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, 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 November 11,2003 there were 1,725,341 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 14
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Exhibits 15
-2-
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
ASSETS September 30, 2003 December 31, 2002
------ ------------------ -----------------
Cash and due from banks $ 11,023 $ 9,186
Federal funds sold 4,740 16,910
-------- --------
Cash and cash equivalents 15,763 26,096
Interest bearing time deposits with other banks 3,500 3,600
Securities available for sale 75,730 72,720
Federal Home Loan Bank Stock, at cost 760 750
Loans receivable, net of unearned income 129,767 113,455
Less: allowance for loan losses 1,652 1,386
-------- --------
Net loans receivable 128,115 112,069
Premises and equipment, net 4,334 4,634
Accrued interest receivable 1,248 1,144
Goodwill 1,932 1,932
Other assets 3,679 2,959
-------- --------
Total Assets $235,061 $225,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing demand $ 33,894 $ 26,514
Savings and interest bearing demand 115,516 110,729
Time of less than $100,000 41,901 43,470
Time of $100,000 and over 10,495 9,145
-------- --------
Total Deposits 201,806 189,858
Borrowings 12,000 15,000
Accrued interest payable and other liabilities 2,218 2,366
Mandatory redeemable capital debentures 5,000 5,000
-------- --------
Total Liabilities 221,024 212,224
Stockholders' Equity:
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding 1,789,457 in 2003 and 1,688,130 in 2002 9,302 7,869
Retained earnings 4,604 5,249
Accumulated other comprehensive income 131 562
-------- --------
Total Stockholders' Equity 14,037 13,680
-------- --------
Total Liabilities and Stockholders' Equity $235,061 $225,904
======== ========
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans receivable, including fees $2,036 $1,956 $6,008 $5,773
Securities:
Taxable 360 609 1,328 1,556
Tax-exempt 198 130 532 346
Federal funds sold 14 87 95 324
Interest bearing deposits 11 31 36 81
------ ------ ------ ------
Total Interest Income 2,619 2,813 7,999 8,080
------ ------ ------ ------
INTEREST EXPENSE
Deposits 479 671 1,574 2,210
Borrowings 142 148 437 397
Mandatory redeemable capital debentures 60 65 186 65
------ ------ ------ ------
Total Interest Expense 681 884 2,197 2,672
------ ------ ------ ------
Net Interest Income 1,938 1,929 5,802 5,408
Provision for Loan Losses 70 75 315 225
------ ------ ------ ------
Net Interest Income after Provision for Loan Losses 1,868 1,854 5,487 5,183
------ ------ ------ ------
NON-INTEREST INCOME
Service fees on deposit accounts 197 195 569 510
ATM fees 87 70 251 187
Insurance commissions and fees 512 414 1,599 1,276
Investment brokerage fees 54 56 192 204
Net gain on sale of loans held for sale 0 -- 24 24
Net gain on sale of other real estate owned 0 -- 63 --
Other 64 59 233 190
------ ------ ------ ------
Total Non-Interest Income 914 794 2,931 2,391
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,371 1,245 3,998 3,474
Occupancy, net 154 151 478 447
Furniture and equipment 199 199 600 629
Stationary and supplies 43 50 140 129
Audit and exams 28 35 80 101
Advertising and promotion 111 121 286 363
Postage and freight 44 42 134 114
Amortization of intangible assets 42 33 119 98
Other 383 372 1,263 1,020
------ ------ ------ ------
Total Non-Interest Expense 2,375 2,248 7,098 6,375
------ ------ ------ ------
Income before Income Taxes 407 400 1,320 1,199
Provision for Income Taxes 91 113 331 350
------ ------ ------ ------
Net Income $ 316 $ 287 $ 989 $ 849
====== ====== ====== ======
Earnings per share
------ ------ ------ ------
Basic $ 0.18 $ 0.16 $ 0.55 $ 0.49
====== ====== ====== ======
------ ------ ------ ------
Diluted $ 0.17 $ 0.16 $ 0.54 $ 0.47
====== ====== ====== ======
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Accumulated
Number of Other
Shares Common Retained Comprehensive
Outstanding Stock Earnings Income
----------- ----- -------- ------
(Dollars in thousands, except per share amounts)
------------------------------------------------
Balance December 31, 2001 1,659,057 $7,732 $4,509 $123
Comprehensive income:
Net income - - 849 -
Change in unrealized gains (losses) on
securities available for sale - - - 449
Total Comprehensive Income
Treasury shares purchased (14,554) - - -
Issuance of common stock and exercise of stock options 5,623 38 - -
Issuance of common stock through dividend reinvestment plan 9,313 86 - -
Cash dividends on common stock ($.18 per share) - - (298) -
--------------------------------------------------
Balance September 30, 2002 1,659,439 $7,856 $5,060 $572
==================================================
Balance December 31, 2002 1,688,130 $7,869 $5,249 $562
Comprehensive income:
Net income - - 989 -
Change in unrealized gains (losses) on
securities available for sale - - - (431)
Total Comprehensive Income
Treasury shares purchased (2,400) - - -
Treasury shares retired - (25) - -
Issuance of common stock and exercise of stock options 7,037 52 - -
Shares issued through dividend reinvestment plan 11,478 128 - -
Cash dividends on common stock ($.14 per share) - - (356) -
5% Stock Dividend 85,212 1,278 (1,278) -
