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, 2005
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
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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 May 6, 2005 there were 3,016,618 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 18
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 18
Exhibits 19
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
--------------------
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS March 31, 2005 December 31, 2004
------ -----------------------------------
Cash and due from banks $9,922 $10,434
Federal funds sold 12,800 18,860
---------- ----------
Cash and cash equivalents 22,722 29,294
Interest bearing time deposits with other banks 500 3,900
Securities available for sale 75,509 74,736
Federal Home Loan Bank Stock, at cost 700 690
Loans receivable, net of unearned income 166,639 156,916
Less: allowance for loan losses 1,828 2,274
---------- ----------
Net loans receivable 164,811 154,642
Premises and equipment, net 5,952 5,618
Accrued interest receivable 1,409 1,330
Goodwill 2,334 2,334
Other assets 6,282 5,731
---------- ----------
Total Assets $280,219 $278,275
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $31,934 $34,451
Interest bearing 196,020 195,376
---------- ----------
Total Deposits 227,954 229,827
Borrowings 14,000 10,000
Accrued interest payable and other liabilities 1,569 1,641
Junior subordinated debentures 5,155 5,155
---------- ----------
Total Liabilities 248,678 246,623
Stockholders' Equity:
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding 3,007,408 in 2005 and 2,994,874 in 2004 25,496 25,397
Retained earnings 6,426 6,116
Accumulated other comprehensive income (loss) (381) 139
---------- ----------
Total Stockholders' Equity 31,541 31,652
---------- ----------
Total Liabilities and Stockholders' Equity $280,219 $278,275
========== ==========
See Notes to Consolidated Financial Statements
-3-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended March 31,
----------------------------
2005 2004
---------- ----------
INTEREST INCOME
Loans receivable, including fees $2,620 $2,101
Securities:
Taxable 447 466
Tax-exempt 293 208
Federal funds sold 40 14
Interest bearing deposits 23 10
---------- ----------
Total Interest Income 3,423 2,799
---------- ----------
INTEREST EXPENSE
Deposits 578 474
Borrowings 131 133
Junior subordinated debentures 78 60
---------- ----------
Total Interest Expense 787 667
---------- ----------
Net Interest Income 2,636 2,132
PROVISION FOR LOAN LOSSES 135 148
---------- ----------
Net Interest Income after Provision for Loan Losses 2,501 1,984
---------- ----------
OTHER INCOME
Service fees on deposit accounts 236 191
ATM fees 83 72
Insurance commissions and fees 595 566
Mortgage banking fees 58 165
Investment brokerage fees 64 73
Other 65 83
---------- ----------
Total Other Income 1,101 1,150
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 1,594 1,576
Occupancy, net 255 206
Furniture and equipment 251 202
Stationary and supplies 48 37
Professional fees 115 83
Advertising and promotion 116 87
Insurance 42 35
Postage and freight 45 43
Amortization of intangible assets 64 46
Other 373 313
---------- ----------
Total Other Expenses 2,903 2,628
---------- ----------
Income before Income Taxes 699 506
PROVISION FOR INCOME TAXES 179 135
---------- ----------
Net Income $520 $371
========== ==========
EARNINGS PER SHARE
---------- ----------
Basic $0.17 $0.20
========== ==========
---------- ----------
Diluted $0.17 $0.19
========== ==========
See Notes to Consolidated Financial Statements
-4-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2005 and 2004
(Dollars in thousands, except share amounts)
(Unaudited)
Accumulated
Number of Other Total
Shares Common Retained Comprehensive Treasury Stockholders'
Outstanding Stock Earnings Income (Loss) Stock Equity
----------- ----- -------- ------------- ----- ------
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
================================================================================
Balance December 31, 2004 2,994,874 $25,397 $6,116 $139 $ -- $31,652
Comprehensive income:
Net income -- -- 520 -- -- 520
Change in unrealized losses on securities
available for sale, net of tax -- -- -- (520) -- (520)
--------
Total Comprehensive Income --
Exercise of stock options 9,621 50 -- -- -- 50
Income tax benefit of stock options exercised -- 31 -- -- -- 31
Shares issued through dividend reinvestment plan 2,913 43 -- -- -- 43
Additional expenses for stock offering (25) (25)
Dividends on common stock ($.07 per share) -- -- (210) (210)
--------------------------------------------------------------------------------
Balance March 31, 2005 3,007,408 $25,496 $6,426 ($381) $ -- $31,541
================================================================================
See Notes to Consolidated Financial Statements
-5-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2005 2004
---------- ----------
Cash Flows from Operating Activities
Net income $520 $371
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 135 148
Provision for depreciation and amortization 229 126
Net amortization of securities premiums and discounts 68 164
Earnings on investment in life insurance (20) (27)
(Decrease) increase in assets:
Accrued interest receivable (79) 20
Other assets 23 (444)
(Increase) decrease in accrued interest payable and other liabilities (41) 414
---------- ----------
Net Cash Provided by Operating Activities 835 772
---------- ----------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (4,395) (5,795)
Maturities, calls and principal repayments 2,686 6,811
Net increase in loans (10,574) (4,600)
Purchases of premises and equipment (499) (446)
Decrease (increase) in FHLB stock (10) --
Net (increase) decrease in interest bearing time deposits with other banks 3,400 --
Purchase of investment in life insurance -- (1,500)
---------- ----------
Net Cash Used in Investing Activities (9,392) (5,530)
---------- ----------
Cash Flows from Financing Activities
Net increase (decrease) in deposits (1,873) 5,188
Increase in borrowings 4,000 --
