-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EC4LzOfViePSsYIoZuY1xlpIvvw7bDzKQLihi0ngbQb2JVS2Q/eKos+wcVqMUs7W DKsOFDsn0Lih6Yme19qIPA== 0000914317-01-500480.txt : 20020410 0000914317-01-500480.hdr.sgml : 20020410 ACCESSION NUMBER: 0000914317-01-500480 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSSEX BANCORP CENTRAL INDEX KEY: 0001028954 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223475473 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12569 FILM NUMBER: 1788868 BUSINESS ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 BUSINESS PHONE: 9738272914 MAIL ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 10QSB 1 form10qsb41157_11-7.txt 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 September 30, 2001 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 November 9, 2001 there were 1,656,004 shares of common stock, no par value, outstanding. SUSSEX BANCORP FORM 10-QSB INDEX Part I - Financial Information Page(s) Item I. Financial Statements and Notes to Consolidated 1 Financial Statements Item 2. Management's Discussion and Analysis of 7 Financial condition and Results of Operations Part II - Other Information Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 13 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUSSEX BANCORP CONSOLIDATED BALANCE SHEETS (in Thousands, Except Share Data) (Unaudited)
ASSETS September 30, 2001 December 31, 2000 - ------ ------------------ ----------------- Cash and Due from Banks $ 5,784 $ 4,835 Federal Funds Sold 25,270 8,030 Interest Bearing Deposits 0 55 --------- --------- Total Cash and Cash Equivalents 31,054 12,920 Time Deposits in Other Banks 6,100 100 Securities available for sale, at estimated fair value 50,288 33,186 Securities held to maturity, estimated fair value of $6,393,000 in 2000 0 6,431 --------- --------- Total Securities 50,288 39,617 Loans Held for Sale 0 297 Loans (Net of Unearned Income) 102,497 101,166 Less: Allowance for Possible Loan Losses 1,081 973 --------- --------- Net Loans 101,416 100,193 Other Real Estate Owned 185 0 Premises and Equipment, Net 4,867 4,516 Federal Home Loan Bank Stock 685 693 Intangible Assets 472 535 Accrued Interest Receivable 1,085 981 Other Assets 1,798 1,777 --------- --------- Total Assets $ 197,950 $ 161,629 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Liabilities: Deposits: Demand $ 24,546 $ 24,458 Savings 82,274 63,705 Time 50,306 42,714 Time of $100,000 and over 17,634 9,984 --------- --------- Total Deposits 174,760 140,861 Federal Home Loan Bank Advances 10,000 10,000 Other Liabilities 873 658 --------- --------- Total Liabilities 185,633 151,519 Stockholders' Equity: Common Stock, No Par Value Authorized 5,000,000 Shares, Issued 1,669,712 in 2001 and 1,511,567 in 2000 7,703 6,385 Retained Earnings 4,421 4,027 Treasury Stock, 13,708 Shares in 2001 and 13,166 Shares in 2000 (127) (122) Accumulated Other Comprehensive Income, Net of Income Tax 320 (180) --------- --------- Total Stockholders' Equity 12,317 10,110 Total Liabilities and Stockholders' Equity $ 197,950 $ 161,629 ========= =========
See Notes to Consolidated Financial Statements 1 SUSSEX BANCORP CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Share Data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- INTEREST INCOME Interest and Fees on Loans $ 1,986 $ 1,946 $ 6,097 $ 5,506 Interest on Time Deposits 61 16 120 69 Interest on Securities: Taxable 574 530 1744 1645 Exempt from Federal Income Tax 65 75 198 237 Interest on Federal Funds Sold 219 81 655 192 ----------- ----------- ----------- ----------- Total Interest Income 2,905 2,648 8,814 7,649 INTEREST EXPENSE Interest on Deposits: 1,335 1,186 4,051 3,333 Interest Expense on Federal Funds Purchased 0 71 0 187 Interest Expense on FHLB Advances 127 0 376 0 ----------- ----------- ----------- ----------- Total Interest Expense 1,462 1,257 4,427 3,520 Net Interest Income 1,443 1,391 4,387 4,129 Provision for Possible Loan Losses 63 63 189 174 ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 1,380 1,328 4,198 3,955 NON-INTEREST INCOME Service charges on Deposit Accounts 142 114 403 338 Gain (loss) on Sale of Securities, Available for Sale 8 (6) 8 (14) Other Income 184 112 517 295 ----------- ----------- ----------- ----------- Total Non-Interest Income 334 220 928 619 NON-INTEREST EXPENSE Salaries and Employee Benefits 766 705 2260 2050 Occupancy Expense, Net 124 111 371 332 Furniture and Equipment Expense 140 130 394 400 Data Processing Expense 31 23 87 65 Stationary and Supplies 21 23 75 73 Advertising and Promotion 51 61 151 145 Audit and Exams 32 21 95 72 Amortization of Intangibles 21 21 63 63 Other Expenses 286 200 749 623 ----------- ----------- ----------- ----------- Total Non-Interest Expense 1,472 1,295 4,245 3,823 Income Before Provision for Income Taxes 242 253 881 751 Provision for Income Taxes 68 61 257 175 ----------- ----------- ----------- ----------- Net Income $ 174 $ 192 $ 624 $ 576 =========== =========== =========== =========== Net Income Per Common Share-Basic $ 0.11 $ 0.13 $ 0.38 $ 0.39 =========== =========== =========== =========== Net Income Per Common Share-Diluted $ 0.10 $ 0.13 $ 0.38 $ 0.38 =========== =========== =========== =========== Weighted Average Shares Outstanding-Basic 1,652,244 1,494,467 1,638,504 1,494,180 Weighted Average Shares Outstanding-Diluted 1,671,890 1,505,681 1,656,435 1,504,756