--------------------------------------------------
Balance September 30, 2003 1,789,457 $9,302 $4,604 $131
==================================================
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Total
Treasury Stockholders
Stock Equity
----- ------
(Dollars in thousands, except per share amounts)
------------------------------------------------
Balance December 31, 2001 ($127) $12,237
Comprehensive income:
Net income - 849
Change in unrealized gains (losses)
on securities available for sale - 449
Total Comprehensive Income 1,298
Treasury shares purchased (156) (156)
Issuance of common stock and exercise of stock options - 38
Issuance of common stock through dividend reinvestment plan - 86
Cash dividends on common stock ($.18 per share) - (298)
--------------------------
Balance September 30, 2002 ($283) $13,205
==========================
Balance December 31, 2002 $0 $13,680
Comprehensive income:
Net income - 989
Change in unrealized gains (losses)
on securities available for sale - (431)
Total Comprehensive Income 558
Treasury shares purchased (25) (25)
Treasury shares retired 25 -
Issuance of common stock and exercise of stock options - 52
Shares issued through dividend reinvestment plan - 128
Cash dividends on common stock ($.14 per share) - (356)
5% Stock Dividend - -
--------------------------
Balance September 30, 2003 $0 $14,037
==========================
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------- ------------
(In Thousands)
Cash Flows from Operating Activities
Net income $ 989 $ 849
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 315 225
Provision for depreciation and amortization 386 428
Net amortization of securities premiums and discounts 892 357
Net realized gain on sale of foreclosed real estate (63) -
Proceeds from sale of loans 668 1,220
Net gains on sale of loans (24) (24)
Loans originated for sale (644) (1,196)
Earnings on investment in life insurance (37) (42)
Increase in assets:
Accrued interest receivable (104) (196)
Other assets (360) (387)
Decrease in accrued interest payable and other liabilities (148) (1)
-------- --------
Net Cash Provided by Operating Activities 1,870 1,233
-------- --------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (42,634) (46,695)
Maturities, calls and principal repayments 38,014 21,389
Net increase in loans (16,584) (3,876)
Purchases of bank premises and equipment (86) (206)
Purchase of FHLB stock (10) (65)
Proceeds from sale of foreclosed real estate 250 -
Decrease (increase) in interest bearing time deposits with other banks 100 (3,000)
-------- --------
Net Cash Used in Investing Activities (20,950) (32,453)
-------- --------
Cash Flows from Financing Activities
Net increase in deposits 11,948 11,990
Net purchase (redemption) of borrowings (3,000) 5,000
Net purchase of debentures - 5,000
Proceeds from the issuance of common stock 52 38
Purchase of treasury stock (25) (156)
Dividends paid, net of reinvestments (228) (212)
-------- --------
Net Cash Provided by Financing Activities 8,747 21,660
-------- --------
Net Decrease in Cash and Cash Equivalents (10,333) (9,560)
Cash and Cash Equivalents - Beginning 26,096 41,035
-------- --------
Cash and Cash Equivalents - Ending $ 15,763 $ 31,475
======== ========
Supplementary Cash Flows Information
Interest paid $ 2,988 $ 2,779
======== ========
Income taxes paid $ 623 $ 331
======== ========
Supplementary Schedule of Noncash Investing and Financing Activities
Other real estate acquired in settlement of loans $ 223 $ 0
======== ========
See Notes to Consolidated Financial Statements
-3-
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., ("Tri-State") a full service insurance agency
located in Sussex County, New Jersey. All inter-company transactions and
balances have been eliminated in consolidation. The Bank operates eight banking
offices all located in Sussex County, New Jersey. The Company is subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "FRB"). The Bank's deposits are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to applicable
limits. The operations of the Company and the Bank are subject to the
supervision and regulation of the FRB, FDIC and the New Jersey Department of
Banking and Insurance (the "Department") and the operations of Tri-State are
subject to the supervision and regulation by the Department.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for full year
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the nine-month period ended September
30, 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. Stockholders' Equity and Subsequent Event
On October 15, 2003, the Board of Directors declared a 5% common stock
dividend payable on November 24, 2003 to shareholders of record as of November
3, 2003. Accordingly, 85,212 shares of common stock will be issued to the
Company's stockholders and $1,278,000 will be transferred from retained
earnings to common stock. The effect of the stock dividend has been
retroactively reflected as of September 30, 2003 on the consolidated balance
sheet and the consolidated statement of stockholders' equity. The earnings per
share amounts disclosed on the consolidated income statement and related
footnote reflect the effect of the stock dividend on the number of outstanding
shares for all periods.