Proceeds from the exercise of stock options 50 140
Purchase of treasury stock -- (2)
Expenses paid related to stock offering (25) --
Dividends paid, net of reinvestments (167) (72)
---------- ----------
Net Cash Provided by Financing Activities 1,985 5,254
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (6,572) 496
Cash and Cash Equivalents - Beginning 29,294 15,496
---------- ----------
Cash and Cash Equivalents - Ending $22,722 $15,992
========== ==========
Supplementary Cash Flows Information
Interest paid $780 $667
========== ==========
Income taxes paid $-- $--
========== ==========
Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans $270 $--
========== ==========
See Notes to Consolidated Financial Statements
-6-
Notes to Consolidated Financial Statements (Unaudited)
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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. All inter-company transactions and balances have been eliminated in
consolidation. 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. 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,
2005, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. 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, 2004.
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.
Three Months Ended March 31, 2005 Three Months Ended March 31, 2004
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
(In thousands, except per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------- -------------------------------------
Basic earnings per share:
Net income applicable to common stockholders $520 3,003 $0.17 $371 1,819 $0.20
======= =======
Effect of dilutive securities:
Stock options -- 46 -- 90
Deferred common stock payments for
purchase of insurance agency -- -- 1 12
---------------------------------------------------------------------------- --------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $520 3,049 $0.17 $372 1,921 $0.19
========================================================================================= =================================
3. Comprehensive Income
--------------------
The components of other comprehensive income (loss) and related tax
effects for the three months ended March 31, 2005 and 2004 are as follows:
-7-
Three Months Ended March 31,
(Dollars in thousands) 2005 2004
--------------------------------------------------------------------------------- ----------
Unrealized holding gains (losses) on available for sale securities ($868) $691
Less: reclassification adjustments for gains included in net income -- --
--------------------------------------------------------------------------------- ----------
Net unrealized gains (losses) (868) 691
Tax effect 348 (276)
--------------------------------------------------------------------------------- ----------
Other comprehensive income (loss), net of tax ($520) $415
================================================================================= ==========
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.
Three Months Ended March 31, 2005 Three Months Ended March 31, 2004
------------------------------------------- -------------------------------------------
Banking and Insurance Banking and Insurance
(Dollars in thousands) Financial Services Services Total Financial Services Services Total
-------------------------------------------------------------------------------------- -------------------------------------------
Net interest income from external sources $2,636 $-- $2,636 $2,132 $-- $2,132
Other income from external sources 506 595 1,101 584 566 1,150
Depreciation and amortization 186 43 229 101 25 126
Income before income taxes 677 22 699 442 64 506
Income tax expense 170 9 179 109 26 135
Total assets 277,039 3,180 280,219 244,053 3,173 247,226
-------------------------------------------------------------------------------------- -------------------------------------------
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,
(Dollars in thousands) 2005 2004
------------------------------------------------------------------------------- -----------
Net income, as reported $520 $371
Total stock-based compensation expense determined under fair value
based method for all awards, net of related tax effects (153) (29)
------------------------------------------------------------------------------- -----------
Pro forma net income $367 $342
=============================================================================== ===========
Basic earnings per share:
As reported $0.17 $0.20
Pro forma $0.12 $0.19
Diluted earnings per share:
As reported $0.17 $0.19
Pro forma $0.12 $0.18
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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 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 $507,000 of standby letters of credit as of March 31, 2005.
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, 2005 for guarantees under
standby letters of credit issued is not material.
-8-
7. New Accounting Standard
-----------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) replaces
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Statement No. 123(R)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
service in exchange for the award. Public companies are required to adopt the
new standard using a modified prospective method and may elect to restate prior
periods using the modified retrospective method. Under the modified prospective
method, companies are required to record compensation cost for new and modified
awards over the related vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion, at the date of
adoption, of previously issued and outstanding awards over the remaining vesting
period of such awards. No change to prior periods presented is permitted under
the modified prospective method. Under the modified retrospective method,
companies record compensation costs for prior periods retroactively through
restatement of such period using the exact pro forma amounts disclosed in the
companies' footnotes. Also, in the period of adoption and after, companies
record compensation cost based on the modified prospective method. Statement No.