See Notes to Consolidated Financial Statements 2 SUSSEX BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net Income $174 $192 $624 $576 Other Comprehensive Income, Net of Tax Unrealized Gain On Available for Sale Securities 200 202 500 104 ------------------------------------------------------------ Comprehensive Income $374 $394 $1,124 $680 ============================================================
See Notes to Consolidated Financial Statements 3 SUSSEX BANCORP CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands) (Unaudited)
Unrealized Gain (Loss) on Securities Common Retained Treasury Available Stockholders Stock Earnings Stock for Sale Equity ----- -------- ----- -------- ------ Balance December 31, 2000 $ 6,385 $ 4,027 ($ 122) ($ 180) $ 10,110 Net Income for the Period 0 624 0 0 624 Cash Dividend 0 (230) 0 0 (230) Sale of Common Stock 1162 0 0 0 1162 Stock Options Exercized 43 0 0 0 43 Shares Issued Through Dividend Reinvestment Plan 113 0 0 0 113 Treasury Stock Purchased 0 0 (5) 0 (5) Change in Unrealized Gain on Securities, Available for Sale 0 0 0 500 500 -------- -------- -------- -------- -------- Balance September 30, 2001 $ 7,703 $ 4,421 ($ 127) $ 320 $ 12,317 ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2001 2000 ---- ---- Cash Flows from Operating Activities: Net Income $ 624 $ 576 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization of Premises and Equipment 350 356 Amortization of Intangible Assets 63 63 Premium Amortization of Securities, net 200 91 Provision for Possible Loan Losses 189 174 (Gain) Loss on Sale of Securities, Available for Sale (8) 14 (Amortization) of Loan Origination and Commitment Fees, net (17) (5) Decrease in Loans Held for Sale 297 474 Deferred Federal Income Tax (Increase) 0 (92) Decrease (Increase) in Accrued Interest Receivable (104) 11 (Increase) in Cash Value of Life Insurance Policy (41) (1,024) (Increase) in Other Assets (306) (152) Increase in Accrued Interest and Other Liabilities 215 245 -------- -------- Net Cash Provided by Operating Activities $ 1,462 $ 731 -------- -------- Cash Flow from Investing Activities: Securities Available for Sale: Proceeds from Maturities and Paydowns 9,767 4,714 Proceeds from Sales/Calls Prior to Maturity 14,232 3,487 Purchases (34,861) (3,115) Transfer From Held to Maturity (5,583) 0 Securities Held to Maturity: Proceeds from Maturities 1,365 2,113 Purchases (532) (650) Transfer to Available for Sale 5,583 0 Net (Purchases) Maturities of Time Deposits in Other Banks (6,000) 1,188 Net (Increase) in Loans Outstanding (1,395) (12,955) (Increase) in Other Real Estate Owned (185) 0 Capital Expenditures (701) (943) -------- -------- Net Cash (Used in) Investing Activities ($18,310) ($ 6,161) -------- -------- Cash Flows from Financing Activities: Net Increase in Total Deposits 33,899 3,556 Net Increase in Federal Funds Purchased 0 2,010 Exercise of Stock Options 43 0 Purchase of Treasury Stock (5) (50) Sale of Common Stock 1,162 0 Payment of Dividends Net of Reinvestment (117) (129) -------- -------- Net Cash Provided by Financing Activities $ 34,982 $ 5,387 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents $ 18,134 ($ 43) Cash and Cash Equivalents, Beginning of Period 12,920 9,753 -------- -------- Cash and Cash Equivalents, End of Period $ 31,054 $ 9,710 ======== ========
See Notes to Consolidated Financial Statements 5 SUSSEX BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Sussex Bancorp ("the Company"), a one-bank holding company, was incorporated in January, 1996 to serve as the holding company for the Sussex Bank, formerly Sussex County State Bank ("the Bank"). The Bank is the only active subsidiary of the Company at September 30, 2001. The Bank operates eight banking offices all located in Sussex County and pursuant to an acquisition which was consummated on October 1, 2001, is the parent of Tri-State Insurance Agency, Inc., a full service insurance agency located in Sussex County, New Jersey. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, FDIC and the New Jersey Department of Banking and Insurance (the "Department"). The consolidated financial statements included herein have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for interim periods. All adjustments made were of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in the Company's Annual Report on Form 10-KSB for the fiscal period ended December 31, 2000. 2. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for a one day period. 3. Securities The amortized cost and approximate market value of securities are summarized as follows (in thousands):