3. Earnings per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed issuance of
potential common shares that may be issued by the Company relating to
outstanding stock options and guaranteed and contingently issuable shares from
the acquisition of Tri-State. Potential common shares related to stock options
are determined using the treasury stock method.
The following table sets forth the computations of basic and diluted
earnings per share as retroactively adjusted for the 5% stock dividend declared
October 15, 2003 (dollars in thousands, except per share data):
Three Months Ended September 30, 2003 Three Months Ended Septembere 30, 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 $ 316 1,788 $ 0.18 $ 287 1,744 $ 0.16
============== ==============
Effect of dilutive securities:
Stock options - 50 - 18
Deferred common stock payments for
purchase of insurance agency 1 34 5 61
---------------------------- ----------------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $ 317 1,872 $ 0.17 $ 292 1,823 $ 0.16
========================================== ==========================================
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 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 $ 989 1,783 $ 0.55 $ 849 1,741 $ 0.49
============== ==============
Effect of dilutive securities:
Stock options - 28 - 18
Deferred common stock payments for
purchase of insurance agency 5 38 8 61
---------------------------- ----------------------------
Diluted earnings per share:
Net income applicable to common stock-
holders and assumed conversions $ 994 1,849 $ 0.54 $ 857 1,820 $ 0.47
========================================== ==========================================
4. Comprehensive Income
The components of other comprehensive income and related tax effects for
the three and nine months ended September 30, 2003 and 2002 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
(in Thousands) (in Thousands)
Unrealized holding gains (losses) on available for sale securities (1,053) $374 ($718) $751
Less: reclassification adjustments for gains included in net income - - - -
----------- ------------ ------------ ------------
Net unrealized gains (losses) (1,053) 374 (718) 751
Tax effect (421) 149 (287) 302
----------- ------------ ------------ ------------
Other comprehensive income (loss), net of tax ($632) $225 ($431) $449
=========== ============ ============ ============
5. Segment Information
The Company's insurance agency operations are managed separately from the
traditional banking and related financial services that the Company also offers.
The insurance agency operation provides commercial, individual, and group
benefit plans and personal coverage.
Three Months Ended September 30, 2003 Three Months Ended September 30, 2002
----------------------------------------------- -----------------------------------------------
Banking and Insurance Banking and Insurance
Financial Services Services Total Financial Services Services Total
(In Thousands) (In Thousands)
Revenues from external sources $3,021 $512 $3,533 $3,193 $414 $3,607
Income before income taxes 312 95 407 364 36 400
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002
----------------------------------------------- -----------------------------------------------
Banking and Insurance Banking and Insurance
Financial Services Services Total Financial Services Services Total
(In Thousands) (In Thousands)
Revenues from external sources $9,331 $1,599 $10,930 $9,195 $1,276 $10,471
Income before income taxes 1,066 254 1,320 1,055 144 1,199
6. 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 periods presented:
-4-
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands) (In Thousands)
Net income, as reported $ 316 $ 287 $ 989 $ 849
Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects (16) (8) (32) (18)
------- ------- ------- -------
Pro forma net income $ 300 $ 279 $ 957 $ 831
======= ======= ======= =======
Basic earnings per share:
As reported $ 0.18 $ 0.16 $ 0.55 $ 0.49
Pro forma $ 0.17 $ 0.16 $ 0.54 $ 0.48
Diluted earnings per share:
As reported $ 0.17 $ 0.16 $ 0.54 $ 0.47
Pro forma $ 0.16 $ 0.16 $ 0.52 $ 0.46
7. Acquisition
On January 2, 2003, the Company acquired certain assets of the Garrera
Insurance Agency through its subsidiary, Tri-State Insurance Agency, Inc. and
hired the former principal pursuant to an employment agreement. The acquisition
was accounted for using the purchase method of accounting. The entire purchase
price, which was not material to the Company, 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 purchase price was based, in part,
upon the future performance of the acquired book of business, with certain
payments deferred until the 25th month after the closing. The value of these
deferred payments will be added monthly to the value of the purchase price,
increasing the identifiable intangible. The value of this intangible asset is
included in Other Assets on the Company's balance sheet. The performance of the
acquired book of business since January 2, 2003 is included in the accompanying
consolidated financial statement.