123(R) is effective for periods beginning after December 15, 2005 (i.e. first
quarter 2006 for the Company). Early application of Statement No. 123(R) is
encouraged, but not required.
The Company will adopt the modified prospective method. Using the modified
prospective method, the Company estimates that total stock-based compensation
expense, based on awards currently outstanding that will vest in 2006, net of
related tax effects, will be $94,000 for the year ending December 31, 2006.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No.
107"), "Shared-Based Payment", providing guidance on option valuation methods,
the accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R) on January 1, 2006.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
-------------
MANAGEMENT STRATEGY
-------------------
The Company's goal is to serve as a community-oriented financial
institution serving the Northwestern New Jersey, Northeastern Pennsylvania and
New York tri-state marketplace. Our market presence has been expanded by opening
loan production offices in early 2005 in Milford, Pennsylvania and Warwick, New
York with added availability of all of our financial services in those counties
contiguous to our existing New Jersey market. While offering traditional
community bank loan and deposit products and services, the Company obtains
significant non-interest income through its Tri-State Insurance Agency, Inc.
("Tri-State") insurance brokerage operations, the sale of non-deposit products
and the residential mortgage banking/brokerage division, which offers 30-year
fixed residential mortgages which are funded by third party investors.
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, 2004. 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 12 and
14 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 to interest rates, the
ability to control costs and expenses, general economic conditions and economic
conditions in the Company's Sussex, New Jersey marketplace, and the success of
the Company's efforts to diversify its revenue base by
-9-
developing additional sources of non-interest income while continuing to manage
its existing fee based business. The Company undertakes no obligation to
publicly release the results of any revisions to those forward looking
statements that may be made to reflect events or circumstances after this date
or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
---------------------
Three Months ended March 31, 2005 and March 31, 2004
----------------------------------------------------
Overview
--------
The Company realized net income of $520 thousand for the first quarter of
2005, an increase of $149 thousand, or 40.2%, from the $371 thousand reported
for the same period in 2004. Basic earnings per share decreased from $0.20 in
the first quarter of 2004 to $0.17 for the first quarter of 2005, a decrease of
15.0% and diluted earnings per share decreased from $0.19 in the first quarter
of 2004 to $0.17 for the quarter ended March 31, 2005, a decrease of 10.5%. The
decrease in both earning per share and diluted earnings per share was due to a
capital offering that closed in December 2004. As a result of the offering,
common stock outstanding increased by 1,131,150 shares to 2,994,874 shares
outstanding at December 31, 2004.
The results for the first three months of 2005 reflect an increase in net
interest income, primarily due to increased loan interest income, offset by
decreases in non-interest income, primarily due to a decrease in mortgage
banking fees from our residential lending division and increases in non-interest
expenses associated with occupancy and furniture and fixture expenses associated
with the Company's expansion.
-9-
Comparative Average Balances and Average Interest Rates
-------------------------------------------------------
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 for the three month period
ended March 31, 2005 and 2004. The average balances of loans include non-accrual
loans, and associated yields include loan fees, which are considered adjustment
to yields.
Three Months Ended March 31,
(Dollars in thousands) 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Earning Assets: Balance Interest (1) Rate (2) Balance Interest (1) Rate (2)
-----------------------------------------------------------------------------------------------------------------------------
Securities:
Tax exempt (3) $27,498 $420 6.19% $22,262 $296 5.35%
Taxable 48,887 447 3.71% 52,489 466 3.57%
---------------------------------------------------------------------------------------------------------------------------
Total securities 76,385 867 4.60% 74,751 762 4.10%
Total loans receivable (4) 163,732 2,620 6.49% 135,335 2,101 6.24%
Other interest-earning assets 11,075 63 2.32% 9,403 24 1.05%
---------------------------------------------------------------------------------------------------------------------------
Total earning assets 251,192 $3,550 5.73% 219,489 $2,887 5.29%
Non-interest earning assets 23,795 24,185
Allowance for loan losses (2,200) (1,777)
--------------------------------------------------------- ---------
Total Assets $272,787 $241,897
========================================================= =========
Sources of Funds:
Interest bearing deposits:
NOW $7,386 $9 0.49% $49,813 $59 0.47%
Money market 57,329 140 0.99% 4,211 6 0.60%
Savings 66,464 115 0.70% 65,636 106 0.65%
Time 59,613 314 2.14% 58,003 303 2.10%
---------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 190,792 578 1.23% 177,663 474 1.07%
Borrowed funds 10,951 131 4.77% 11,000 133 4.77%
Junior subordinated debentures 5,155 78 6.08% 5,155 60 4.63%
---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 206,898 $787 1.54% 193,818 $667 1.38%
Non-interest bearing liabilities:
Demand deposits 32,747 30,865
Other liabilities 1,372 2,087
--------------------------------------------------------- ---------
Total non-interest bearing liabilities 34,119 32,952
Stockholders' equity 31,770 15,127
--------------------------------------------------------- ---------
Total Liabilities and Stockholders' Equity $272,787 $241,897
========================================================= =========
--------------------------------------------- --------------------- ---------------------
Net Interest Income and Margin (5) $2,763 4.46% $2,220 4.07%
============================================= ===================== =====================
-10-
(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 (Tax and Equity Fiscal Responsibility Act) interest expense
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
-------------------
Net interest income is the difference between interest and fees on loans
and other interest-earning assets and interest paid on interest-bearing
liabilities. Net interest income is directly affected by changes in volume and
mix of interest-earning assets and interest-bearing liabilities that support
those assets, as well as changing interest rates when differences exist in
repricing dates of assets and liabilities.