September 30, 2001 December 31, 2000 Amortized Market Amortized Market Cost Value Cost Value ---- ----- ---- ----- Available For Sale US Treasury securities $ 1,508 $ 1,540 $ 4,043 $ 4,033 Mortgage Backed Securities 34,888 35,270 25,116 24,880 Corporate Bonds 5,215 5,306 3,477 3,469 Obligations of State and Political subdivisions 7,293 7,357 0 0 Equity Securities 850 815 850 804 ------- ------- ------- ------- Total $49,754 $50,288 $33,486 $33,186 ======= ======= ======= ======= Held to maturity Obligations of State and Political subdivisions $ 0 $ 0 $ 6,431 $ 6,393 ------- ------- ------- ------- Total $ 0 $ 0 $ 6,431 $ 6,393 ======= ======= ======= ======= ------- ------- ------- ------- Total Securities $49,754 $50,288 $39,917 $39,579 ======= ======= ======= =======
4. Net Income Per Common Share Basic net income per share of common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effect of outstanding stock options. 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three and Nine Months ended September 30, 2001 and September 30, 2000. OVERVIEW The Company realized net income of $174 thousand for the third quarter of 2001, a decrease of $18 thousand from the $192 thousand reported for the same period in 2000. Basic earnings per share decreased from $0.13 in the third quarter of 2000 to $0.11 for the third quarter of 2001. Diluted earnings per share decreased from $0.13 in the third quarter of 2000 to $0.10 per share in the quarter ended September 30, 2001. These decreases in earnings per share are reflective of both the increase in the weighted average shares outstanding in 2001 resulting from the Lakeland Bancorp stock purchase in January 2001 and the slight decline in earnings. For the nine months ended September 30, 2001, net income was $624 thousand, an increase of $48 thousand from the $576 thousand reported for the same period in 2000. Basic and diluted earnings per share were $0.38 for the nine months ended September 30, 2001 compared to basic earnings per share of $0.39 and diluted earnings per share of $0.38 for the nine months ended September 30, 2000. RESULTS OF OPERATIONS Interest Income. Total interest income increased $257 thousand, or 9.7%, to $2.9 million for the quarter ended September 30, 2001 from $2.6 million for the same period in 2000. This increase was primarily attributable to an increase in average interest earning assets of $35.6 million, or 24.6%, from $144.7 million for the third quarter of 2000 to $180.3 million in the third quarter of 2001, partially offset by a decline in average yield. An increase of $183 thousand in interest earned on federal funds sold and time deposits and an increase of $44 thousand in interest earned on taxable investment securities were the largest components of the increase in interest income. The yield on average interest-earning assets on a fully taxable equivalent basis decreased 91 basis points from 7.35% for the third quarter of 2000 to 6.44% for the third quarter of 2001, reflecting both market changes in interest rates and larger average balances in lower yielding federal funds sold and time deposits in other banks. For the nine months ended September 30, 2001, interest income increased $1.2 million, or 15.2%, to $8.8 million from the $7.6 million reported for the same period in 2000. This growth in interest income is the result of a $30.8 million, or 21.7% increase in the average balance of interest-earning assets over the comparable period last year. The average balance in other interest bearing assets increased $18.5 million and the loan portfolio increased $10.4 million during the first nine months of 2001 over the same period in 2000. As the result of declining market rates and growth in lower yielding earning assets, the average yield on interest earning assets on a fully taxable equivalent basis decreased 40 basis points from 7.27% from the first nine months of 2000 to 6.87% for the same period of 2001. Interest Expense. The Company's interest expense for the third quarter of 2001 increased $205 thousand, or 16.3% to $1.5 million from $1.3 million for the third quarter of 2000, as the average balance of interest bearing liabilities increased $34.2 million, or 28.5% from the same period last year. Interest on time deposits, the largest component of the increase, increased $198 thousand, or 29.6% to $867 thousand in interest expense as the average balance in time deposits increased $18.2 million, or 37.1% in the third quarter of 2001 compared to the same period in 2000. NOW, savings and money market deposits combined showed an aggregate increase of $10.0 million, or 15.0%, in average balances during the third quarter of 2001 from the third quarter of 2000 and a net decrease in interest expense of $49 thousand to $468 thousand from $517 thousand during the same third quarter periods. These decreases in interest expense reflect the decrease in the market rates of interest between the two periods. As the average borrowed funds increased $7.0 million from third quarter 2000 compared to the third quarter of 2001, the Company's interest expense on borrowed funds increased $56 thousand, to $127 