate of 3.01%. The remaining $10 million in borrowings consist
of three notes that mature on December 21, 2010 with a convertible quarterly
option which allows the Federal Home Loan Bank to change the note to then
current market rates. The interest rates on these three borrowings range from
4.77% to 5.14%.
-12-
At March 31, 2004, 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, 2004, liquid investments totaled $16.0 million, and
all mature within 30 days.
The following table represents the Company's contractual obligations to
make future payments.
Payments due by period
------------------------------------------------------------------------------------------------------------
Less than More than
(In Thousands) Total 1 year 1-3 years 3-5 years 5 years
------------------------------------------------------------------------------------------------------------
Borrowings $11,000 $1,000 $ -- $ -- $10,000
Operating lease obligations 859 229 356 153 121
Purchase obligations 746 746 -- -- --
Time deposits 58,791 45,530 10,247 2,541 473
Junior subordinated debentures 5,155 -- -- -- 5,155
-----------------------------------------------------------------------------------------------------------
Total $76,551 $47,505 $10,603 $2,694 $15,749
===========================================================================================================
The Company has no investment in or financial relationship with any
unconsolidated entities that are reasonably likely to have a material effect on
liquidity or the availability of capital resources.
The Company is not aware of any known trends or any known demands,
commitments, events or uncertainties, which would result in any material
increase or decrease in liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's financial statements do not reflect off-balance sheet
arrangements that are made in the normal course of business. These off-balance
sheet arrangements consist of unfunded loans and letters of credit made under
the same standards as on-balance sheet instruments. These unused commitments, at
March 31, 2004 totaled $31,485,000. This consisted of $7,159,000 in commercial
construction lines of credit, $7,531,000 in commercial lines of credit,
$8,628,000 in home equity lines of credit, $5,270,000 in commitments to grant
commercial and residential loans and the remainder in other unused commitments.
These instruments have fixed maturity dates, and because many of them will
expire without being drawn upon, they do not generally present any significant
liquidity risk to the Company.
Management believes that any amounts actually drawn upon can be funded in
the normal course of operations. The Company has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity or the availability of capital resources.
CAPITAL RESOURCES
Total stockholders' equity increased $887 thousand to $15.8 million at
March 31, 2004 from $14.9 million at year-end 2003. Activity in stockholders'
equity consisted of a net increase in retained earnings of $244 thousand derived
from $371 thousand in net income earned during the first three months of 2004,
offset by $127 thousand for the payment of the January 2004 cash
dividend. Other increases were $175 thousand in stock options exercised, $55
thousand for shares issued through the dividend reinvestment plan, an unrealized
gain on securities available for sale, net of income tax, of $415 thousand.
On July 11, 2002, the Company raised an additional $4.8 million, net of
offering costs, in 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 interest rate is based on the three-month LIBOR rate plus
365 basis points and is adjusted quarterly. Beginning April 7, 2004, the new
quarterly rate of interest on the debentures will be 4.79%. 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, or if the regulatory capital or tax treatment of
the securities is substantially changed. These trust preferred securities are
included in the Company's and the Bank's capital ratio calculations.
At March 31, 2004 the Company and the Bank both meet the well-capitalized
regulatory standards applicable to them. The table below presents the capital
ratios at March 31, 2004, for the Company and the Bank, as well as the minimum
regulatory requirements.
(Dollars In Thousands) Amount Ratio Amount Minimum Ratio
-------------- ------ ----- ------ -------------
The Company:
Leverage Capital $17,457 7.32% $> 9,545 4%
-
Tier 1 - Risk Based 17,457 11.10% > 6,291 4%
-
Total Risk-Based 19,312 12.28% > 12,582 8%
-
The Bank:
Leverage Capital 16,794 7.04% > 9,541 4%
-
Tier 1 Risk-Based 16,794 10.71% > 6,271 4%
-
Total Risk-Based 18,649 11.90% > 12,542 8%
-
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the
-13-
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures are, as of the end of the period covered by
this report, effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC
filings.
(b) Changes in internal controls.
Not applicable
PART 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 and Small Business Issuer Purchases of Equity
Securities
There were no changes in securities. The following table provides
information about the Company's common stock repurchases during the first
quarter of 2004:
Maximum
Total Number Number of
of Shares Shares that
Purchased as May Yet Be
Total Number Part of Publicly Purchased
of Shares Average Price Announced Plans Under the Plans
Period Purchased Paid per Share or Programs or Programs
------ --------- -------------- ----------- -----------
January 1, 2004 through
January 31, 2004 96 $16.49 96 19,242
February 1, 2004 through
February 29, 2004 -- -- -- --
March 1, 2004 through
March 31, 2004 -- -- -- --
---------------------------------------------------------------------
Total 96 $16.49 96 19,242
On April 16, 1999 the Company announced a stock repurchase plan whereby the
Company may repurchase up to 50,000 shares of outstanding stock. There is no
expiration date to this plan.
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
Number Description
------ -----------
31.1 Certification of Donald L Kovach pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Candace A. Leatham pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
January 22, 2004 7 Press release announcing earnings for
the year end December 31, 2003.
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
By: /s/ Candace A. Leatham
----------------------
CANDACE A. LEATHAM
Executive Vice President and
Chief Financial Officer
Date:
-14-