8. New Accounting Standards
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 $1,174,000 of
standby letters of credit as of September 30, 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 September
30, 2003 for guarantees under standby letters of credit issued after December
31, 2002 is not material.
In January 2003, the Financial Accounting Standards Board issued FAB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". This interpretation provides new guidance for the
consolidation of variable interest entities (VIEs) and requires such entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among parties involved. The interpretation also adds
disclosure requirements for investors that are involved with unconsolidated
VIEs. The disclosure requirements apply to all financial statements issued after
January 31, 2003. The consolidation requirements apply immediately to VIEs
created after January 31, 2003 and are effective December 31, 2003 for VIEs
acquired before February 1, 2003. The adoption of this interpretation did not
have a significant impact on the Company's financial condition of results of
operations.
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement No. 149, "Amendment of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities". This statement clarifies the definition of
a derivative and incorporates certain decisions made by the board as part of the
Derivatives Implementation Group process. This Statement is effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003, and should be applied prospectively. The provisions of the
statement that relate to implementation issues addressed by the Derivatives
Implementation Group that have been effective should continue to be applied in
accordance with their respective dates. Adoption of this standard did not have a
significant impact on the Company's financial condition or results of
operations.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement requires that an issuer classify a
financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003. The adoption of this standard
did not have a significant impact on the Company's financial condition or
results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 2003 and September 30, 2002
CRITICAL ACCOUNTING POLICIES
-5-
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 12 and
13 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 $316 thousand for the third quarter of
2003, an increase of $29 thousand from the $287 thousand reported for the same
period in 2002. Basic earnings per share, as retroactively adjusted for the 5%
stock dividend declared October 15, 2003, increased from $0.16 in the third
quarter of 2002 to $0.18 for the third quarter of 2003. Diluted earnings per
share were $0.16 in the third quarter of 2002 and increased to $0.17 in the
third quarter of 2003.
For the nine months ended September 30, 2003, net income was $989 thousand,
an increase of $140 thousand from the $849 thousand reported for the same period
in 2002. Basic earnings per share , as retroactively adjusted for the 5% stock
dividend declared October 15, 2003, were $0.55 for the nine months ended
September 30, 2003 compared to $0.49 for the nine-month period ended September
30, 2002. Diluted earnings per share were $0.54 for the nine months ended
September 30, 2003, an increase from $0.47 from the first nine months of 2002.
The results reflect an increase in net interest income , primarily as a
result of a substantial decrease in interest expense due to declining market
rates of interest, coupled with increases in non-interest income, primarily from
our insurance agency operations.
RESULTS OF OPERATIONS
Interest Income. Total interest income decreased $160 thousand, or 0.6%, to
$2.7 million for the quarter ended September 30, 2003 from the same period in
2002. This decrease was primarily attributable to a decrease in the average
yield of 62 basis points, on a fully taxable equivalent basis, from 5.66% during
the third quarter of 2002 to 5.04% in the third quarter of 2003. Average earning
assets increased $12.1 million from $200.7 million in the third quarter of 2002
to $212.8 million in the same quarter in 2003. Although the average rate earned
on investment securities declined by 149 basis points, the average balance
increased by $11.4 million, or 17.6%, to $76.2 million in the third quarter of
2003. Similarly, while the average rate earned in the loan portfolio decreased
78 basis points to 6.33% for the third quarter of 2003 from 7.11% in the third
quarter of 2002, the average loan balance increased 17.1% from $109.1 million to
$127.7 million from third quarter 2002 to third quarter 2003. The interest
earned on other interest bearing assets declined $94 thousand while the average
balance in other interest earning assets decreased by $17.9 million, or 67.0%,
to $8.8 million from $26.8 million from the third quarter of 2002, primarily
reflecting a decline in federal funds sold. The market declines in interest
rates exceeded the impact of volume increases in average balances on interest
income, resulting in a decrease in interest income for the third quarter of 2003
compared to the third quarter if 2002.
For the nine months ended September 30, 2003, interest income, on a fully
taxable equivalent basis, remained stable compared to the first nine months of
2002, at $8.2 million for both nine month periods. During the first nine months
of 2003 average interest earning assets increased $18.5 million to $211.3
million from $192.8 million during the same period in 2002. The average balance
in the loan portfolio increased $14.7 million, taxable securities increased
$14.2 million and tax exempt securities increased $6.1 million, while the
average balance of other interest-earning assets decreased $16.4 million during
the first nine months of 2003 over the same period in 2002. While average
interest bearing asset balances increased, the continued effect of lower market
rates of interest resulted in a 50 basis point decrease in the average yield on
interest earning assets on a fully taxable equivalent basis from 5.70% from the
first nine months of 2002 to 5.20% for the same period of 2003.