Net interest income, on a fully taxable equivalent basis (a 39% tax rate),
increased $543 thousand, or 24.5%, to $2.8 million for the three months ended
March 31, 2005 compared to $2.2 million for the same three month period in 2004.
Total interest income, on a fully taxable equivalent basis, increased by $663
thousand to $3.6 million for the three months ended March 31, 2005 compared to
$2.9 million in the first quarter of 2004. Total average earning assets
increased by $31.7 million to $251.2 million from $219.5 million for the three
months ended March 31, 2004. The repositioning of average balances in higher
yielding loans and the increase in market rates of interest have increased the
average rate earned 44 basis points from 5.29% for the first three months of
2004 to 5.73% in the same period in 2005.
Interest expense increased $120 thousand to $787 thousand from $667
thousand for the three months ended March 31, 2005 as the average balance in
interest bearing liabilities increased $13.1 million, to $206.9 million for the
first quarter of 2005 from $193.8 million in the same period in 2004 and as a
result of increases in market rates of interest. The average rate paid on
interest bearing liabilities increased 16 basis points to 1.54% for the first
quarter of 2005 from 1.38% for the three months ended March 31, 2004.
The net interest margin increased, on a fully taxable equivalent basis, by
39 basis points to 4.46% for the three months ended March 31, 2005 compared to
4.07% for the same period in 2004.
Interest Income
---------------
Total interest income, on a fully taxable equivalent basis, increased by
$663 thousand to $3.6 million for the three months ended March 31, 2005 compared
to $2.9 million in the same period in 2004. Total interest income increased on
both the investment securities portfolio and the loan portfolio.
Total interest income on securities, on a fully taxable equivalent basis,
increased $105 thousand, or 9.5%, from the three months ended March 31, 2004 to
the same period in 2005. As the average balance of total securities increased
$1.6 million, the average rate earned increased 50 basis points, from 4.10% in
the first quarter of 2004 to 4.60% for the first quarter of 2005. The increase
in the average securities portfolio reflects a $3.6 million reduction in taxable
securities and a $5.2 million increase in tax-exempt securities. The increase in
yield was accomplished though the repositioning of these securities and the tax
equivalent effect on the interest earned in an increasing market rate
environment.
Comparing the average balance in the loan portfolio for the three months
ended March 31, 2004 to same period in 2005, the average balance in loans
increased $28.4 million, or 21.0%, while the interest earned on total loans
increased $519 thousand, or 24.7%. The average rate earned on loans increased 25
basis points from 6.24% for the three months ended March 31, 2004 to 6.49% for
the same period in 2005. The increase in our loan portfolio reflects our
continuing efforts to enhance our loan origination capacity. In particular, we
have enhanced our loan department through the hiring of additional lending staff
and originators.
Interest Expense
----------------
The Company's interest expense for the three months ended March 31, 2005
increased $120 thousand, or 18.0 %, to $787 thousand from $667 thousand for the
same period in 2004, as the balance in average interest-bearing liabilities
increased $13.1 million, or 6.7% to $206.9 million from $193.8 million between
the same two periods. The average rate paid on total interest-bearing
liabilities has increased by 16 basis points from 1.38% for the three months
ended March 31, 2004 to 1.54% for the same period in 2005. The increases reflect
both a restructuring of the deposit portfolio as time deposits continue to
reprice at higher market rates of interest and increased balances in money
market accounts.