thousand for the quarter ended September 30, 2001 from $71 thousand for the third quarter ended September 30, 2000. The Company entered into three ten year callable Federal Home Loan Bank advances totaling $10 million in December 2000 compared to short term borrowed funds of $4.0 million in the third quarter of 2000. The FHLB advances were an investment strategy used to payoff short term borrowings and to have liquidity available to purchase investments. The Company's average cost of funds decreased 40 basis points to 3.76% for the third quarter of 2001 from 4.16% for the third quarter in 2000. This decrease in the average cost of funds was the result of the Company decreasing its rates of interest paid on all deposit accounts as market rates of interest fell during the third quarter of 2001 compared to the average rates paid in the third quarter of 2000 and the lower average rate paid on the average balance of $10 million in FHLB advances of 4.97% in 2001 compared to the 6.87% paid on an average third quarter balance of $4.0 million in short term borrowings during the third quarter of 2000. For the nine months ended September 30, 2001 interest expense increased $907 thousand, or 25.8%, to $4.4 million from $3.5 million for the same period last year as the average balance of total interest bearing liabilities increased $29.3 million, or 24.8%, to $147.2 million during the comparative nine month periods and the Company's average rate paid on interest bearing deposits increased by 3 basis points. This increase in interest expense was largely due to an increase of $802 thousand, or 44.4%, in interest expense on time deposits from $1.8 million for the nine months of 2000 to $2.6 million during the same period in 2001. In the first nine months of 2001, the average balance in time deposit accounts increased $18.3 million, or 39.3%, over the average balance for the nine months ended September 30, 2000 and the average rate paid increased to 5.37% in the current period from 5.18% in the prior year period. The Company's borrowed funds increased $6.2 million from $3.8 million during the first nine months of 2000 to $10 million in the first nine months of 2001. As the Company moved from short term funding to long term funding, the average rate paid on these borrowed funds decreased 143 basis points. The average rate paid on total interest bearing liabilities increased 3 basis points from 3.99% in the first nine months of 2000 to 4.02% during the same period in 2001. The average balance of non-interest bearing demand deposits increased $1.7 million to $25.2 million for the first nine months of 2001 from $23.5 million for the same period in 2000. 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 nine months ended September 30, 2001 and 2000. The average balance of loans includes non-accrual loans, and associated yields include loan fees, which are considered adjustment to yields. 7 Comparative Average Balance Sheets Nine Months Ended September 30,
2001 2000 Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid ------- ------- ---- ------- ------- ---- (Dollars in Thousands) Assets Interest Earning Assets: Taxable Loans (net of unearned income) $101,928 $6,097 8.00% $ 91,564 $5,506 8.03% Tax Exempt Securities 6,495 253 5.21% 7,836 307 5.23% Taxable Investment Securities 38,952 1,698 5.83% 35,719 1,610 6.02% Other (1) 25,118 821 4.37% 6,617 296 5.98% -------- ------ -------- ------ Total Earning Assets $172,493 $8,869 6.87% $141,736 $7,719 7.27% Non-Interest Earning Assets $ 13,376 $ 10,363 Allowance for Possible Loan Losses ($1,026) ($898) -------- -------- Total Assets $184,843 $151,201 ======== ======== Liabilities and Shareholders' Equity Interest Bearing Liabilities: NOW Deposits $ 16,144 $ 162 1.34% $ 14,185 $ 134 1.26% Savings Deposits 49,048 1,125 3.07% 46,496 1,197 3.44% Money Market Deposits 7,092 156 2.94% 6,774 196 3.86% Time Deposits 64,879 2,608 5.37% 46,588 1,806 5.18% Borrowed Funds 10,000 376 4.96% 3,843 187 6.39% -------- ------ -------- ------ Total Interest Bearing Liabilities $147,163 $4,427 4.02% $117,886 $3,520 3.99% Non-Interest Bearing Liabilities: Demand Deposits $25,193 $23,507 Other Liabilities 807 622 -------- -------- Total Non-Interest Bearing Liabilities $26,000 $24,129 Shareholders' Equity $11,680 $9,186 -------- -------- Total Liabilities and Shareholders' Equity $184,843 $151,201 ======== ======== Net Interest Differential $4,442 $4,199 Net Interest Margin 2.85% 3.28% Net Yield on Interest-Earning Assets 3.44% 3.96%