Interest Expense. The Company's interest expense for the third quarter of
2003 decreased $202 thousand, or 22.9%, to $682 thousand from $884 thousand in
the third quarter of 2002. Despite the decline in interest expense, the average
balance of interest bearing liabilities increased $8.6 million, or 4.9% to
$185.0 million during the third quarter of 2003 from $176.4 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 1.46% for the third quarter of 2003 from 1.99% in the third
quarter of 2002. NOW deposit average balances grew $11.0 million, or 31.2%, from
$35.2 million during the third quarter 2002 to $46.2 million in the third
quarter of 2003. However, the interest expense on NOW deposits decreased $14
thousand from the third quarter of 2002, as the average interest rate paid
decreased 31 basis points from 0.77% to 0.46% during the same period. Average
savings deposits increased $3.3 million, or 5.3%, while the average rate paid
declined 57 basis points from 1.30% in the third quarter of 2002 to 0.73% in the
third quarter of 2003. The average balance in time deposits decreased $3.5
million, or 6.3% in the third quarter of 2003 compared to the same period in
2002 as the interest expense on time deposits declined $91 thousand, or 23.4% to
$298 thousand between the same two periods. The increase in NOW and savings
account average balances and the decline in time deposit average balances
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. Average borrowed funds and
capital debenture balances decreased $892 thousand to $17.3 million in the third
quarter of 2003 from $18.2 million in the third quarter of 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. The capital
debentures bear a floating rate of interest, which averaged 4.77% in the third
quarter of 2003, down 94 basis points from 5.71% in the third quarter of 2002.
For the nine months ended September 30, 2003 interest expense decreased
$475 thousand, or 17.8%, to $2.2 million from $2.7 million for the same period
last year. This decrease was largely due to a decrease in interest expense on
time deposits of $415 thousand, or 30.2%, from $1.4
-6-
million for the first nine months of 2002 to $958 thousand during the first nine
months of 2003. The average balance in time deposit accounts decreased $5.0
million, or 8.7%, over the same nine-month periods, as higher costing time
deposits have matured and management has elected not to compete for these
deposits solely on the basis of rate. The Company has shifted its focus from
attracting time deposits to attracting and retaining customers through a long
term marketing promotion of lower costing NOW and savings accounts. The average
balance of NOW deposits increased $11.9 million, or 36.2%, from $32.9 million
during the first nine months of 2002 to $44.8 million in the first nine months
of 2003. Savings deposits increased $3.8 million, or 6.2%, from $60.8 million
during the first nine months of 2002 to $64.6 million during the same period of
2003. The Company's borrowed funds increased $3.8 million, or 37.8%, from $10.0
million during the first six months of 2002 to $13.8 million for the first nine
months of 2003. The issuance of $5 million in capital debentures during July of
2002 initially bore an average rate of 5.71% during the first nine months of
2002. The rate on these debentures has decreased to an average rate of 4.92%
during the first nine months of 2003. The average rate paid on total interest
bearing liabilities decreased 53 basis points from 2.12% in the first nine
months of 2002 to 1.59% during the same period in 2003. This decrease in the
average cost of funds was the combination of the Company decreasing its rates of
interest paid on interest bearing deposits due to the decline in market rates
and the Company's strategy of attracting lower cost deposits.
The following table presents, on a fully taxable equivalent basis, a
summary of the Company's interest-earning assets and their average yields, and
interest-bearing liabilities and their average costs and shareholders' equity
for the nine months ended September 30, 2003 and 2002. The average balance of
loans includes non-accrual loans, and associated yields include loan fees, which
are considered adjustment to yields.
