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, 2003
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 April 29, 2003 there were 1,696,462 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 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
CERTIFICATIONS 14
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS MARCH 31, 2003 DECEMBER 31, 2002
---------------- -----------------
Cash and due from banks $9,521 $9,186
Federal funds sold 13,200 16,910
---------------- -----------------
Cash and cash equivalents 22,721 26,096
Interest bearing time deposits with other banks 3,600 3,600
Securities available for sale 75,566 72,720
Federal Home Loan Bank Stock, at cost 700 750
Loans receivable, net of unearned income 118,531 113,455
Less: allowance for loan losses 1,496 1,386
---------------- -----------------
Net loans receivable 117,035 112,069
Premises and equipment, net 4,575 4,634
Accrued interest receivable 1,228 1,144
Goodwill 1,932 1,932
Other assets 3,361 2,959
---------------- -----------------
Total Assets $230,718 $225,904
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing demand $29,864 $26,514
Savings and interest bearing demand 112,153 110,729
Time of less than $100,000 43,728 43,470
Time of $100,000 and over 9,605 9,145
---------------- -----------------
Total Deposits 195,350 189,858
Borrowings 14,000 15,000
Accrued interest payable and other liabilities 2,598 2,366
Mandatory redeemable capital debentures 5,000 5,000
---------------- -----------------
TOTAL LIABILITIES 211,948 207,224
Stockholders' Equity:
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding 1,695,462 in 2003 and 1,688,130 in 2002 7,936 7,869
Retained earnings 5,444 5,249
Accumulated other comprehensive income 390 562
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 13,770 13,680
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $230,718 $225,904
================ =================
See Notes to Consolidated Financial Statements
-3-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
-------- --------
INTEREST INCOME
Loans receivable, including fees $1,939 $1,917
Securities:
Taxable 523 448
Tax-exempt 165 100
Federal funds sold 45 125
Interest bearing deposits 13 17
-------- --------
TOTAL INTEREST INCOME 2,685 2,607
-------- --------
INTEREST EXPENSE
Deposits 560 829
Borrowings 149 124
Mandatory redeemable capital debentures 63 -
-------- --------
TOTAL INTEREST EXPENSE 772 953
-------- --------
NET INTEREST INCOME 1,913 1,654
PROVISION FOR LOAN LOSSES 125 75
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,788 1,579
-------- --------
NON-INTEREST INCOME
Service fees on deposit accounts 183 141
ATM fees 74 52
Insurance commissions and fees 564 428
Investment brokerage fees 63 72
Net gain on sale of loans held for sale - 18
Other 111 54
-------- --------
TOTAL NON-INTEREST INCOME 995 765
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,286 1,091
Occupancy, net 175 147
Furniture and equipment 206 216
Stationary and supplies 47 38
Audit and exams 25 36
Advertising and promotion 81 111
Postage and freight 44 35
Amortization of intangible assets 38 33
Other 455 313
-------- --------
TOTAL NON-INTEREST EXPENSE 2,357 2,020
-------- --------
INCOME BEFORE INCOME TAXES 426 324
PROVISION FOR INCOME TAXES 113 93
-------- --------
NET INCOME $313 $231
======== ========
EARNINGS PER SHARE
-------- --------
Basic $0.18 $0.14
======== ========
-------- --------
Diluted $0.18 $0.13
======== ========
See Notes to Consolidated Financial Statements
-4-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
ACCUMULATED
NUMBER OF OTHER TOTAL
SHARES COMMON RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS
OUTSTANDING STOCK EARNINGS INCOME STOCK EQUITY
----------- ----- -------- ------ ----- ------
Balance December 31, 2001 1,659,057 $7,732 $4,509 $123 ($127) $12,237
Comprehensive income:
Net income - - 231 - - 231
Change in unrealized gains (losses) on securities
available for sale - - - (116) - (116)
-------
Total Comprehensive Income 115
Treasury shares purchased (10,023) - - - (105) (105)
Issuance of common stock and exercise of stock options 1,090 10 - - - 10
Issuance of common stock through dividend reinvestment plan 3,542 29 - - - 29
Dividends on common stock ($.06 per share) - - (101) - - (101)
-----------------------------------------------------------------
Balance March 31, 2002 1,653,666 $7,771 $4,639 $7 ($232) $12,185
=================================================================
Balance December 31, 2002 1,688,130 $7,869 $5,249 $562 $0 $13,680
Comprehensive income:
Net income - - 313 - - 313
Change in unrealized gains (losses) on securities
available for sale - - - (172) - (172)
-------
Total Comprehensive Income 141
Treasury shares purchased (2,400) - - - (25) (25)
Treasury shares retired - (25) - - 25 -
Issuance of common stock and exercise of stock options 4,186 35 - - - 35
Shares issued through dividend reinvestment plan 5,546 57 - - - 57
Dividends on common stock ($.07 per share) - - (118) - - (118)
-----------------------------------------------------------------
Balance March 31, 2003 1,695,462 $7,936 $5,444 $390 $0 $13,770
=================================================================
See Notes to Consolidated Financial Statements
-5-
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2003 2002
----------------- ----------------
(In Thousands)
Cash Flows from Operating Activities
Net income $313 $231
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 125 75
Provision for depreciation and amortization 135 150
Net amortization of securities premiums and discounts 277 117
Proceeds from sale of loans - 652
Net gains on sale of loans - (18)
Loans originated for sale - (634)
Earnings on investment in life insurance (13) (14)
(Increase) decrease in assets:
Accrued interest receivable (84) (74)
Other assets (274) (67)
Increase (decrease) in accrued interest payable and other liabilities 232 (24)
----------------- ---------------
Net Cash Provided by Operating Activities 711 394
----------------- ---------------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (17,381) (12,786)
Maturities, calls and principal repayments 13,971 7,142
Net (increase) decrease in loans (5,091) 1,491
Purchases of bank premises and equipment (76) (82)
Proceeds from redemption of FHLB stock 50 -
Net increase in interest bearing time deposits with other banks - (4,000)
----------------- ---------------
Net Cash Used in Investing Activities (8,527) (8,235)
----------------- ---------------
Cash Flows from Financing Activities
Net increase in deposits 5,492 1,812
Repayment of borrowings (1,000) -
Proceeds from the issuance of common stock 35 10
Purchase of treasury stock (25) (105)
Dividends paid, net of reinvestments (61) (72)
----------------- ---------------
Net Cash Provided by Financing Activities 4,441 1,645
----------------- ---------------
Net (Decrease) Increase in Cash and Cash Equivalents (3,375) (6,196)
Cash and Cash Equivalents - Beginning 26,096 41,035
----------------- ---------------
Cash and Cash Equivalents - Ending $22,721 $34,839
================= ===============
Supplementary Cash Flows Information
Interest paid $786 $1,109
================= ===============
Income taxes paid $0 $0
================= ===============
Supplementary Schedule of Noncash Investing and Financing Activities
Other real estate acquired in settlement of loans $0 $0
================= ===============
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 subsidiaries, Sussex Bank (the "Bank") and
Sussex Capital Trust I. The Bank's wholly-owned subsidiaries are Sussex Bancorp
Mortgage Company, Inc., SCB Investment Company, Inc., and Tri-State Insurance
Agency, Inc. All intercompany transactions and balances have been eliminated in
consolidation. The Bank operates eight banking offices all located in Sussex
County and is the parent of Tri-State Insurance Agency, Inc., ("Tri-State") a
full service insurance agency located in Sussex County, New Jersey. The Company
is subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System (the "FRB"). The Bank's deposits are insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up
to applicable limits. The operations of the Company and the Bank are subject to
the supervision and regulation of the FRB, FDIC and the New Jersey Department of
Banking and Insurance (the "Department") 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,
2003, are not necessarily indicative of the results that may be expected for the
year ended December 31, 2003. 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, 2002.
2. Net Income Per Common Share
Basic net income per share of common stock is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted 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 or 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 (dollars in thousands, except per hare data):
THREE MONTHS ENDED MARCH 31, 2003 THREE MONTHS ENDED MARCH 31, 2002
--------------------------------------- -------------------------------------
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
--------------------------------------- -------------------------------------
Basic earnings per share:
Net income applicable to common
stockholders $313 1,693 $0.18 $231 1,659 $0.14
===== =====
Effect of dilutive securities:
Stock options -- 14 -- 17
Deferred common stock payments for
purchase of insurance agency 2 38 1 57
------------------------------ ---------------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $315 1,745 $0.18 $232 1,733 $0.13
====================================== ====================================
3. Comprehensive Income
The components of other comprehensive income and related tax effects for the
three months ended March 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ -----------
(IN THOUSANDS)
Unrealized holding gains (losses) on available for sale securities ($287) ($193)
Less: reclassification adjustments for gains included in net income - -
----- -----
Net unrealized gains (losses) (287) (193)
Tax effect (115) (77)
----- -----
Other comprehensive income (loss), net of tax ($172) ($116)
===== =====
-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, 2003:
Revenues from external sources $3,116 $564 $3,680
Income before income taxes 346 80 426
Total assets 227,886 2,832 230,718
THREE MONTHS ENDED MARCH 31, 2002:
Revenues from external sources $2,944 $428 $3,372
Income before income taxes 262 62 324
Total assets 202,860 2,219 205,079
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 those 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 quarters ended March 31, 2003 and 2002:
THREE MONTHS ENDED MARCH 31,
2003 2002
---------- ----------
(IN THOUSANDS)
Net income, as reported $313 $231
Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects (7) (3)
--------- ---------
Pro forma net income $306 $228
========= =========
Basic earnings per share:
As reported $0.18 $0.14
Pro forma $0.18 $0.14
Diluted earnings per share:
As reported $0.18 $0.13
Pro forma $0.18 $0.13
6. Acquisition
On January 2, 2003, the Company acquired certain assets of the Garrera
Insurance Agency through its subsidiary, Tri-State Insurance Agency, Inc. The
acquisition was accounted for using the purchase method of accounting. The total
purchase price including transaction costs was $68,000 and was allocated to the
identifiable intangible asset representing the fair value of the acquired book
of business, which will be amortized over 3 years. The results of operations of
the insurance agency from January 2, 2003 are included in the accompanying
consolidated financial statement.
7. New Accounting Standard
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies." In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability or
equity security of the guaranteed party, which would include financial standby
letters of credit. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this Interpretation, including, among
others, guarantees related to commercial letters of credit and loan commitments.
The disclosure requirements of FIN 45 require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
accounting recognition requirements of FIN 45 are to be applied prospectively to
guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did
not have a significant impact on the Company's financial condition or results of
operations.
Outstanding letters of credit written are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. The Company had $531,000 of
standby letters of credit as of March 31, 2003. The Bank uses the same credit
policies in making conditional obligations as it does for on-balance sheet
instruments.
These standby letters of credit expire within the next twelve months. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan commitments. The Company requires
collateral and personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained through a liquidation
of such collateral and enforcement of personal guarantees would be sufficient to
cover the maximum potential amount of future payments required under the
corresponding guarantees. The current amount of the liability as of March 31,
2003 for guarantees under standby letters of credit issued after December 31,
2002 is not material.
-8-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months ended March 31, 2003 and March 31, 2002
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, 2002. 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
11 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, and general economic conditions. 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.
OVERVIEW
The Company realized net income of $313 thousand for the first quarter of
2003, an increase of $82 thousand from the $231 thousand reported for the same
period in 2002. Basic earnings per share increased from $0.14 in the first
quarter of 2002 to $0.18 for the first quarter of 2003. Diluted earnings per
share were $0.13 in the first quarter of 2002 and increased to $0.18 in the
first quarter of 2003.
The results reflect a substantial decrease in interest expense due to
declining market rates of interest, coupled by increases in interest income due
to the growth of $21.6 million in average earning assets from the first quarter
of 2002 to the same period this year.
RESULTS OF OPERATIONS
INTEREST INCOME. Total interest income increased $78 thousand, or 3.0%, to
$2.7 million for the quarter ended March 31, 2003 from $2.6 million for the same
period in 2002. This increase was primarily attributable to an increase of $21.6
million in average first quarter interest earning assets from $186.6 million in
2002 to $208.2 million in 2003, while the average yield declined 36 basis
points, on a fully taxable equivalent basis, from 5.73% during the first quarter
of 2002 to 5.37% in the first quarter of 2003. Although the average rate earned
on investment securities declined by 100 basis points, the average balance
increased by $27.7 million, or 60.1%, to $73.9 million in the first quarter of
2003 and resulted in a $165 thousand increase to interest income, on a tax
equivalent basis, for the same period. The average rate earned in the loan
portfolio decreased 47 basis points to 6.84% for the first quarter of 2003 from
7.33% in the first quarter of 2002 and the average loan balance increased 8.4%
from $106.1 million to $115.0 million from first quarter 2002 to first quarter
2003. The interest income earned on the loan portfolio increased a nominal $22
thousand. The interest earned on other interest bearing assets declined $77
thousand while the average balance in other interest earning assets decreased by
$15 million, or 43.7%, to $19.3 million from $34.3 million from the first
quarter of 2002. The impact of volume increases in average balances on interest
income exceeded the market declines in interest rates, resulting in an increase
in interest income for the first quarter of 2003 compared to the first quarter
if 2002.
INTEREST EXPENSE. The Company's interest expense for the first quarter of
2003 decreased $181 thousand, or 19.0% to $772 thousand from $953 thousand in
the first quarter of 2002. The average balance of interest bearing liabilities
increased $21.3 million, or 13.1% to $183.7 million during the first quarter of
2003 from $162.4 million in the same period of 2002. 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 1.70% for the first quarter of
2003 from 2.38% in the first quarter of 2002. Interest expense on time deposits,
the largest component of the decrease, declined $203 thousand, or 37.4% to $340
thousand as the average balance in time deposits decreased $5.7 million, or 9.6%
in the first quarter of 2003 compared to the same period in 2002. NOW deposit
average balances grew $11.0 million, or 34.8%, from $31.7 million during the
first quarter 2002 to $42.8 million in the first quarter of 2003. The interest
expense on NOW deposits decreased $4 thousand from the first quarter of 2002, as
the average interest rate paid decreased 27 basis points from 0.92% to 0.65%
during the same periods. Average savings deposits reflect an increase of $5.3
million, or 9.2%, in average balances while the average rate paid declined 53
basis points from 1.44% in the first quarter of 2002 to 0.91% in the first
quarter of 2003. The decline in time deposits and increase in NOW and savings
accounts reflects management's continued efforts to reposition the Company's
deposit portfolio away from higher cost deposits through an ongoing marketing
promotion for transaction accounts and other low cost deposits. While total
average interest bearing deposits increased $12.0 million from $152.4 million
during the first quarter of 2002 to $164.4 million in the first quarter of 2003,
the average rate paid on deposits fell 83 basis points to 1.38% and the interest
expense declined $269 thousand to $560 thousand in the first quarter of 2003
from the same period in 2002. Average borrowed funds and capital debenture
balances increased to $19.3 million in the first quarter of 2003 from $10
million in the first quarter if 2002. In the third quarter of 2002, the Company
entered into several short-term FHLB advances and issued $5 million in mandatory
redeemable capital debentures that were not present during the first quarter if
2002. The capital debentures bear a floating rate of interest, which averaged
5.11% in the first quarter of 2003, and the related interest expense was $63
thousand for the quarter ended March 31, 2003.
The following table presents, on a tax equivalent basis, a summary of the
Company's interest-earning assets and their average yields, and interest-bearing
liabilities and their average costs and shareholders' equity for the three
months ended March 31, 2003 and 2002. The average balance of loans includes
non-accrual loans, and associated yields include loan fees, which are considered
adjustment to yields.
-9-
THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 2003 2002
-------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
EARNING ASSETS: BALANCE INTEREST (1) RATE (2) BALANCE INTEREST (1) RATE (2)
-------------------------------------------------------------------------------------------------------------------------------
Securities:
Tax exempt (3) $15,777 $234 6.02% $10,212 $137 5.44%
Taxable 58,073 509 3.55% 35,913 441 4.98%
-------------------------------------------------------------------------------------------------------------------------------
Total securities 73,850 743 4.08% 46,125 578 5.08%
Taxable loans: (net of unearned income)
Mortgage and construction 68,089 1,196 7.12% 61,584 1,147 7.51%
Commercial 16,261 228 5.69% 11,470 184 6.51%
Consumer 30,634 515 6.82% 33,030 586 7.20%
-------------------------------------------------------------------------------------------------------------------------------
Total loans receivable (4) 114,984 1,939 6.84% 106,084 1,917 7.33%
Other interest-earning assets 19,345 72 1.51% 34,340 149 1.76%
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets 208,179 $2,754 5.37% 186,549 $2,644 5.75%
Non-interest earning assets 20,864 18,247
Allowance for loan losses -1,419 -1,181
------------------------------------------------------------- -----------
Total assets $227,624 $203,615
============================================================= ===========
SOURCES OF FUNDS:
---------------------------------------------
Interest bearing deposits:
NOW $42,756 $68 0.65% $31,712 $72 0.92%
Money market 4,859 10 0.83% 3,534 8 0.92%
Savings 63,410 142 0.91% 58,090 206 1.44%
Time 53,399 340 2.58% 59,064 543 3.73%
-------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 164,424 560 1.38% 152,400 829 2.21%
Borrowed funds 14,300 149 4.23% 10,000 124 5.03%
Capital debentures 5,000 63 5.11% 0 0 0.00%
-------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 183,724 $772 1.70% 162,400 $953 2.38%
Non-interest bearing liabilities:
Demand deposits 27,838 26,465
Other liabilities 2,273 2,413
------------------------------------------------------------- -----------
Total non-interest bearing liabilities 30,111 28,878
Stockholders' equity 13,789 12,337
------------------------------------------------------------- -----------
Total liabilities and stockholders' equity $227,624 $203,615
============================================================= ===========
--------------------------------------------- ------------------------ ------------------------
Net interest income and margin (5) $1,982 3.86% $1,691 3.68%
======================== ========================
(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 fully taxable equivalent basis, the net interest
income for the first quarter of 2003 increased $291 thousand over the same
period last year. This increase was the result of liabilities repricing faster
and lower then earning assets in a declining market rate environment and the
Company's ability to shift it's funding to lower costing interest bearing
liabilities, thereby further reducing its cost of funds. The net interest margin
increased, on a fully taxable equivalent basis, by 18 basis points to 3.86% in
the first quarter of 2003 compared to 3.68% the year earlier.
PROVISION FOR LOAN LOSSES. For the three months ended March 31, 2003 the
provision for loan losses was $125 thousand compared to $75 thousand for the
first quarter ended March 31, 2002. The provision for loan losses reflects
management's judgment concerning the risks inherent in the Company's existing
loan portfolio and the size of the allowance necessary to absorb the risks, as
well as the average balance of the portfolio over both periods. Management
reviews the adequacy of its allowance on an ongoing basis and will provide for
additional provisions, as management may deem necessary.
NON-INTEREST INCOME. For the first quarter of 2003, total non-interest
income increased $230 thousand, or 30.1%, from the same period in 2002. In the
first quarter of 2003 insurance commissions and fees increased $136 thousand, or
31.8%, from $428 thousand reported in the first quarter of 2002 to $564 thousand
for the quarter ended March 31, 2003. On January 2, 2003, the Company acquired
the Garrera Insurance Agency through Tri-State. The Garrera acquisition
accounted for $72 thousand of the first quarter increase and industry-wide
insurance premium increases of 10% to 15% account for the balance of the
increase. Service charges on deposit accounts increased $42 thousand for the
quarter ended March 31, 2003 and is credited to the growth in the Company's
deposits. Mortgage banker fees increased in the first quarter of 2003 to $44
thousand from $1 thousand during the first quarter of 2002 due to several large
placements closing in the first quarter of 2003. Offsetting these increases,
investment brokerage fee income has decreased by $9 thousand due to lower sales
volume and no loans were sold during the first three months of 2003 compared to
a gain on the sale of loans of $18 thousand in the first quarter of 2002.
-10-
NON-INTEREST EXPENSE. For the quarter ended March 31, 2003, non-interest
expense increased $337 thousand from the same period last year. The Company's
salaries and employee benefits increased $195 thousand, or 17.9%, from the
addition of five full time equivalent employees and increased sales commissions
earned at the Company's insurance subsidiary. Other non-interest expense
increases from first quarter 2002 to first quarter 2003 were education and
training expenses of $26 thousand due to a new Company commitment to a
comprehensive employee training program which began in the fourth quarter of
2002, additional occupancy expenses of $28 thousand due to increases in snow
removal and utility charges, and the expensing of $36 thousand in professional
fees incurred in reviewing expansion of our insurance operations.
INCOME TAXES. Income tax expense increased $20 thousand to $113
thousand for the three months ended March 31, 2003 as compared to $93 thousand
for the same period in 2002. The increase in income taxes resulted from a higher
level of income before income taxes in 2003 compared to 2002.
FINANCIAL CONDITION
March 31, 2003 as compared to December 31, 2002
Total assets increased to $230.7 million at March 31, 2003, a $4.8 million
increase from total assets of $225.9 million at December 31, 2002. Increases in
total assets include increases of $5.0 million in net loans and $2.8 million in
securities available for sale, partially offset by a $3.4 million reduction in
cash and cash equivalents. Asset increases were financed through an increase in
total deposits of $5.5 million from $189.9 million at year-end 2002 to $195.4
million on March 31, 2003, offset by a $1 million decrease in borrowings. Total
stockholder's equity increased $90 thousand from $13.7 million at December 31,
2002 to $13.8 million at March 31, 2003.
Total loans at March 31, 2003 increased $5.1 million to $118.5 million from
$113.4 million at year-end 2002. During the three-month period ending March 31,
2003, new originations have exceeded payoffs both through scheduled maturities
and prepayments. The Company continues to see high levels of prepayments 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 balance
in non-residential real estate loans increased $5.5 million from $41.0 million
at December 31, 2002 to $46.5 million on March 31, 2003 and other loans, which
include loans secured by farmland, increased $2.2 million over the same
three-month period. Construction and land development loans have decreased $2.1
million and residential 1-4 family real estate loans have decreased $766
thousand from December 31, 2002 to March 31, 2003. Other minor shifts in ending
balances occurred between December 31, 2002 and March 31, 2003 according to loan
demand.
Federal funds sold decreased by $3.7 million to $13.2 million at March 31,
2003 from $16.9 million on December 31, 2002. During the first quarter of 2003,
these funds were used to purchase higher yielding investment securities and fund
loan demand.
Securities, available for sale, at market value, increased $2.9 million, or
3.9%, from $72.7 million at year-end 2002 to $75.6 million on March 31, 2003.
The Company purchased $17.4 million in new securities in the first three months
of 2003 and $14.0 million in available for sale securities matured, were called
and were repaid. There was a $287 thousand decrease in unrealized gains in the
available for sale portfolio and $277 thousand in net amortization expenses
recorded during the first three months of 2003. There were no held to maturity
securities at March 31, 2003 or at year-end 2002.
Total deposits increased $5.5 million, or 2.9%, to $195.4 million during the
first three months of 2003 from $189.9 million at December 31, 2002.
Non-interest bearing deposits increased $3.4 million, interest-bearing and
savings deposits increased $1.4 million, and time deposits increased $718
thousand from December 31, 2002 to March 31, 2003. Increases in non-interest
bearing, interest bearing and savings deposits were due to an ongoing deposit
promotion program. Management continues to monitor the shift in deposits through
its Asset/Liability Committee.
ASSET QUALITY
At March 31, 2003, non-accrual loans decreased $165 thousand to $1.1
million, as compared to $1.3 million at December 31, 2002. Management continues
to monitor the Company's asset quality and believes that the non-accrual loans
are adequately collateralized and does not anticipate any material losses.
The following table provides information regarding risk elements in the loan
portfolio:
MARCH 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Non-accrual loans $1,093,000 $1,258,000
Non-accrual loans to total loans 0.92% 1.11%
Non-performing assets to total assets 0.55% 0.67%
Allowance for loan losses
as a % of non-performing loans 136.87% 107.11%
Allowance for loan losses to total loans 1.26% 1.22%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. The level of the allowance is based on
management's evaluation of potential losses in the portfolio, after
consideration of risk characteristics of the loans and prevailing and
anticipated economic conditions. Provisions charged to expense and reduced by
charge-offs, net of recoveries, increase the allowance for loan losses. Although
management strives to maintain an allowance it deems adequate, future economic
changes, deterioration of borrowers' credit worthiness, and the impact of
examinations by regulatory agencies all could cause changes to the Company's
allowance for loan losses.
At March 31, 2003, the allowance for loan losses was $1.5 million, an
increase of 7.9% from the $1.4 million at year-end 2002. There were $16 thousand
in charge offs and $1 thousand in recoveries reported in the first three months
of 2003. The allowance for loan losses as a percentage of total loans was 1.26%
at March 31, 2003 compared to 1.22% on December 31, 2002.
-11-
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 an
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. 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, 2003 and 2002.
MARCH 31, 2003 MARCH 31, 2002
---------------------------------------------------------------------------------------------------------
CHANGE IN % CHANGE CHANGE IN % CHANGE
NET INTEREST IN NET INTEREST NET INTEREST IN NET INTEREST
(DOLLARS IN THOUSANDS) INCOME INCOME INCOME INCOME
----------------------------------------------------------------------------------------------------------
Down 200 basis points ($198) 4.30% ($292) 7.14%
Down 100 basis points (53) 2.31% (98) 4.76%
Up 100 basis points (182) -7.89% (11) -0.55%
Up 200 basis points (425) -9.22% (97) -2.36%
----------------------------------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
At March 31, 2003, 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, 2003, liquid investments totaled $22.7 million, and all mature
within 30 days.
It is management's intent to fund future loan demand primarily with
deposits. In addition, the Bank is a member of the Federal Home Loan Bank of New
York and as of March 31, 2003, had the ability to borrow up to $16.7 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
$11.3 million. The Company at March 31, 2003 had borrowings totaling $14 million
secured by the pledge of its one to four family mortgages and selected
securities. Four short-term borrowings have maturities from April 2003 through
July 2004 with interest rates ranging from 2.03% to 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%.
CAPITAL RESOURCES
Total stockholders' equity increased $90 thousand to $13.8 million at March
31, 2003 from $13.7 million at year-end 2002. Activity in stockholder's equity
consisted of a net increase in retained earnings of $195 thousand derived from
$313 thousand in net income earned during the first three months of 2003, offset
by $118 thousand in payments for cash dividends. Other increases were $35
thousand in stock options exercised and $57 thousand for shares issued through
the dividend reinvestment plan, offset by an unrealized loss on securities
available for sale, net of income tax, of $172 thousand and the retirement of
$25 thousand in treasury stock.
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, 2003, the new
quarterly rate of interest on the debentures will be 4.94%. 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. These trust preferred securities are included in
the Company's and the Bank's capital ratio calculations.
At March 31, 2003 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, 2003, for the Company and the Bank, as well as the minimum
regulatory requirements.
MINIMUM
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
THE COMPANY:
Leverage Capital $15,252 6.80% $8,977 4%
Tier 1 - Risk Based 15,252 11.27% 5,414 4%
Total Risk-Based 17,292 12.78% 10,827 8%
THE BANK:
Leverage Capital 15,496 6.91% 8,971 4%
Tier 1 Risk-Based 15,496 11.47% 5,403 4%
Total Risk-Based 16,992 12.58% 10,807 8%
-12-
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, 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-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are 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
Not applicable
Item 3. DEFAULTS UPON SERVED SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORT ON FORM 8-K
(a). Exhibits
Number Description
------ -----------
99 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
January 24, 2003 7 Press release announcing results for
the year end December 31, 2002 and
declaration of cash dividend and press
release announcing the promotion of
executive officers.
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:
-13-
CERTIFICATIONS
I, Donald L. Kovach, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Sussex Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By:/s/ DONALD L. KOVACH
---------------------
DONALD L. KOVACH
President and
Chief Executive Officer
Date:
I, Candace A. Leatham, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Sussex Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By:/s/ CANDACE A. LEATHAM
----------------------
CANDACE A. LEATHAM
Executive Vice President and
Chief Financial Officer
Date:
-14-
EXHIBIT 99
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Donald L. Kovach and Candace A. Leatham hereby jointly
certify as follows:
They are the Chief Executive Officer and the Chief Financial Officer,
respectively, of Sussex Bancorp (the "Company");
To the best of their knowledge, the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2003 (the "Report") complies in all material
respects with the requirements of Section 13(a) of the Securities Exchange Act
of 1934, as amended; and
To the best of their knowledge, based upon a review of the Report, the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
By:/s/ DONALD L. KOVACH
--------------------
DONALD L. KOVACH
President and
Chief Executive Officer
Date:
By:/s/ CANDACE A. LEATHAM
----------------------
CANDACE A. LEATHAM
Executive Vice President and
Chief Financial Officer
Date:
(A signed original of this written statement required by Section 906 has been
provided to Sussex Bancorp and will be retained by Sussex Bancorp and furnished
to the Securities Exchange Commission or its staff upon request.)
-15-