(1) Includes FHLB stock, federal funds sold, interest-bearing deposits, and time deposits 8 Net-Interest Income. The net interest income for the third quarter of 2001 increased $52 thousand over the same period last year. The net interest spread decreased, on a fully taxable equivalent basis, by 51 basis points to 2.68% and the net yield on interest-bearing assets declined by 63 basis points to 3.26% in the current quarter compared to the third quarter of 2000. These results show the effects of an increase in the average balance in lower yielding federal funds brought in through an increase in the average balance in time deposits. Due to the declining market rates of interest during the first nine months of 2001, the Company's anticipated increase in loan average balances has slowed as new loan originations have not kept the pace with loan payoffs. Net interest income for the nine months ended September 30, 2001 increased $258 thousand, or 6.2%, compared to the third quarter of 2000. The net interest margin, on a fully taxable equivalent basis, decreased 43 basis points to 2.85% and the net yield on interest earning assets decreased 52 basis points to 3.44% in the current nine month period compared to the same period last year. This decrease was mostly due to a decrease in the average yield earned on interest earning assets. The funds brought in from the highly successful time deposit promotion were not immediately needed to fund loan demand, and are presently invested in lower yielding, more liquid, federal funds until invested in new loan demand or investment securities. Provision for Loan Losses. For the three months ended September 30, 2001 and 2000, the provision for possible loan losses was $63 thousand. The provision for possible loan losses was $189 thousand for the nine months ended September 30, 2001 as compared to $174 thousand for the same period last year. The provision for loan losses over the three and nine month periods 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 in the average balance of the portfolio over both periods. Management reviews the adequacy of its allowance on an ongoing basis and will provide for additional provision in future periods, as management may deem necessary. Non-Interest Income. For the third quarter of 2001, total non-interest income increased $114 thousand, or 51.8%, from the same period in 2000. Service charges on deposit accounts increased $28 thousand in the third quarter of 2001 compared to the three months ended September 30, 2000. Other income increased $72 thousand, or 64.3%, in the third quarter of 2001 from the same period in 2000. This increase was mostly the result of an increase of $40 thousand in fees generated by the non-deposit investment products offered by our third party provider, IBFS, and an increase of $15 thousand in ATM/Debit card fee income in the third quarter of 2001 over the third quarter of 2000. For the nine months ended September 30, 2001, non-interest income increased $309 thousand, or 49.9%, from the same period in 2000. Service charges on deposit accounts increased $64 thousand for the nine month period ending September 30, 2001 over the same period in 2000. This increase was largely due to increased fees charged on deposit accounts which became effective on April 1, 2001. Other income increased $222 thousand, or 75.3%, from September 30, 2000 to September 30, 2001. The components of this increase were an $89 thousand increase in the fees generated from non-deposit investment products offered through IBFS, a $50 thousand increase in commission income from Sussex Bancorp Mortgage Company, a $36 thousand increase in ATM/Debit card income due to the new debit card program which started late in 2000 and an increase of $30 thousand earned on an executive life insurance policy. In the first nine months of 2001, an $8 thousand gain on the sale of available for sale securities was recorded compared to a $14 thousand loss in available for sale securities during the first nine months of 2000. Non-Interest Expense. For the quarter ended September 30, 2001, non-interest expense increased $177 thousand from the same period last year. Salaries and employee benefits increased $61 thousand, or 8.7%, as salaries increased $64 thousand and employee benefits decreased $3 thousand. This decrease in employee benefits was the result of a $25 thousand refund in medical claim expenses. Other increases from third quarter 2000 to third quarter 2001 were non-deposit investment department consulting fees of $24 thousand, legal and professional fees of $14 thousand, net occupancy expense of $13 thousand and director and committee fees of $13 thousand. For the nine months ended September 30, 2001, non-interest expense increased $422 thousand, or 11.0%, from the same period last year. Salaries and employee benefits increased $210 thousand, or 10.2% and occupancy expense increased $39 thousand. Data processing expenses have increased $22 thousand, audits and exams increased $23 thousand and legal fees have increased $22 thousand during the first nine months of 2001 as compared to the first nine months of 2000. The addition of a non-deposit investment consultant in the second quarter of 2001 has increased other expenses by $28 thousand. Other increases in operating expenses reflect normal expenditures relative to the growth of the Company. Income Taxes. Income tax expense increased $7 thousand to $68 thousand for the three months ended September 30, 2001 as compared to $61 thousand for the same period in 2000, due to a lower benefit from tax exempt income. Income taxes also increased for the nine months ended September 30, 2001 to $257 thousand as compared to $175 thousand for the nine months ended September 30, 2000. The increase in income taxes for the nine month periods resulted from a higher level of income before income taxes in combination with a reduced level of tax-exempt income in 2001 compared to 2000. 