Nine Months Ended September 30,
(dollars in thousands) 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Earning Assets: Balanc Interest (1) Rate (2) Balance Interest (1) Rate (2)
--------------------------------------------------------------------------------------------------------------------------
Securities:
Tax exempt (3) $17,804 $755 5.67% $11,734 $479 5.46%
Taxable 57,378 1,328 3.10% 43,225 1,556 4.81%
--------------------------------------------------------------------------------------------------------------------------
Total securities 75,182 2,083 3.70% 54,959 2,035 4.95%
Taxable loans: (net of unearned income)
Mortgage and construction 75,250 3,822 6.79% 62,108 3,432 7.39%
Commercial 16,993 729 5.74% 12,102 593 6.55%
Consumer 29,581 1,457 6.59% 32,906 1,748 7.10%
--------------------------------------------------------------------------------------------------------------------------
Total loans receivable (4) 121,824 6,008 6.59% 107,116 5,773 7.21%
Other interest-earning assets 14,263 131 1.22% 30,704 405 1.76%
--------------------------------------------------------------------------------------------------------------------------
Total earning assets 211,269 $8,222 5.20% 192,779 $8,213 5.70%
Non-interest earning assets 21,519 19,158
Allowance for loan losses (1,526) (1,255)
------------------------------------------------------- ------------
Total Assets $231,263 $210,682
======================================================= ============
Sources of Funds:
Interest bearing deposits:
NOW $44,786 $190 0.57% $32,888 $199 0.81%
Money market 4,044 23 0.76% 4,065 30 0.99%
Savings 64,586 403 0.83% 60,787 608 1.34%
Time 52,892 958 2.42% 57,932 1,373 3.17%
--------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 166,308 1,574 1.27% 155,672 2,210 1.90%
Borrowed funds 13,267 437 4.34% 11,245 397 4.66%
Capital debentures 5,000 186 4.92% 1,502 65 5.71%
--------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 184,575 $2,197 1.59% 168,419 $2,672 2.12%
Non-interest bearing liabilities:
Demand deposits 30,475 27,255
Other liabilities 2,287 2,443
------------------------------------------------------- ------------
Total non-interest bearing liabilities 32,762 29,698
Stockholders' equity 13,926 12,565
------------------------------------------------------- ------------
Total Liabilities and Stockholders' Equity $231,263 $210,682
======================================================= ============
------------------------------------------- -------------------------- --------------------------
Net Interest Income and Margin (5) $6,025 3.81% $5,541 3.84%
=========================================== ========================== ==========================
(1) Includes loan fee income
(2) Average rates on securities are calculated on amortized costs
(3) Full taxable equivalent basis, using a 39% effective tax rate and adjusted
for "TEFRA" disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid,
divided by average total interest-earning assets
Net-Interest Income. On a fully taxable equivalent basis, the net interest
income for the third quarter of 2003 increased $42 thousand over the same period
last year. This increase was the result of the increased volume of earning
assets exceeding the increased volume of interest bearing liabilities. However,
the net interest margin decreased, on a fully taxable equivalent basis, by 14
basis points to 3.77% in the third quarter of 2003 compared to 3.91% the year
earlier due to the average rate earned on total earning assets declining 62
basis points compared to the average rate paid on total interest bearing
liabilities declining only 53 basis points.
Net interest income for the nine months ended September 30, 2003 increased
$484 thousand, or 8.7%, over the same period last year. The net interest margin
decreased, on a fully taxable equivalent basis, 3 basis points from 3.84% for
the first nine months of 2002 to 3.81% for the first nine months of 2003.
Comparing the first nine months of 2002 to the first nine months of 2003, the
average rate paid on interest bearing liabilities repriced faster and lower than
the average rate earned on interest earning assets, while the volume of average
earning assets increased more than the volume of average interest bearing
liabilities, resulting in the 3 basis point decline to the net interest margin.
Provision for Loan Losses. For the three months ended September 30, 2003
the provision for loan losses was $70 thousand compared to $75 thousand for the
third quarter ended September 30, 2002. The provision for loan losses was $315
thousand for the nine months ended September 30, 2003 as compared to $225
thousand for the same period last year. The Company's loan portfolio has shifted
from loans secured by residential properties toward loans secured by
non-residential properties from year-end 2002 to September 30, 2003. 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 third quarter of 2003, total non-interest
income increased $120 thousand, or 15.1%, from the same period in 2002. In the
third quarter of 2003 insurance commissions and fees increased $98 thousand, or
23.7%, from $414 thousand reported in the third quarter of 2002 to $512 thousand
for the quarter ended September 30, 2003. On January 2, 2003, the Company
acquired the book of insurance business of the Garrera Insurance Agency through
Tri-State. The Garrera acquisition accounted for $47 thousand of the third
quarter increase and industry-wide insurance premium increases of 10% to 15%
account for the balance of the increase. ATM and debit card fees have increased
$27 thousand compared to the same period in 2002. This increase is attributable
to the growth in the Company's deposits and the increased use of customer's ATM
or debit cards.
For the nine months ended September 30, 2003, non-interest income increased
$540 thousand, or 22.6%, from the same period in 2002. Insurance commissions and
fees increased $323 thousand, a 25.3% increase over the first nine months of
2002. This increase included $85 thousand from the acquisition of the Garrera
book of business, with the reminder consisting of increased sales and premium
increases. ATM fees increased $64 thousand, or 34.2%, and service charges on
deposit accounts increased $59 thousand, or 11.6%, for the nine-month period
ending September 30, 2003 over the same period in 2002. Mortgage banker fees,
which are included in other income, increased in the first nine months of 2003
to $49 thousand from $14 thousand during the first nine months of 2002. On
August 1, 2003 the Company created a new residential mortgage banking division.