-11-
The Company began a demand account reclassification program which was approved
by the Federal Reserve Bank of New York in December of 2004. Qualifying
non-interest demand and NOW accounts balances are reclassified as money market
accounts to lower Federal Reserve Bank balance requirements. Also, several large
municipal accounts transferred balances from our public fund NOW account to the
public fund money market account from the first quarter of 2004 to the same
period in 2005. To attract municipal accounts, a higher incentive rate was
offered on the public fund money market account. The average rate paid on money
market accounts increased 39 basis points from 0.60% in the first quarter of
2004 to 0.99% in the first quarter of 2005. As municipal balances were
transferred from NOW accounts and the reclassification program has shifted
reported balances, the NOW accounts average balance decreased $42.4 million and
the money market accounts average balance increased $53.1 million in the first
quarter of 2005 compared to three month period ended March 31, 2004.
For the quarter ended March 31, 2005, the Company's average borrowed funds
were $11.0 million. At March 31, 2005 the balance consisted of four convertible
notes totaling $12.0 million and $2.0 million in repurchase agreements from the
Federal Home Loan Bank. 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 6.08% for the three months ended March 31, 2005, up
145 basis points from 4.63% in the same period of 2004.
Provision for Loan Losses
-------------------------
The provision for loan losses for the first quarter of 2005 was $135
thousand compared to a provision of $148 thousand in the first quarter of 2004,
a decrease of $13 thousand or 8.8%. 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.
Non-Interest Income
-------------------
The Company's non-interest income is primarily generated through insurance
commissions earned through the operation of Tri-State, service charges on
deposit accounts, ATM and debit card fees and mortgage banking fees.
The Company's non-interest income decreased by $49 thousand, or 4.3%, to
$1.1 million for the three months ended March 31, 2005 from $1.2 million for the
same period in 2004. The decrease is primarily attributable to the Company's
residential lending division. Mortgage banking fees were $58 thousand for the
quarter ended March 31, 2005, a decrease of $107 thousand, compared to $165
thousand for the three months ended March 31, 2004. The mortgage banking
division brokered $4.5 million in loans for funding by third party investors for
the three months ended March 31, 2005 compared to $12.6 million in the same
period in 2004. This decline is due to increases in market rates of interest and
the slowing of mortgage refinances. Service fees on deposit accounts increased
$45 thousand to $236 thousand in the first quarter of 2005 from $194 thousand
during the same period in 2004. In February of 2005 the Company began a new
"no-return" overdraft privilege program. Fees from this new program have nearly
doubled our daily overdraft fee income.
Non-Interest Expense
--------------------
Total non-interest expense increased from $2.6 million in the first
quarter of 2004 to $2.9 million in the first quarter of 2005, an increase of
$275 thousand, or 10.5%. Salaries and employee benefits, the largest component
of non-interest expense, increased $18 thousand, or 1.1%. This minimal increase
reflects a $91 thousand decrease in commissions paid to commissioned based
employees from the first quarter of 2004 to the same period in 2005 offset by
customary annual salary increases for the Bank's and Tri-State's existing staff.
Occupancy expense increased $49 thousand, or 23.8%, for the first quarter of
2005 over the same period in 2004 due to new lease agreements for administrative
and operation office space at Sterling Plaza in Franklin, New Jersey and loan
office locations in Milford, Pennsylvania and Warwick, New York. Furniture and
equipment expense has increased $49 thousand to $251 thousand, or 24.3%, from
the three months ended March 31, 2004 to the same period in 2005 from a major
computer hardware upgrade and system software conversion in May of 2004 and the
additional expenses associated with the increases in office locations.
Professional fees have increased $32 thousand in the first quarter of 2005 to
$115 thousand due to the preparation for implementation of the Sarbanes Oxley
Act Section 404 and the hiring of an internal audit firm to administer the
documentation and review of the Company's internal controls. Advertising and
promotion expenses have increased $29 thousand in the first quarter of 2005 over
the same period in 2004 due to increased advertisements for deposit product rate
promotions and the fees associated with a new cross-selling initiative program.
-12-
Although insurance commissions and fees increased over the three month
period ended March 31, 2005 from 2004, our insurance operations reported reduced
earnings in the three month period of 2005 compared to 2004. For the three
months ended March 31, 2005, our insurance operations earned income before
income taxes of $22 thousand, a decline from the $64 thousand earned in the year
ago period. The decline in reported net earnings of our insurance operations
reflects increased amortization expense of $18 thousand from the purchase of the
book of business on an acquired insurance agency in 2003. Under the terms of the
2003 purchase, the amortization expense increased to approximately $28 thousand
per quarter in 2005 from $13 thousand in the first quarter of 2004. Amortization
of this book of business will end in December of 2005. In addition, net income
from insurance operations declined in the first quarter of 2005 by $25 thousand,
reflecting the higher commission rates paid to producers on newly booked
business as Tri-State continued to increase its insurance originations.
Income Taxes
------------
The Company's income tax provision, which includes both federal and state
taxes, was $179 thousand and $135 thousand for the three months ended March 31,
2005 and 2004, respectively. This increase in income taxes resulted from an
increase in income before taxes of $193 thousand, or 38.1% for the three months
ended March 31, 2005 as compared to the same period in 2004. The Company's
effective tax rate of 26% and 27% for the three months ended March 31, 2005 and
2004, respectively, is below the statutory tax rate due to tax-exempt interest
on securities and earnings on the investment in life insurance.
FINANCIAL CONDITION
-------------------
March 31, 2005 as compared to December 31, 2004
-----------------------------------------------
At March 31, 2005 the Company had total assets of $280.2 million compared
to total assets of $278.3 million at December 31, 2004, an increase of $1.9
million. Loans receivable increased $9.7 million to $166.6 million at March 31,
2005 from $156.9 million at December 31, 2004. Total deposits decreased to
$228.0 million at March 31, 2005 from $229.8 million at December 31, 2004 as
borrowings increased $4.0 million to $14.0 million at March 31, 2005.
Cash and Cash Equivalents
-------------------------
The Company's cash and cash equivalents decreased by $6.6 million for the
three months ended March 31, 2005 to $22.7 million from $29.3 million at
December 31, 2004. This decrease reflects the Company's decrease in federal
funds sold of $6.1 million to $12.8 million at March 31, 2005 from $18.9 million
at year-end 2004. This decrease in federal funds sold funded the Company's
growth in the loan portfolio.
Securities Portfolio
--------------------
The Company's securities, available for sale, at fair value, increased
$773 thousand, or 1.0%, from $74.7 million at December 31, 2004 to $75.5 million
at March 31, 2005. The Company purchased $4.4 million in new securities during
the first quarter of 2005, $2.7 million in available for sale securities matured
or were repaid and there were no sales or calls in the first three months of
2005. There was an $868 thousand net decrease in unrealized gains in the
available for sale portfolio and $68 thousand in net amortization expenses
recorded during the first quarter of 2005. First quarter balances increased in
state and municipal tax-exempt securities, at fair value, by $1.6 million to
$27.5 million. The securities portfolio contained no high-risk securities or
derivatives as of March 31, 2005. There were no held to maturity securities at
March 31, 2005 or at December 31, 2004.
Loans
-----
Total loans at March 31, 2005 increased $9.7 million, or 6.2% to $166.7
million from $157.0 million at year-end 2004. During the three-month period
ending March 31, 2005, new originations have exceeded payoffs both through
scheduled maturities and prepayments. The Company is emphasizing the origination
of commercial, industrial, and non-residential real estate loans to increase the
yield in its loan portfolio. The Company has also increased its activity in the
loan participation market. 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 $8.9 million, or 12.7%, construction and land development loans
increased $1.1 million, or 5.4% and loans secured by farmland increased $137
thousand or 1.5% from December 31, 2004 to March 31, 2005. Commercial and
industrial loans decreased $619 thousand, or 4.3% and residential 1-4 family
real estate loans have decreased $316 thousand, or 0.8% as residential mortgage
applicants are being referred to our residential mortgage division for
origination by third party
-13-
investors.
The increase in loans was funded during the first quarter of 2005 by a
decrease in the Company's federal funds sold, as well as borrowings from the
Federal Home Loan Bank. The loan to deposit ratios at March 31, 2005 and
December 31, 2004 were 73.1% and 68.3%, respectively.
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"). The Company's
non-accrual loans decreased to $1.0 million at March 31, 2005 from $1.3 million
at December 31, 2004. There were no past due loans over 90 days and still
accruing and no renegotiated loans at March 31, 2005. The Company had one OREO
property valued at $270 thousand at March 31, 2005 and none at December 31,
2004.
The Company seeks to actively manage its non-performing assets. 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 and 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 at each of the periods presented:
(Dollars in thousands) March 31, 2005 December 31, 2004
-----------------------------------------------------------------------------------------------
Non-accrual loans $1,022 $1,304
Non-accrual loans to total loans 0.61% 0.83%
Non-performing assets to total assets 0.46% 0.48%
Allowance for loan losses as a % of non-performing loans 178.86% 169.96%
Allowance for possible loan losses to total loans 1.10% 1.45%
-----------------------------------------------------------------------------------------------
Allowance for 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, 2005, the allowance for loan losses was $1.8 million, a
decrease of 19.6% from the $2.3 million at December 31, 2004. The provision for
loan losses was $135 thousand and there were $581 thousand in charge-offs and
minimal recoveries for the first three months of 2005. The allowance for loan
losses as a percentage of total loans was 1.10% at March 31, 2005 compared to
1.45% on December 31, 2004. At December 31, 2004 the allowance held specific
reserves for the potential charge off of several loans in the loan portfolio.
During the first quarter of 2005, $401 thousand was charged off relating to
delinquent loans and $180 thousand was charged off on the write down of a
property the Company foreclosed on.
Management regularly assesses the appropriateness and adequacy of the loan
loss reserve in relation to credit exposure associated with individual
borrowers, overall trends in the loan portfolio and other relevant factors, and
believes the reserve is reasonable and adequate for each of the periods
presented.
-14-
Premises and Equipment
----------------------
Premises and equipment increased by $334 thousand, or 5.9%, from $5.6
million at December 31, 2004 to $6.0 million at March 31, 2005. This increase
was primarily due the $250 thousand purchase of land in Wantage, New Jersey for
the relocation of the Wantage branch facility.
Deposits
--------
Total deposits decreased $1.9 million, or 0.8%, from $229.8 million at
December 31, 2004 to $228.0 million at March 31, 2005. Non-interest bearing
deposits decreased $2.5 million, or 7.3% to $31.9 million at March 31, 2005 from
$34.5 million at December 31, 2004; interest-bearing deposits increased $944
thousand, or 0.3%, to $196.0 million at March 31, 2005 from $195.4 million at
December 31, 2004. Total time deposits balances increased $1.8 million, or 2.9%,
from $63.2 million at December 31, 2004 to $65.0 million at March 31, 2005 while
other interest bearing deposit account balances decreased $1.2 million, or 0.9%,
to $131.0 million at March 31, 2005 from $132.2 million at December 31, 2004.
Management continues to monitor the shift in deposits through its
Asset/Liability Committee.
Borrowings
----------
Borrowings consist of long term advances and repurchase agreements from
the Federal Home Loan Bank. The advances are secured under terms of a blanket
collateral agreement by a pledge of qualifying investment securities and certain
mortgage loans. As of March 31, 2005 the Company had $12.0 million in notes
outstanding at an average interest rate of 4.95% compared to $10.0 million in
notes outstanding at an average rate of 4.85% for the year ended December 31,
2004. In March of 2005 the Company purchased $2.0 million in securities sold
under agreements to repurchase at an average rate of 3.63%; $1.0 million matures
in September of 2005 and the second $1.0 million matures in March of 2006.
The Company had no short-term borrowings outstanding at March 31, 2005.
The following table summarizes short-term borrowings and weighted average
interest rates paid during the first three months of 2005 and 2004.
Three Months Ended
(Dollars in thousands) March 31, 2005 March 31, 2004
----------------------------------------------------------------------------------------------------------------
Average daily amount of short-term borrowings outstanding during the period $818 $ --
Weighted average interest rate on average daily short-term borrowings 2.74% --
Maximum outstanding short-term borrowings outstanding at any month-end $2,195 --
Short-term borrowings outstanding at period end -- --
Weighted average interest rate on short-term borrowings at period end -- --
----------------------------------------------------------------------------------------------------------------
Junior Subordinated Debentures
------------------------------
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 adjusted quarterly. The rate at March 31, 2005 was 6.31%.
The rate is capped at 12.5% through the first five years, and the securities may
be called at par anytime 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.
As a result of the adoption of FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, and Interpretation of ARB No. 51", we
deconsolidated our wholly-owned subsidiary Sussex Capital Trust I, referred to
as the "Trust", from our consolidated financial statements as of March 31, 2004.
For regulatory reporting purposes, the Federal Reserve is allowing preferred
securities to continue to qualify as Tier 1 Capital subject to specified
limitations. The adoption of FIN 46 did not have an impact on our results of
operations or liquidity.
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
-15-
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 board of directors has established limits for interest rate risk based
on the percentage change in interest income we would incur in differing interest
rate scenarios. Through the first three months of 2005, we sought to remain
relatively balanced, and our policies provide for a variance of no more than 25%
of net interest income, at a 100 and 200 basis point increase or decrease. At
March 31, 2005 the percentages of change were within policy limits.
Our financial modeling simulates our cash flows, interest income and
interest expense from earning assets and interest bearing liabilities for a
twelve month period 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 following table sets forth our interest rate risk profile at March 31,
2005 and 2004. The interest rate sensitivity of our assets and liabilities, and
the impact on net interest income, illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by the assumptions.
March 31, 2005 March 31, 2004
--------------------------------------------------------
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 ($872) 15.74% ($569) 11.53%
Down 100 basis points (226) 8.17% (179) 7.26%
Up 100 basis points 6 0.23% (206) -8.34%
Up 200 basis points (68) -1.23% (526) -10.67%
-----------------------------------------------------------------------------------
Liquidity
---------
It is management's intent to fund future loan demand with deposits and
maturities and pay downs on investments. In addition, the Company is a member of
the Federal Home Loan Bank of New York and as of March 31, 2005, had the ability
to borrow up to $16.1 million against its one to four family mortgages and
selected investment securities as collateral for borrowings. The Company also
has available an overnight line of credit and a one-month overnight repricing
line of credit, each of an amount of $12.3 million at the Federal Home Loan Bank
and an overnight line of credit in the amount of $4.0 million at the Atlantic
Central Bankers Bank. The Company has long-term borrowings totaling $12.0
million secured by the pledge of its one to four family mortgages and selected
securities. These borrowings consist of three notes that mature on December 21,
2010 and one that matures on March 29, 2015 all with a convertible quarterly
option which allows the Federal Home Loan Bank to change the note to then
current market rates. The interest rate on these borrowings ranges from 3.48% to
5.14%. In March of 2005 the Company purchased $2.0 million in securities sold
under an agreement to repurchase at an average rate of 3.63%
At March 31, 2005, the amount of liquid assets remained at a level
management deemed adequate to ensure that contractual liabilities, depositors'
withdrawal requirements, and other operational customer credit needs could be
satisfied. At March 31, 2005, liquid investments totaled $22.7 million, and all
mature within 30 days.
At March 31, 2005, the Company had $75.5 million of securities classified
as available for sale. Of these securities, $55.0 million had $1.0 million of
unrealized losses and therefore are not available for liquidity purposes because
management's intent to hold them until market recovery.
The following table represents the Company's contractual obligations to
make future payments.
-16-
Payments due by period
---------------------------------------------------------------------------------------------
Less than More than
(Dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years
---------------------------------------------------------------------------------------------
Borrowings $14,000 $2,000 $-- $-- $12,000
Operating lease obligations 976 324 388 117 147
Purchase obligations 17 17 -- -- --
Time deposits 65,007 50,578 11,231 2,828 370
Junior subordinated debentures 5,155 -- -- -- 5,155
---------------------------------------------------------------------------------------------
Total $85,155 $52,919 $11,619 $2,945 $17,672
=============================================================================================
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, 2005 totaled $66.7 million. This consisted of $43.8 million in
commitments to grant commercial real estate, construction and land development
loans, $11.4 million in home equity lines of credit, and $11.5 million 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.
Capital Resources
-----------------
Stockholders' equity inclusive of accumulated other comprehensive income
(loss), net of income taxes, was $31.5 million at March 31, 2005, a decrease of
$111 thousand from the $31.6 million at year-end 2004. Activity in stockholders'
equity consisted of net proceeds from common stock issuances of $99 thousand, a
net increase in retained earnings of $310 thousand derived from $520 thousand in
net income earned in the first quarter of 2005, offset by $210 thousand for the
payment of cash dividends and an unrealized loss on securities available for
sale, net of income tax of $346 thousand, decreased stockholders' equity by $520
thousand.
At March 31, 2005 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, 2005, for the Company and the Bank, as well as the minimum
regulatory requirements.
Minimum
(Dollars in thousands) Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
The Company:
Leverage Capital $34,183 12.67% $> 10,794 4%
-
Tier 1 - Risk Based 34,183 18.16% > 7,530 4%
-
Total Risk-Based 36,013 19.13% > 15,061 8%
-
The Bank:
Leverage Capital 26,515 9.88% > 10,736 4%
-
Tier 1 Risk-Based 26,515 14.13% > 7,504 4%
-
Total Risk-Based 28,345 15.11% > 15,008 8%
-
--------------------------------------------------------------------------------
Effect of Inflation
-------------------
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result, the
level of interest rate has a more significant impact on a financial
institution's performance than effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or change with the same
magnitude as the price of goods and services, which prices are affected by
inflation. Accordingly, the liquidity, interest rate sensitivity and maturity
characteristics of the Company's asset and liabilities are more indicative of
its ability to maintain acceptable performance levels. Management of the Company
monitors and seeks to mitigate the impact if interest rate changes by attempting
to match the maturities of assets and liabilities to gap, thus seeking to
minimize the potential effect of inflation.
-17-
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
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. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
There were no changes in securities. There were no repurchases of the
Company's common stock during the first quarter of 2005.
On April 16, 1999 the Company announced a stock repurchase plan whereby
the Company may purchase up to 50,000 shares of outstanding stock. There is no
expiration date to this plan. On April 27, 2005, the Company's Board increased
this plan to 100,000 shares of the Company's common stock. The Company has
previously repurchased 32,000 shares under this program.
Item 3. Defaults upon Senior 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
--------
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.
In accordance with the requirements of the Exchange Act, the registrant
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:
-18-