9 FINANCIAL CONDITION September 30, 2001 as compared to December 31, 2000 Total assets increased to $198.0 million at September 30, 2001, a $36.4 million increase from total assets of $161.6 million at December 31, 2000. Increases in total assets included increases of $18.1 million in cash and cash equivalents, $10.7 million in total securities and $6.0 million in time deposits in other banks and $1.3 million in total loans, net of unearned income. This net increase in assets was funded by an increase in total deposits of $33.9 million from $140.9 million at year-end 2000 to $174.8 million on September 30, 2001 and an increase in total stockholder's equity of $2.2 million from $10.1 million at December 31, 2000 to $12.3 million at September 30, 2001, reflecting both the Company's retained earnings for the first nine months of 2001 and the investment of $1.1 million in the Company's common stock by Lakeland Bancorp in January 2001. Total loans at September 30, 2001 increased $1.3 million to $102.5 million from $101.2 million at year-end 2000. 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. These factors are evident in the loan portfolio balances at September 30, 2001 compared to December 31, 2000. Residential real estate loans decreased $2.1million, construction loans decreased $2.3 million and consumer loans and other loans decreased $1.0 million, while commercial and industrial loans increased $2.9 million and non-residential real estate loans increased $3.8 million. The following schedule presents the components of loans, net of unearned income, for each period presented:
September 30 December 31 2001 2000 ---- ---- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in Thousands) Commercial and industrial $ 7,847 7.66% $ 4,968 4.91% Real Estate-Non Residential 31,309 30.55% 27,529 27.21% Residential Properties (1-4 Family) 53,158 51.86% 55,229 54.59% Construction 6,695 6.53% 8,960 8.86% Consumer 2,547 2.48% 2,780 2.75% Other Loans 941 0.92% 1,700 1.68% -------- ------ -------- ------ Total Loans, Net of Unearned Income $102,497 100.00% $101,166 100.00% ======== ====== ======== ======
Federal funds sold increased by $17.3 million to $25.3 million at September 30, 2001 from $8 million on December 31, 2000 and time deposits in other banks increased $6 million from $100 thousand at year-end 2000 to $6.1 million on September 30, 2001. Time deposits at September 30, 2001 increased $15.2 million from year end 2000, due primarily to the promotion of time deposits during the first quarter of 2001. Management desired to enhance its market share on deposits, and believed that additional funds would be needed to satisfy new loan demand. As deposits increased faster than investment opportunities in a declining rate environment, the excess funds were invested in short-term federal funds and time deposits in other banks. These funds will be used to fund future loan demand, with excess liquidity used to purchase investment securities. Total investment securities increased $10.7 million, or 26.9%, from $39.6 million at year-end 2000 to $50.3 million on September 30, 2001. Securities, available for sale, at market value, increased $17.1 million, or 51.5%, from $33.2 million on December 31, 2000 to $50.3 million at September 30, 2001. The Company purchased $34.9 million in new securities in the first nine months of 2001 and $24.0 million in available for sale securities matured, were called and were repaid. In addition, the Company transferred its held to maturity portfolio of $5.6 million to available for sale during the third quarter of 2001. There were $834 thousand in recorded unrealized gains in the available of sale portfolio during the first nine months of 2001. With the transfer of the held to maturity portfolio in July of 2001, there were no held to maturity securities at September 30, 2001 compared to $6.4 million at year-end 2000. There were $532 thousand in held to maturity purchases and $1.4 million in maturing securities in the held to maturity portfolio during the first nine months of 2001. Total year to date average deposits increased $23.9 million, or 17.3%, to $162.4 million during the first nine months of 2001 from the twelve-month average of $138.4 million for the year ended December 31, 2000. Average time deposits increased by $17.2 million, savings deposits increased by $3.2 million, NOW deposits increased by $1.9 million, demand deposits increased by $1.2 million and money market deposits increased by $463 thousand. As discussed earlier, the increase in time deposits was due to an aggressive promotion of higher yielding time deposits during the first quarter of 2001 and the Company's decision to compete for the deposits on the basis of rate. Management continues to monitor the shift in deposits through its Asset/Liability Committee. The following schedule presents the components of deposits, for each period presented. Nine Months Ended Twelve Months Ended September 30, 2001 December 31, 2000 ------------------ ------------------- Average Percent Average Percent Balance of Total Balance of Total -------- -------- -------- -------- Total Deposits: NOW Deposits ........ $ 16,144 9.94% $ 14,261 10.30% Savings Deposits .... 49,048 30.21% 45,853 33.13% Money Market Deposits 7,092 4.37% 6,629 4.79% Time Deposits ....... 64,879 39.96% 47,656 34.43% Demand Deposits ..... 25,193 15.52% 24,015 17.35% -------- ------ -------- ------ Total Deposits .... $162,356 100.00% $138,414 100.00% ======== ====== ======== ====== 10 ASSET QUALITY At September 30, 2001, non-performing loans increased $972 thousand to $1.5 million, as compared to $552 thousand at December 31, 2000. One construction credit with a value of $1.2 million was transferred to non-accrual during the third quarter of 2001. The credit represents a loan participation secured by seventeen completed condominium units located in Piermont, New York. The Bank is negotiating with the lead bank for the loan on the allocation of future payments. Management believes the Bank is adequately collateralized regarding this credit and does not anticipate a material loss. The following table provides information regarding risk elements in the loan portfolio:
September 30 December 31 2001 2000 ---- ---- Non-accrual loans .................................... $ 1,524 $ 552 Non-accrual loans to total loans ..................... 1.49% 0.55% Non-performing loans to total assets ................. 0.86% 0.34% Allowance for possible loan losses as a percentage of non-performing loans ................. 70.93% 176.27% Allowance for possible loan losses to total loans .... 1.05% 0.96%
ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is maintained at a level considered adequate to provide for potential loan losses. The level of the allowance is based on management's evaluation of potential losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. The allowance for possible loan losses is increased by provisions charged to expense and reduced by charge-offs, net of recoveries. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers' credit worthiness, and the impact of examinations by regulatory agencies all could cause changes to the Company's allowance for possible loan losses. At September 30, 2001, the allowance for possible loan losses was $1.1 million, up 11.1% from the $973 thousand at year-end 2000. There were $81 thousand in charge offs and $1 thousand in recoveries reported in the first nine months of 2001. The allowance for possible loan losses as a percentage of total loans was 1.05% at September 30, 2001 compared to 0.96% on December 31, 2000. LIQUIDITY MANAGEMENT At September 30, 2001, 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 September 30, 2001, liquid investments totaled $31.1 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 September 30, 2001, had the ability to borrow a total of $24.2 million against its one to four family mortgages as collateral for long term advances. The Bank also has available an overnight line of credit in the amount of $7.8 million. In December of 2000 the Company borrowed against its one to four family mortgages and entered into three long term FHLB advances totaling $10 million. The three borrowings, which have an average interest rate of 4.96%, mature on December 21, 2010, but are callable beginning in December 2001, 2002 and 2003, respectively. These borrowings were used to restructure maturing short-term debt of $4 million and make available funds to purchase higher yielding investments. CAPITAL RESOURCES Total stockholders' equity increased $2.2 million to $12.3 million at September 30, 2001 from the $10.1 million at year-end 2000. The increase was due to the sale of common stock of $1.3 million, net income of $624 thousand, shares issued through the dividend reinvestment plan of $113 thousand, stock options exercised of $43 thousand and an increase in the net unrealized gain on securities available for sale of $500 thousand. Decreases to stockholders' equity were cash dividends of $230 thousand and purchases of $5 thousand in treasury stock. On January 17, 2001 the Company sold 9.9% of its outstanding stock to Lakeland Bancorp, a New Jersey based bank holding company, at a price of $8.50 per share. Lakeland purchased 139,906 shares for approximately $1.1 million. As of September 30, 2001 Lakeland Bancorp's stock holdings represented 8.4% of the Company's outstanding stock. At September 30, 2001, each of the Company and the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at September 30, 2001 for both the Company and the Bank as well as the minimum regulatory requirements. Amount Ratio Amount Minimum Ratio ------ ----- ------ ------------- The Company Leverage Capital $11,504 5.98% $ 7,695 4% Tier 1 - Risk Based 11,504 10.39% 4,430 4% Total Risk-Based 12,585 11.36% 8,860 8% The Bank Leverage Capital 10,517 5.47% 7,693 4% Tier 1 Risk-Based 10,517 9.51% 4,422 4% Total Risk-Based 11,598 10.49% 8,843 8% 11 NEW ACCOUNTING PRONOUNCEMENTS The adoption of SFAS No. 138 on January 1, 2001, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" did not have a material impact on the financial condition or results of operations of the Company. On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, which supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this Statement are to be accounted for using the purchase method of accounting. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The Company will apply this new pronouncement on a prospective basis. On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. This Statement supersedes APB Opinion No. 17, Intangible Assets. Under the new standard goodwill will no longer be subject to amortization over its estimated useful life. Rather goodwill will be subject to at least an annual assessment for impairment by applying a fair value test. An acquired intangible asset would be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged regardless of the acquirers intent to do so. All of the provisions of this Statement should be applied in fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized in an entity's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. The Company does not expect that the adoption of this new pronouncement will have a material impact on its financial position or results of operations. Part II Other Information ------------------------- Item 1. Legal Proceedings ----------------- The Company and the Bank are periodically involved in various legal proceedings as a normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit. Item 2. Changes in Securities --------------------- Not applicable Item 3. Defaults Upon Served Securities ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable Item 5. Other Information ----------------- Effective October 1, 2001, the Company completed an acquisition of all of the outstanding stock of Tri-State Insurance Agency, Inc. ("Tri-State"), a full-service insurance agency located in Augusta, New Jersey. The Company intends to operate Tri-State as a wholly owned subsidiary of Sussex Bank. The purchase price paid by the Company for Tri-State is comprised of an upfront payment of $350,000 at closing, and deferred payments on the first, second and third anniversaries of the closing. On each of the first, second, and third anniversaries of the closing, the shareholders of Tri-State will be entitled to an aggregate payment of $700,000, to be satisfied through a mix of cash and common stock of the Company. The deferred payments are subject to adjustment based upon the net income of Tri-State as a subsidiary of Sussex Bank. In Tri-State's first year of operation after the acquisition, it must produce a minimum net pretax profit of $175,000, or the shareholders of Tri-State will receive a dollar for dollar reduction in their deferred payments (i.e., in Year 1, the aggregate payment may be reduced to $525,000 in the event Tri-State produces no profit). In the second year, the targeted net pretax profit is $192,500, and in Year 3 it is $210,000. The estimated number of shares to be issued to the former principals of Tri-State on the first three anniversaries of the acquisition will be deemed outstanding for purposes of calculating the Company's diluted earnings per share in future periods, although they will not be deemed outstanding until issued for purposes of calculating the Company's basic earnings per share. The estimated number of shares to be issued for purposes of the Company's diluted earnings per share will be calculated based upon Tri-State's earnings to date at the time of calculation and the Company's then current stock price. The actual number of shares issued by the Company to the former principals of Tri-State may vary significantly from these estimates, and will not be known until such time as the shares are actually issued. As part of the acquisition, each of the principals of Tri-State have entered into an employment agreement providing for their employment by Tri-State for a period of at least five years. After the initial five-year term, the employment agreement will automatically renew for additional three-year periods unless twelve months prior to the end of the initial term either party provides notice of its intention not to renew. 12 Item 6. Exhibits and Report on form 8-K ------------------------------- (a). Exhibits None (b). Reports on Form 8-K Filing Date Item Number Description ----------- ----------- ----------- July 21, 2001 Item 5 Reporting Company's second quarter 2001 results SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUSSEX BANCORP Date: By: /s/ Candace A. Leatham ------------------------- CANDACE A. LEATHAM Senior Vice President and Chief Financial Officer 13 -----END PRIVACY-ENHANCED MESSAGE-----