Mortgage banking fees of $6 thousand from the new banking operations are
included in the 2003 year to date number of $49 thousand, reflecting the limited
operations conducted in the third quarter. In the first nine months of 2003, a
$63 thousand gain on the sale of other real estate owned was recorded, while
there were no similar gains during the first nine months of 2002.
Non-Interest Expense. For the quarter ended September 30, 2003,
non-interest expense increased $127 thousand from the same period last year. The
majority of this increase is attributed to the increase of the Company's
salaries and employee benefits of $126 thousand, or 10.1%, from the addition of
six full time equivalent employees and a 12% increase in medical insurance
premiums which became effective April 1, 2003. Other non-interest expense
increases from third quarter 2002 to third quarter 2003 were education and
training expenses of $16 thousand due to a new Company commitment to a
comprehensive employee training program which began in the fourth quarter of
2002.
For the nine months ended September 30, 2003, non-interest expense
increased $723 thousand, to $7.1 million, from the first nine months of 2002.
Salaries and employee benefits increased $524 thousand, or 15.1%, related to
staff increases and increased costs associated with standard employee benefits
offered by the Company. Other non-interest expense increases compared to the
first nine months of 2002 were professional fees increases of $78 thousand for
the review of possible expansion of our insurance operations and the expensing
of origination costs associated with the issuance of the Company's Trust
Preferred securities, education and training increases of $52 thousand for the
continuation of the new employee training program and legal expenses increases
of $37 thousand incurred in connection with the commencement of the Company's
residential mortgage banking division and the sale of the Company's credit card
portfolio. Advertising and marketing expenses decreased $77 thousand over the
first nine months of 2003 compared to the same period in 2002 as the Company
reduced its direct mail promotion efforts, focusing its advertising of new low
cost accounts to selected households.
-7-
Income Taxes. Income tax expense decreased $22 thousand to $91 thousand for
the three months ended September 30, 2003 as compared to $113 thousand for the
same period in 2002. This decrease in income taxes resulted from an increased
level of tax-exempt income in the current quarterly period. Income taxes
decreased $19 thousand for the nine months ended September 30, 2003 to $331
thousand as compared to $350 thousand for the nine months ended September 30,
2002. These decreases in income taxes resulted primarily due to an increased
level of tax-exempt income.
FINANCIAL CONDITION
September 30, 2003 as compared to December 31, 2002
Total assets increased to $235.1 million at September 30, 2003, a $9.2
million increase from total assets of $225.9 million at December 31, 2002.
Increases in total assets include increases of $16.0 million in net loans and
$3.0 million in securities available for sale, partially offset by a $10.3
million reduction in cash and cash equivalents. Asset increases were financed
through an increase in total deposits of $11.9 million from $189.9 million at
year-end 2002 to $201.8 million on September 30, 2003, offset by a $3 million
decrease in borrowings. Total stockholder's equity increased $357 thousand from
$13.7 million at December 31, 2002 to $14.0 million at September 30, 2003.
Total loans at September 30, 2003 increased $16.3 million to $129.8 million
from $113.4 million at year-end 2002. During the nine-month period ending
September 30, 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 Company has also increased its activity in the loan
participation market, both originations and purchases. The balance in
non-residential real estate loans increased $13.8 million from $41.0 million at
December 31, 2002 to $54.8 million on September 30, 2003 and other loans, which
include loans secured by farmland, increased $5.0 million over the same
nine-month period. Construction and land development loans have decreased $1.9
million and residential 1-4 family real estate loans have decreased $1.0 million
from December 31, 2002 to September 30, 2003. Other minor shifts in ending
balances occurred between December 31, 2002 and September 30, 2003 according to
loan demand.
Federal funds sold decreased by $12.2 million to $4.7 million at September
30, 2003 from $16.9 million on December 31, 2002. During the first nine months
of 2003, these funds were used to fund loan demand and to purchase higher
yielding investment securities.
Securities, available for sale, at market value, increased $3.0 million, or
4.0%, from $72.7 million at year-end 2002 to $75.7 million at September 30,
2003. The Company purchased $42.6 million in new securities in the first nine
months of 2003 and $38.0 million in available for sale securities matured, were
called and were repaid. There was a $718 thousand decrease in unrealized gains
in the available for sale portfolio and $892 thousand in net amortization
expenses recorded during the first nine months of 2003. There were no held to
maturity securities at September 30, 2003 or at December 31, 2002.
Total deposits increased $11.9 million, or 6.3%, to $201.8 million during
the first nine months of 2003 from $189.9 million at December 31, 2002. Non
-interest bearing deposits increased $7.4 million, or 27.8%, to 16.8% of total
deposits at September 30, 2003 from 14.0% of total deposits at December 31,
2002, interest-bearing and savings deposits increased $4.8 million, or 4.3% and
total time deposits decreased $219 thousand from December 31, 2002 to September
30, 2003. Business non-interest bearing demand accounts account for $5.0 million
of the growth in non-interest bearing demand accounts. Management continues to
monitor the shift in deposits through its Asset/Liability Committee
ASSET QUALITY
At September 30, 2003, non-accrual loans decreased $84 thousand to $1.2
million, as compared to $1.3 million at December 31, 2002. There were no loans
ninety days past due and still accruing or renegotiated loans at September 30,
2003. 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:
September 30, 2003 December 31, 2002
---------------------------------------------
Non-accrual loans $1,174,000 $1,258,000
Non-accrual loans to total loans 0.90% 1.11%
Non-performing assets to total assets 0.59% 0.67%
Allowance for loan losses
as a % of non-performing loans 140.72% 107.11%
Allowance for possible loan losses to total loans 1.27% 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 September 30, 2003, the allowance for loan losses was $1.7 million, an
increase of 19.2% from the $1.4 million at year-end 2002. There were $50
thousand in charge offs and $1 thousand in recoveries reported in the first nine
months of 2003. The allowance for loan losses as a percentage of total loans was
1.27% at September 30, 2003 compared to 1.22% on December 31, 2002.
INTEREST RATE SENSITIVITY
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. Interest rate sensitivity is the volatility of a
company's earnings from a movement in market interest rates. Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk. We do not
employ gap analysis as a rate risk management tool, but rather we rely upon
earnings at risk analysis to forecast the impact on our net interest income of
instantaneous 100 and 200 basis point increases and decreases in market rates.
In assessing the impact on earnings, the rate shock analysis assumes that no
change occurs in our funding sources or types
-8-
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 June 30, 2003 and 2002.
September 30, 2003 September 30, 2002
-----------------------------------------------------------------------------------------------------
Change in % Change Change in % Change
Net Interest in Net Interest Net Interest in Net Interest
(Dollars in Thousands) Margin Margin Margin Margin
-----------------------------------------------------------------------------------------------------
Down 200 basis points ($541) 11.53% ($860) 19.03%
Down 100 basis points (173) 7.36% (386) 17.07%
Up 100 basis points (200) -8.52% (5) -0.24%
Up 200 basis points (481) -10.25% (64) -1.41%
-----------------------------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
At September 30, 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 September 30, 2003, liquid investments totaled $15.8 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, 2003, had the ability to borrow up to $17.3 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 September 30, 2003 had borrowings totaling $12
million secured by the pledge of its one to four family mortgages and selected
securities. Two short-term borrowings have maturities in October 2003 and July
2004 with interest rates ranging from 2.43 % 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 $357 thousand to $14.0 million at
September 30, 2003 from $13.7 million at year-end 2002. Activity in
stockholder's equity consisted of a net increase in retained earnings of $633
thousand derived from $989 thousand in net income earned during the first nine
months of 2003, offset by $356 thousand in payments for cash dividends. Other
increases were $52 thousand in stock options exercised, $128 thousand for shares
issued through the dividend reinvestment plan, an unrealized loss on securities
available for sale, net of income tax, of $431 thousand, partially offset by 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 October 7, 2003, the new
quarterly rate of interest on the debentures will be 4.8%. 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 September 30, 2003 the Company and the Bank both meet the
well-capitalized regulatory standards applicable to them. The table below
presents the capital ratios at September 30, 2003, for the Company and the Bank,
as well as the minimum regulatory requirements.
Amount Ratio Amount Minimum Ratio
The Company:
Leverage Capital $15,997 6.94% $9,220 4%
Tier 1 - Risk Based 15,997 10.99% 5,823 4%
Total Risk-Based 18,017 12.38% 11,646 8%
The Bank:
Leverage Capital 15,954 6.93% 9,214 4%
Tier 1 Risk-Based 15,954 10.98% 5,812 4%
Total Risk-Based 17,606 12.12% 11,624 8%
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the 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, as of the end of the period covered
by this report, effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's periodic SEC filings.
(b) Changes in internal controls.
Not applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company and the Bank are periodically involved in various legal
proceedings as a normal incident to their businesses. In the opinion of
management, no material loss is expected from any such pending lawsuit.
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults upon Served Securities
-------------------------------
-9-
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Report on form 8-K
(a). Exhibits
Number Description
------ -----------
31.1 Certification of Donald L Kovach pursuant to Section
302 of the Sarbanes -Oxley Act of 2002
31.2 Certification of Candace Leatham pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
July 10, 2003 5 Announcement of a $0.07 per share cash
dividend
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: