SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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 June 30, 2004
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to _________________
Commission file number 0-29030
SUSSEX BANCORP.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3475473
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(State of other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
399 Route 23, Franklin, New Jersey 07416
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code) (973) 827-2914
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
As of August 6, 2004 there were 1,838,537 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 and Small Business Issuer
Purchases of Equity Securities 14
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Exhibits 16
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
ASSETS June 30, 2004 December 31, 2003
------ ------------- -----------------
Cash and due from banks $ 12,387 $ 11,301
Federal funds sold 4,990 4,195
--------- ---------
Cash and cash equivalents 17,377 15,496
Interest bearing time deposits with other banks 500 3,500
Securities available for sale 74,759 76,545
Federal Home Loan Bank Stock, at cost 690 760
Loans receivable, net of unearned income 144,275 134,374
Less: allowance for loan losses 1,958 1,734
--------- ---------
Net loans receivable 142,317 132,640
Premises and equipment, net 5,470 4,650
Accrued interest receivable 1,209 1,241
Goodwill 2,124 2,124
Other assets 6,669 3,661
--------- ---------
Total Assets $ 251,115 $ 240,617
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 35,710 $ 31,715
Interest bearing demand 181,689 175,942
--------- ---------
Total Deposits 217,399 207,657
Borrowings 11,000 11,000
Accrued interest payable and other liabilities 2,520 2,056
Junior subordinated debentures 5,155 --
Mandatory redeemable capital debentures -- 5,000
--------- ---------
Total Liabilities 236,074 225,713
Stockholders' Equity:
Common stock, no par value, authorized
5,000,000 shares; issued and outstanding
1,835,085 in 2004 and 1,811,460 in 2003
9,913 9,616
Retained earnings 5,547 5,040
Accumulated other comprehensive income (loss) (419) 248
--------- ---------
Total Stockholders' Equity 15,041 14,904
--------- ---------
Total Liabilities and Stockholders' Equity $ 251,115 $ 240,617
========= =========
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans receivable, including fees $2,161 $2,033 $4,262 $3,972
Securities:
Taxable 419 445 885 968
Tax-exempt 205 169 413 334
Federal funds sold 17 36 31 81
Interest bearing deposits 7 12 17 25
------ ------ ------ ------
Total Interest Income 2,809 2,695 5,608 5,380
------ ------ ------ ------
INTEREST EXPENSE
Deposits 493 535 967 1,095
Borrowings 132 146 265 295
Junior subordinated debentures 61 63 121 126
------ ------ ------ ------
Total Interest Expense 686 744 1,353 1,516
------ ------ ------ ------
Net Interest Income 2,123 1,951 4,255 3,864
Provision for Loan Losses 105 120 253 245
------ ------ ------ ------
Net Interest Income after Provision for Loan Losses 2,018 1,831 4,002 3,619
------ ------ ------ ------
NON-INTEREST INCOME
Service fees on deposit accounts 191 189 382 372
ATM fees 78 90 150 164
Insurance commissions and fees 604 523 1,170 1,087
Mortgage broker fees 161 0 326 44
Investment brokerage fees 48 75 121 138
Net gain on sale of loans held for sale 0 24 0 24
Net gain on sale of other real estate owned 0 63 0 63
Other 85 58 168 125
------ ------ ------ ------
Total Non-Interest Income 1,167 1,022 2,317 2,017
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,514 1,341 3,090 2,627
Occupancy, net 208 149 414 324
Furniture and equipment 210 195 412 401
Stationary and supplies 46 50 83 97
Audit and exams/Professional Fees 74 87 157 216
Advertising and promotion 96 94 183 175
Postage and freight 48 46 91 90
Amortization of intangible assets 48 39 94 77
Other 398 365 746 716
------ ------ ------ ------
Total Non-Interest Expense 2,642 2,366 5,270 4,723
------ ------ ------ ------
Income before Income Taxes 543 487 1,049 913
Provision for Income Taxes 152 127 287 240
------ ------ ------ ------
Net Income $ 391 $ 360 $ 762 $ 673
====== ====== ====== ======
Earnings per share
------ ------ ------ ------
Basic $ 0.21 $ 0.20 $ 0.42 $ 0.38
====== ====== ====== ======
------ ------ ------ ------
Diluted $ 0.20 $ 0.20 $ 0.40 $ 0.37
====== ====== ====== ======
See Notes to Consolidated Financial Statements
Accumulated
Number of Other
Shares Common Retained Comprehensive
Outstanding Stock Earnings Income (loss)
----------- ------- -------- ------------
(Dollars in thousands, except per share amounts)
Balance December 31, 2002 1,688,130 $ 7,869 $ 5,249 $ 562
Comprehensive income:
Net income -- -- 673 --
Change in unrealized gains (losses) on securities
available for sale -- -- -- 201
Total Comprehensive Income
Treasury shares purchased (2,400) -- -- --
Treasury shares retired -- (25) -- --
Issuance of common stock and exercise of stock options 5,186 40 -- --
Shares issued through dividend reinvestment plan 9,065 94 -- --
Dividends on common stock ($.14 per share) -- -- (237) --
--------- ------- ------- ------
Balance June 30, 2003 1,699,981 $ 7,978 $ 5,685 $ 763
========= ======= ======= ======
Balance December 31, 2003 1,811,460 $ 9,616 $ 5,040 $ 248
Comprehensive income:
Net income -- -- 762 --
Change in unrealized gains on securities available
for sale, net of tax -- -- -- (6 67)
Total Comprehensive Income
Treasury shares purchased (96) -- -- --
Treasury shares retired -- (2) -- --
Issuance of common stock and exercise of stock options 17,985 167 -- --
Income tax benefit of stock options exercised -- 35 -- --
Shares issued through dividend reinvestment plan 5,736 97 -- --
Dividends on common stock ($.14 per share) -- -- (255) --
--------- ------- ------- -------
Balance June 30, 2004 1,835,085 $ 9,913 $ 5,547 ($ 419)
========= ======= ======= =======
See Notes to Consolidated Financial Statements
Total
Treasury Stockholders
Stock Equity
-------- ------------
Balance December 31, 2002 $ 0 $ 13,680
Comprehensive income:
Net income -- 673
Change in unrealized gains (losses) on securities
available for sale -- 201
---
Total Comprehensive Income 874
Treasury shares purchased (25) (25)
Treasury shares retired 25 --
Issuance of common stock and exercise of stock options -- 40
Shares issued through dividend reinvestment plan -- 94
Dividends on common stock ($.14 per share) -- (237)
----- --------
Balance June 30, 2003 $ 0 $ 14,426
===== ========
Balance December 31, 2003 $ 0 $ 14,904
Comprehensive income:
Net income -- 762
Change in unrealized gains on securities available
for sale, net of tax -- (667)
----- -----
Total Comprehensive Income 95
Treasury shares purchased (2) (2)
Treasury shares retired 2 --
Issuance of common stock and exercise of stock options -- 167
Income tax benefit of stock options exercised -- 35
Shares issued through dividend reinvestment plan -- 97
Dividends on common stock ($.14 per share) -- (255)
----- ---------
Balance June 30, 2004 $ 0 $ 15,041
===== =========
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended June 30,
-----------------------------
2004 2003
---------- ----------
Cash Flows from Operating Activities
Net income $ 762 $ 673
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 253 245
Provision for depreciation and amortization 256 264
Net amortization of securities premiums and discounts 352 580
Net realized gain on sale of foreclosed real estate -- (63)
Proceeds from sale of loans -- 668
Net gains on sale of loans -- (24)
Loans originated for sale -- (644)
Earnings on investment in life insurance (55) (25)
(Increase) decrease in assets:
Accrued interest receivable 32 (64)
Other assets (853) (445)
Increase in accrued interest payable and other liabilities 464 180
----------- ---------
Net Cash Provided by Operating Activities 1,211 1,345
---------- ---------
Cash Flows from Investing Activities
Securities available for sale:
Purchases (13,775) (29,513)
Maturities, calls and principal repayments 14,097 27,279
Net increase in loans (9,930) (12,511)
Purchases of bank premises and equipment (1,076) (99)
(Increase) decrease in FHLB stock 70 (10)
Proceeds from sale of foreclosed real estate -- 250
Decrease (increase) in interest bearing time deposits with other banks 3,000 100
Purchase of investment in life insurance (1,500) --
---------- ---------
Net Cash Used in Investing Activities (9,114) (14,504)
---------- ---------
Cash Flows from Financing Activities
Net increase in deposits 9,742 10,569
Repayment of borrowings 0 (2,000)
Proceeds from the exercise of stock options 202 40
Purchase of treasury stock (2) (25)
Dividends paid, net of reinvestments (158) (143)
---------- ---------
Net Cash Provided by Financing Activities 9,784 8,441
---------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents 1,881 (4,718)
Cash and Cash Equivalents - Beginning 15,496 26,096
---------- ---------
Cash and Cash Equivalents - Ending $ 17,377 $ 21,378
========== =========
Supplementary Cash Flows Information
Interest paid $ 1,353 $ 1,549
========== =========
Income taxes paid $ 431 $ 434
========== =========
Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans $ -- $ 223
========== =========
See Notes to Consolidated Financial Statements
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The consolidated financial statements include the accounts of Sussex Bancorp
(the "Company") and its wholly-owned subsidiary Sussex Bank (the "Bank"). The
Bank's wholly-owned subsidiaries are Sussex Bancorp Mortgage Company, Inc.,
SCB Investment Company, Inc., and Tri-State Insurance Agency, Inc.,
("Tri-State") a full service insurance agency located in Sussex County, New
Jersey. All inter-company transactions and balances have been eliminated in
consolidation. Sussex Bank is also a 49% limited partner of Sussex Settlement
Services, L.P, a title insurance agency whose registered office is located in
King of Prussia, Pennsylvania. The Bank operates eight banking offices all
located in Sussex County, New Jersey. The Company is subject to the
supervision and regulation of the Board of Governors of the Federal Reserve
System (the "FRB"). The Bank's deposits are insured by the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits. The operations of the Company and the Bank are subject to
the supervision and regulation of the FRB, FDIC and the New Jersey Department
of Banking and Insurance (the "Department") and the operations of Tri-State
are subject to the supervision and regulation by the Department.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for full year financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included
and are of a normal, recurring nature. Operating results for the six-month
period ended June 30, 2004, are not necessarily indicative of the results that
may be expected for the year ended December 31, 2004. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto that are included in the Company's
Annual Report on Form 10-KSB for the fiscal period ended December 31, 2003.
2. Earnings per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance of potential common shares that may be issued by the Company relating
to outstanding stock options and guaranteed and contingently issuable shares
from the acquisition of Tri-State. Potential common shares related to stock
options are determined using the treasury stock method.
The following table sets forth the computations of basic and diluted
earnings per share as retroactively adjusted for the 5% stock dividend
declared October 15, 2003 (dollars in thousands, except per share data):
Three Months Ended June 30, 2004 Three Months Ended June 30, 2003
------------------------------------ ---------------------------------------
Per Per
Income Shares Share Income Shares Share
(Dollars in thousands, except (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
per share data)
----------- -------------- -------- ----------- -------------- -------
Basic earnings per share:
Net income applicable to common
stockholders $ 391 1,832 $ 0.21 $ 360 1,784 $ 0.20
====== ======
Effect of dilutive securities:
Stock options -- 73 -- 19
Deferred common stock payments for
purchase of insurance agency 1 16 2 39
----- ----- ----- -----
Diluted earnings per share:
Net income applicable to common
stock-holders and assumed conversions
$ 392 1,921 $ 0.20 $ 362 1,842 $ 0.20
===== ===== ====== ====== ===== ======
Six Months Ended June 30, 2004 Six Months Ended June 30, 2003
------------------------------------ ---------------------------------------
Per Per
Income Shares Share Income Shares Share
(Dollars in thousands, except (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
per share data)
------------------------------------ ---------------------------------------
Basic earnings per share:
Net income applicable to common
stockholders $ 762 1,826 $ 0.42 $ 673 1,780 $ 0.38
====== ======
Effect of dilutive securities:
Stock options -- 81 -- 17
Deferred common stock payments for
purchase of insurance agency
1 14 5 41
------ ----- ----- -----
Diluted earnings per share:
Net income applicable to common
stock-holders and assumed
conversions $ 763 1,921 $ 0.40 $ 678 1,838 $ 0.37
===== ===== ====== ===== ===== ======
3. Comprehensive Income
The components of other comprehensive income and related tax effects for
the three and six months ended June 30, 2004 and 2003 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------ ------------ ------------- ------------
(In thousands) (In thousands)
Unrealized holding gains (losses) on available for sale
securities ($ 1,802) $ 622 ($ 1,111) $ 335
Less: reclassification adjustments for gains included in net
income -- -- -- --
-------- ------ -------- -----
Net unrealized gains (losses) (1,802) 622 (1,111) 335
Tax effect (720) 249 (444) 134
-------- ------ -------- -----
Other comprehensive income (loss), net of tax ($ 1,082) $ 373 ($ 667) $ 201
======== ====== ======== =====
4. Segment Information
The Company's insurance agency operations are managed separately from the
traditional banking and related financial services that the Company also
offers. The insurance agency operation provides commercial, individual, and
group benefit plans and personal coverage.
Three Months Ended June 30, 2004 Three Months Ended June 30, 2003
----------------------------------------- -----------------------------------------
Banking and Insurance Banking and Insurance
Financial Services Services Total Financial Services Services Total
================== ======== ===== ================== ======== =====
(In Thousands) (In Thousands)
Net interest income and other income $ 2,680 $ 610 $ 3,290 $ 2,450 $ 523 $ 2,973
Income before income taxes 471 72 543 445 42 487
Total assets 247,552 3,563 251,115 232,578 2,821 235,399
Six Months Ended June 30, 2004 Six Months Ended June 30, 2003
----------------------------------------- -----------------------------------------
Banking and Insurance Banking and Insurance
Financial Services Services Total Financial Services Services Total
================== ======== ===== ================== ======== =====
(In Thousands) (In Thousands)
Net interest income and other income $ 5,389 $ 1,183 $ 6,572 $ 4,794 $ 1,087 $ 5,881
Income before income taxes 913 136 1,049 816 97 913
Total assets 247,552 3,563 251,115 232,578 2,821 235,399
3
5. Stock Option Plans
The Company accounts for stock option plans under the recognition and
measurement principles of APB Opinion No. 25. "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the Company's
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
----------------- ----------------- ----------------- -------------
(In thousands) (In thousands)
Net income, as reported $ 391 $ 360 $ 762 $ 673
Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (35) (11) (64) (17)
------- ------ ------ ------
Pro forma net income $ 356 $ 349 $ 698 $ 656
======= ====== ======= ======
Basic earnings per share:
As reported $ 0.21 $ 0.20 $ 0.42 $ 0.38
Pro forma $ 0.19 $ 0.20 $ 0.38 $ 0.37
Diluted earnings per share:
As reported $ 0.20 $ 0.20 $ 0.40 $ 0.37
Pro forma $ 0.19 $ 0.19 $ 0.36 $ 0.36
6. Guarantees
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The
credit risk involved in issuing letters of credit is essentially the same as
those that are involved in extending loan facilities to customers. The
Company, generally, holds collateral and/or personal guarantees supporting
these commitments. The Company had $382,000 of standby letters of credit as
of June 30, 2004. Management believes that the proceeds obtained through a
liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payment required under the
corresponding guarantees. The current amount of the liability as of June 30,
2004 for guarantees under standby letters of credit issued is not material.
7. New Accounting Standard
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003. The
Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). Sussex Capital Trust I qualifies as a variable interest
entity under FIN 46. Sussex Capital Trust issued mandatory redeemable
preferred securities (Trust Preferred Securities) to third-party investors and
loaned the proceeds to the Company. Sussex Capital Trust I holds, as it sole
asset, subordinated debentures issued by the Company.
FIN 46 required the Company to deconsolidate Sussex Capital Trust I from the
consolidated financial statements as of March 31, 2004. There has been no
restatement of prior periods. The impact of this deconsolidation was to
increase junior subordinated debentures or long-term debt by $5,155,000 and
reduce the mandatory capital debentures line item by $5,000,000 which had
represented the trust preferred securities of the trust. The Company's equity
interest in the trust subsidiary of $155,000, which had previously been
eliminated in consolidation, is now reported in "Other assets". For
regulatory reporting purposes, the Federal Reserve Board has indicated that
the preferred securities will continue to qualify as Tier I Capital subject to
previously specified limitations, until further notice. If regulators make a
determination that Trust Preferred Securities can no longer be considered in
regulatory capital, the securities become callable and the Company may redeem
them. The adoption of FIN 46 did not have an impact on the Company's results
of operations or liquidity.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three and Six Months ended June 30, 2004 and June 30, 2003
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies is included in
Note 1 to the consolidated financial statements of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2003. Some of these policies
are particularly sensitive, requiring significant judgments, estimates and
assumptions to be made by management, most particularly in connection with
determining the provision for loan losses and the appropriate level of the
allowance for loan losses. Additional information is contained on pages 11
and 12 of this Form 10-QSB for the provision and allowance for loan losses.
FORWARD LOOKING STATEMENTS
When used in this discussion, the words "believes", "anticipates",
"contemplated", "expects", or similar expressions are intended to identify
forward looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Those risks and uncertainties include changes in interest rates,
the ability to control costs and expenses, general economic conditions and
economic conditions in the Company's Sussex, New Jersey marketplace. The
Company undertakes no obligation to update those forward looking statements to
reflect the occurrence of unanticipated events or otherwise.
OVERVIEW
The Company realized net income of $391 thousand for the second quarter of
2004, an increase of $31 thousand from the $360 thousand reported for the same
period in 2003. Basic earnings per share, as retroactively adjusted for the 5%
stock dividend declared October 15, 2003, increased from $0.20 in the second
quarter of 2003 to $0.21 for the second quarter of 2004. Diluted earnings per
share were $0.20 in both second quarters ending June 30, 2003 and 2004.
4
For the six months ended June 30, 2004, net income was $762 thousand, an
increase of $89 thousand from the $673 thousand reported for the same period
in 2003. Basic earnings per share were $0.42 for the six months ended June
30, 2004 compared to $0.38 for the six-month period ended June 30, 2003.
Diluted earnings per share were $0.40 for the six months ended June 30, 2004,
an increase from $0.37 from the first six months of 2003.
The results reflect an increase in net interest income, a result of both
increasing interest income and decreasing interest expense, coupled with
increases in non-interest income, primarily due to an increase in mortgage
banking fees from our residential lending division, partially offset by
increases in non-interest expenses associated with additions to staff and
higher related salary and benefit expenses.
RESULTS OF OPERATIONS
Interest Income. Total interest income increased $114 thousand, or 4.2%,
to $2.8 million for the quarter ended June 30, 2004 from the same period in
2003. This increase was primarily attributable to an increase of $12.7
million, or 6.0%, in the average earning assets to $225.5 million in the
second quarter of 2004 from $212.8 million in the same quarter of 2003. The
average yield on earning assets decreased 4 basis points, on a fully taxable
equivalent basis, to 5.17% during the second quarter of 2004 from 5.21% in the
second quarter of 2003. Interest income on loans increased $128 thousand from
$2.0 million in the second quarter 2003 to $2.2 million during the same period
in 2004, while the average balance of total loans receivable increased $19.5
million, or 15.9%, from $122.6 million during the second quarter of 2003 to
$142.1 million for the same quarter in 2004. Income from other interest-
earning assets decreased by fifty percent to $24 thousand for the second
quarter of 2004 from $48 thousand for the second quarter of 2004 from the
second quarter in 2003 while the average balance decreased $6.4 million, or
$41.3%, to $9.1 million in the second quarter of 2004 from $15.5 million in
the same period of 2003. The interest earned on total securities increased
$27 thousand, or 3.9%, while the average balance in total securities
decreased by $396 thousand, or 1.0%, to $74.3 million from $74.7 million from
the second quarter of 2003. The average rate earned on total securities
increased by 18 basis points from 3.68% for the quarter ended June 30, 2003 to
3.86% for the period ending June 30, 2004. This average rate increase was
accomplished by investing in higher yielding tax-exempt securities. The volume
increase in total average earning assets and the shifting of average balances
to higher yielding interest-earning assets exceeded the impact of market
declines in interest rates, resulting in the increase in interest income for
the second quarter of 2004 compared to the second quarter of 2003.
For the six months ended June 30, 2004, interest income, on a fully taxable
equivalent basis, increased $265 thousand, or 4.8%, to $5.8 million from the
$5.5 million reported for the same period in 2003. During the first six
months of 2004 average interest-earning assets increased $12.0 million to
$222.5 million from $210.5 million during the same period in 2003. The
average balance in the loan portfolio increased $19.9 million, tax-exempt
securities increased $6.0 million, taxable securities decreased $6.1 million
and the average balance of other interest-earning assets decreased $7.8
million during the first six months of 2004 over the same period in 2003. As
total average interest bearing asset balances increased, the average rate
earned decreased by 6 basis points on a fully taxable equivalent basis from
5.29% from the first half of 2003 to 5.23% for the same period of 2004.
Interest Expense. The Company's interest expense for the second
quarter of 2004 decreased $58 thousand, or 7.8%, to $686 thousand from $744
thousand in the second quarter of 2003. Despite the decline in interest
expense, the average balance of interest bearing liabilities increased $13.3
million, or 7.2% to $198.3 million during the second quarter of 2004 from
$185.0 million in the same period of 2003. The increase in the average
balance of interest bearing liabilities was offset by the reduction in rates,
as the average cost of funds declined to 1.39% for the second quarter of 2004
from 1.61% in the second quarter of 2003. Average money market deposits
increased $9.6 million, or 256.19%, while the average rate paid increased 33
basis points from 0.75% in the second quarter of 2003 to 1.08% in the second
quarter of 2004. Several large municipal accounts transferred balances from
our public fund NOW account to a newly offered public fund money market
account. To attract municipal accounts, a higher incentive rate was offered
on the public fund money market account. As municipal balances were
transferred from NOW accounts, the NOW accounts average balance decreased $1.0
million, or 2.3%, to $44.3 million during the second quarter 2004 from $45.3
million in the second quarter of 2003. The interest expense on NOW accounts
decreased $20 thousand from the second quarter of 2003, as the average
interest rate paid decreased 17 basis points from 0.61% to 0.44% during the
same period. Average borrowed funds and debenture balances decreased $2.1
million to $16.2 million in the second quarter of 2004 from $18.3 million in
the second quarter of 2003, due primarily to the maturity of short-term
advances from the Federal Home Loan Bank. At June 30, 2004, the Company's
borrowed funds consisted of one $1.0 million short-tem FHLB advance and three
convertible notes from the FHLB totaling $10.0 million. In the third quarter
of 2002, the Company issued $5.2 million in junior subordinated debentures.
The debentures bear a floating rate of interest, which averaged 4.68% in the
second quarter of 2004, down 30 basis points from 4.98% in the second quarter
of 2003.
For the six months ended June 30, 2004 interest expense decreased $163
thousand, or 10.8%, to $1.4 million from $1.5 million for the same period last
year as average interest-bearing deposit balances increased $14.3 million, or
8.7% from $165.6 million for the first six months of 2003 to $179.9 million
for the first half of 2004. The average rate paid on total interest-bearing
deposits has decreased by 25 basis points from 1.33% for the first six months
of 2003 to 1.08% for the same period in 2004. The Company's borrowed funds
decreased $2.8 million, or 20.2%, from $13.8 million during the first six
months of 2003 to $11.0 million for the first half of 2004. The junior
subordinated debentures have an average deconsolidated balance of $5.2 million
and an average rate of 4.64% during the first six months of 2004, compared to
an average rate of 5.01% for the first six months of 2003. The average rate
paid on total interest bearing liabilities decreased 27 basis points from
1.66% in the first six months of 2003 to 1.39% during the same period in 2004.
With the decline in market rates, the decrease in the average cost of funds
exceeded the increase in the average balance of total interest-bearing
liabilities.
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 six months ended June 30, 2004 and 2003. The average balance of loans
includes non-accrual loans, and associated yields include loan fees, which are
considered adjustment to yields.
Six Months Ended June 30,
(dollars in thousands) 2004 2003
---------------------------------------------------------------------------------------------------------------
Average Average Average Average
Earning Assets: Balance Interest (1) Rate (2) Balance Interest(1) Rate(2)
-------------- --------- -------- -------- -------- --------- -------
Securities:
Tax exempt (3) $ 22,172 $ 589 5.34% $ 16,191 $ 474 5.90%
Taxable 52,349 885 3.40% 58,475 968 3.34%
-------- ------- ------- --------- ------- ----
Total securities 74,521 1,474 4.00% 74,666 1,442 3.89%
Total loans receivable (4) 138,719 4,262 6.18% 118,822 3,971 6.74%
Other interest-earning assets 9,255 48 1.05% 17,029 106 1.26%
-------- ------- ------- ---------- ------- ----
Total earning assets 222,495 $ 5,784 5.23% 210,517 $ 5,519 5.29%
Non-interest earning assets 24,527 21,191
Allowance for loan losses (1,842) (1,472)
-------- ---------
Total Assets $ 245,180 $ 230,236
========= =========
Sources of Funds:
Interest bearing deposits:
NOW $ 47,066 $ 107 0.46% $ 44,059 $ 136 0.62%
Money market 8,784 42 0.97% 4,302 18 0.84%
Savings 66,097 215 0.65% 63,938 281 0.89%
Time 57,941 603 2.09% 53,264 660 2.50%
-------- ------- -------- -------- ------- ----
Total interest bearing deposits 179,888 967 1.08% 165,563 1,095 1.33%
Borrowed funds 11,000 265 4.77% 13,779 295 4.26%
Junior subordinated debentures 5,155 121 4.64% 5,000 126 5.01%
-------- ------- -------- -------- ------- ----
Total interest bearing liabilities 196,043 $ 1,353 1.39% 184,342 $ 1,516 1.66%
Non-interest bearing liabilities:
Demand deposits 31,826 29,680
Other liabilities 2,159 2,296
-------- ---------
Total non-interest bearing liabilities 33,985 31,976
Stockholders' equity 15,152 13,918
-------- ---------
Total Liabilities and Stockholders'
Equity $ 245,180 $ 230,236
========= =========
Net Interest Income and Margin (5) $ 4,431 4.01% $ 4 ,003 3.83%
========= ====== ========= ====
(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 second quarter of 2004 increased $189 thousand over the same
period last year. This increase was largely the result of the rate for total
interest bearing liabilities decreasing 22 basis points to 1.39% in the second
quarter of 2004 from 1.61% in the same period of 2003, as the yield on total
earning assets decreased only 4 basis points during the same two second
quarterly periods. The increase in the volume of interest-bearing liabilities
also exceeded the increase in the volume of interest earning assets by $640
thousand. The net interest margin increased, on a fully taxable equivalent
basis, by 13 basis points to 3.94% in the second quarter of 2004 compared to
3.81% the year earlier.
5
Net interest income for the six months ended June 30, 2004, on a fully
taxable equivalent basis, increased $428 thousand, or 10.7%, over the same
period last year. The net interest margin increased, on a fully taxable
equivalent basis, 18 basis points from 3.83% for the first six months of 2003
to 4.01% for the first half of 2004. Comparing the first six months of 2003
to the first six months of 2004, the increase in the net interest margin was
more a component of rate than of volume, as the average rate paid on interest
bearing liabilities decreased 27 basis points and the average rate earned on
interest earning assets decreased only 6 basis points.
Provision for Loan Losses. For the three months ended June 30, 2004 the
provision for loan losses was $105 thousand compared to $120 thousand for the
quarter ended June 30, 2003. The provision for loan losses was $253 thousand
for the six months ended June 30, 2004 as compared to $245 thousand for the
same period last year. The provision for loan losses reflects management's
judgment concerning the risks inherent in the Company's existing loan
portfolio and the size of the allowance necessary to absorb the risks, as well
as the average balance of the portfolio over both periods. Management reviews
the adequacy of its allowance on an ongoing basis and will provide additional
provisions, as management may deem necessary.
Non-Interest Income. For the second quarter of 2004, total non-interest
income increased $145 thousand, or 14.2%, from the same period in 2003. The
majority of this increase is attributed to the Company's new residential
lending division which began operation in the third quarter of 2003. In the
second quarter of 2004 mortgage banking fees were $161 thousand compared to no
mortgage banking fee income reported in the second quarter of 2003. Insurance
commissions and fee income increased $81 thousand, or 15.5%, from $523
thousand in the second quarter of 2003 to $604 thousand in the quarter ended
June 30, 2004. This increase was largely due to increases in new business and
a stronger sales force.
For the six months ended June 30, 2004, non-interest income increased
$300 thousand, or 14.9%, from the same period in 2003. Most of this increase
is from the Company's new residential lending division. Mortgage banking fees
were $326 thousand for the first half of 2003, compared to $44 thousand for
the same period in 2003. Insurance commissions increased $83 thousand during
the first six months of 2004 compared to 2003. Other income increased $43
thousand, or 34.4%, from $125 thousand during the first six months of 2003 to
$168 thousand for the six months ended June 30, 2004. Of this increase, $36
thousand is from income recorded on a bank owned life insurance policy
purchased in January of 2004. All other categories of non-interest income
showed minor fluctuations. In the first six months of 2003, a $63 thousand
gain on the sale of foreclosed real estate and a $24 thousand gain on the
sale of loans held for sale were recorded, while there were no similar gains
during the first six months of 2004.
Non-Interest Expense. For the quarter ended June 30, 2004, non-interest
expense was $2.6 million, an increase of $276 thousand, or 11.7%, from $2.4
million for the six months ended June 30, 2003. This increase is attributed
to the increase of the Company's salaries and employee benefits of $173
thousand, or 12.9%, for the addition of ten full time equivalent employees and
commissions paid on the residential mortgage banking activity. Occupancy
expense has increased $59 thousand, or 40.0%, from second quarter of 2003 to
the same period in 2004, due to a new lease agreement for administrative and
operations office space at Sterling Plaza, Franklin, New Jersey, which is
being rented to accommodate the Company's growth and expansion needs.
Furniture and equipment expense has increased $15 thousand from the second
quarter of 2003 to the same period in 2004 from the purchase of computer
hardware and software made in connection with a major hardware upgrade and
system conversion in May of 2004.
For the six months ended June 30, 2004, non-interest expense increased $547
thousand, or 11.6%, to $5.3 million, from the first six months of 2003.
Salaries and employee benefits increased $463 thousand, or 17.6%, relating to
general staff increases and costs associated with an increased number of
commission based employees. The other major non-interest expense increase for
the first six months of 2004 over the same period in 2003 was an increase of
$90 thousand for the lease and occupancy of new administrative offices at
Sterling Plaza in Franklin, New Jersey.
Income Taxes. Income tax expense increased $25 thousand to $152 thousand (28%
effective tax rate) for the three months ended, June 30, 2004 compared to $127
thousand (26% effective tax) rate for the same period in 2003. Income taxes
increased $47 thousand for the six months ended June 30, 2004 to $287 thousand
(27% effective tax rate) as compared to $240 thousand (26% effective tax rate)
for the six months ended June 30, 2003. These increases in income taxes resulted
from an increase in income before taxes for the three and six month periods
ended June 30, 2004 compared to the same periods ended June 30, 2003.
FINANCIAL CONDITION
June 30, 2004 as compared to December 31, 2003
Total assets increased to $251.1 million at June 30, 2004, a $10.5 million
increase from total assets of $240.6 million at December 31, 2003. Increases
in total assets include increases of $9.7 million in net loans, $1.9 million
in cash and cash equivalents and $3.0 million in other assets, partially
offset by a $1.8 million reduction in securities available for sale and a $3.0
million decline in interest bearing time deposits with other banks. Asset
increases were financed through an increase in total deposits of $9.7 million
from $207.7 million at year-end 2003 to $217.4 million at June 30, 2004.
Total stockholder's equity increased $137 thousand from $14.9 million at
December 31, 2003 to $15.0 million at June 30, 2004. Due to the decline in
the fair value of the available for sale investment portfolio during the
first half of 2004, accumulated other comprehensive income decreased $667
thousand from $248 thousand on December 31, 2003 to an accumulated other
comprehensive loss of $419 thousand at June 30, 2004.
Total loans at June 30, 2004 increased $9.9 million to $144.3 million from
$134.4 million at year-end 2003. During the six-month period ending June 30,
2004, new originations have exceeded payoffs both through scheduled maturities
and prepayments. The Company continues to see significant prepayment activity
as borrowers seek to refinance loans in the current low interest rate
environment. The Company is emphasizing the origination of commercial,
industrial, and non-residential real estate loans to increase the yield in its
loan portfolio and reduce its dependence on loans secured by 1-4 family
properties. The Company has also increased its activity in the loan
participation market. The majority of the originated and sold participations
are commercial real estate related loans which exceed the Company's legal
lending limit. The balance in non-residential real estate loans increased
$5.5 million from $59.2 million at December 31, 2003 to $64.7 million on June
30, 2004, construction and land development loans increased $4.0 million,
loans secured by farmland increased $2.2 million and commercial and industrial
loans increased $1.8 million over the same six-month period. Residential 1-4
family real estate loans have decreased $3.6 million from December 31, 2003 to
June 30, 2004 as residential mortgage applicants are being referred to our
residential mortgage division for third party processing.
Federal funds sold increased by $795 thousand to $5.0 million at June 30,
2004 from $4.2 million on December 31, 2003. During the first six months of
2004, these funds were provided by the increase in total deposits and have
been used to fund increased loan demand.
6
Securities, available for sale, at fair value, decreased $1.8 million
from $76.5 million at year-end 2003 to $74.8 million at June 30, 2004. The
Company purchased $13.8 million in new securities in the first six months of
2004 and $14.1 million in available for sale securities matured, were called
and were repaid. There was a $1.1 million increase in unrealized losses in
the available for sale portfolio and $352 thousand in net amortization
expenses recorded during the first six months of 2004. There were no held to
maturity securities at June 30, 2004 or at December 31, 2003.
Premises and equipment increased by $820 thousand, or 17.6%, from $4.7 million
at December 31, 2003 to $5.5 million on June 30, 2004. This increase was due to
a renovation project at the main office location in Franklin, NJ, leasehold
improvements at the Company's new administrative and operations facility and the
Company's purchase of new computer hardware and software attributed to a network
upgrade and system conversion. Other assets increased from $3.7 million on
December 31, 2003 to $6.7 million on June 30, 2004. This $3.0 million increase
was generated from the purchase of a $1.5 million bank owned life insurance
policy in January of 2004, the prepayment of the Company's insurance policies
and receivable and deferred tax asset balances increasing during this six month
period.
Total deposits increased $9.7 million, or 4.7%, to $217.4 million during
the first six months of 2004 from $207.7 million at December 31, 2003. Non-
interest bearing deposits increased $4.0 million to $35.7 million at June 30,
2004 from $31.7 million at December 31, 2003, interest-bearing and savings
deposits increased $6.4 million, or 5.3%, and total time deposits decreased
$634 thousand, from December 31, 2003 to June 30, 2004. Non-interest bearing
business and business NOW deposit balances increased $3.3 million from
December 31, 2003 to June 30, 2004 and non-core IOLTA and public fund account
balances have recorded a $5.9 million increase in balances in the first six
months of 2004. Management continues to monitor the shift in deposits through
its Asset/Liability Committee.
LOAN AND ASSET QUALITY
Non-performing assets consist of non-accrual loans and all loans over
ninety days delinquent and foreclosed real estate owned ("OREO"). At June 30,
2004, non-accrual loans increased by $250 thousand to $1.4 million, as
compared to $1.2 million at December 31, 2003. There were no loans ninety
days past due and still accruing or renegotiated loans at June 30, 2004. The
Company had $223 thousand in OREO properties at June 30, 2004 and at December
31, 2003. In addition to active monitoring and collecting on delinquent
loans, management has an active loan review process for customers with
aggregate relationships of $250,000 or more if the credit(s) are unsecured or
secured, in whole or substantial part, by collateral other than real estate
and $1,000,000 or more if the credit(s) are secured, in whole or substantial
part, by real estate. Management continues to monitor the Company's asset
quality and believes that the non-accrual loans are adequately collateralized
and anticipated material losses have been adequately reserved for in the
allowance for loan losses.
The following table provides information regarding risk elements in the loan
portfolio (dollars in thousands):
June 30, 2004 December 31, 2003
------------- ------------------
(Dollars in thousands)
Non-accrual loans $ 1,427 $ 1,177
Non-accrual loans to total loans 0.99% 0.88%
Non-performing assets to total assets 0.66% 0.63%
Allowance for loan losses
as a % of non-performing loans 137.21% 130.67%
Allowance for possible loan losses to total loans 1.36% 1.29%
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to
provide for potential loan losses. The allowance is allocated to specific
loan categories based upon management's classification of problem loans under
the bank's internal loan grading system and to pools of other loans that are
not individually analyzed. Management makes allocations to specific loans
based on the present value of expected future cash flows or the fair value of
the underlying collateral for impaired loans and to other classified loans
based on various credit risk factors. These factors include collateral
values, the financial condition of the borrower and industry and current
economic trends.
Allocations to commercial loan pools are categorized by commercial loan type
and are based on management's judgment concerning historical loss trends and
other relevant factors. Installment and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience
adjusted for portfolio activity and current conditions. Additionally, all
other delinquent loans are grouped by the number of days delinquent with this
amount assigned a general reserve amount.
At June 30, 2004, the allowance for loan losses was $2.0 million, an increase
of 12.9% from the $1.7 million at year-end 2003. The provision for loan
losses was $253,000 and there were $29,000 in charge offs and no recoveries
reported in the first six months of 2004. The allowance for loan losses as a
percentage of total loans was 1.36% at June 30, 2004 compared to 1.29% on
December 31, 2003.
INTEREST RATE SENSITIVITY
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line
with general market interest rates. Interest rate sensitivity is the
volatility of a company's earnings from a movement in market interest rates.
Interest rate "gap" analysis is a common, though imperfect, measure of
interest rate risk. We do not employ gap analysis as a rate risk management
tool, but rather we rely upon earnings at risk analysis to forecast the impact
on our net interest income of instantaneous 100 and 200 basis point increases
and decreases in market rates. In assessing the impact on earnings, the rate
shock analysis assumes that no change occurs in our funding sources or types
of assets in response to the rate change.
Our financial modeling simulates our cash flows, interest income and interest
expense from earning assets and interest bearing liabilities in each of the
different interest rate environments, using actual individual deposit, loan
and investment maturities and rates in the model calculations. Assumptions
regarding the likelihood of prepayments on residential mortgage loans and
investments are made based on historical relationships between interest rates
and prepayments. Commercial loans with prepayment penalties are assumed to
pay on schedule to maturity. In actual practice, commercial borrowers may
request and be granted interest rate reductions during the life of a
commercial loan due to competition from financial institutions and declining
interest rates. The interest rate sensitivity of the Company's assets and
liabilities, and the impact on net interest income would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by the assumptions.
7
The following table sets forth the Company's interest rate risk profile
at June 30, 2004 and 2003.
June 30, 2004 June 30, 2003
----------------------------- --------------------------------
Change in Gap as a Change in Gap as a
Net Interest % of Net Interest % of
(Dollars in Thousands) Income Total Assets Income Total Assets
--------------------- ------------ ------------ ------------ ------------
Down 200 basis points ($584) 11.66% ($154) 3.27%
Down 100 basis points (147) 5.86% (33) 1.39%
Up 100 basis points (70) -2.80% (213) -9.05%
Up 200 basis points (211) -4.22% (517) -10.99%
------------ ------------ ------------ ------------
LIQUIDITY MANAGEMENT
It is management's intent to fund future loan demand primarily with deposits and
maturities and paydowns on investments. In addition, the Bank is a member of the
Federal Home Loan Bank of New York and as of June 30, 2004, had the ability to
borrow up to $16.5 million against its one to four family mortgages and selected
investment securities as collateral for borrowings. The Bank also has available
an overnight line of credit and a one-month overnight repricing line of credit,
each in the amount of $11.8 million at the Federal Home Loan Bank and an
overnight line of credit in the amount of $4 million at the Atlantic Central
Bankers Bank. The Company at June 30, 2004 had borrowings totaling $11 million
secured by the pledge of its one to four family mortgages and selected
securities. One short-term borrowing of $1 million has a maturity in July of
2004 with an interest rate of 3.01%. The remaining $10 million in borrowings
consist of three notes that mature on December 21, 2010 with a convertible
quarterly option which allows the Federal Home Loan Bank to change the note to
then current market rates. The interest rates on these three borrowings range
from 4.77% to 5.14%.
At June 30, 2004, the amount of liquid assets remained at a level management
deemed adequate to ensure that contractual liabilities, depositors' withdrawal
requirements, and other operational and customer credit needs could be
satisfied. At June 30, 2004, liquid investments totaled $17.4 million, and
all mature within 30 days.
The following table represents the Company's contractual obligations to make
future payments.
Payments due by period
--------------------------------------------------------------
Less than More than
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
--------- ---------- ---------- ----------- ---------
Borrowings $ 11,000 $ 1,000 $ -- $ -- $ 10,000
Operating lease obligations 857 236 365 134 122
Purchase obligations 389 389 -- -- --
Time deposits 55,847 43,661 8,756 2,945 485
Junior subordinated debentures 5,155 -- -- -- 5,155
-------- --------- ------- ------- --------
Total $ 73,248 $ 45,286 $ 9,121 $ 3,079 $ 15,762
======== ========= ======= ======= ========
The Company has no investment in or financial relationship with any
unconsolidated entities that are reasonably likely to have a material effect
on liquidity or the availability of capital resources.
The Company is not aware of any known trends or any known demands,
commitments, events or uncertainties, which would result in any material
increase or decrease in liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's financial statements do not reflect off-balance sheet
arrangements that are made in the normal course of business. These
off-balance sheet arrangements consist of unfunded loans and letters of credit
made under the same standards as on-balance sheet instruments. These unused
commitments, at June 30, 2004 totaled $31,183,000. This consisted of
$9,164,000 in commercial construction lines of credit, $9,496,000 in home
equity lines of credit, $7,275,000 in commercial lines of credit, $3,184,000
in commitments to grant commercial and residential loans and the remainder in
other unused commitments. These instruments have fixed maturity dates, and
because many of them will expire without being drawn upon, they do not
generally present any significant liquidity risk to the Company.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations.
CAPITAL RESOURCES
Total stockholders' equity increased $137 thousand to $15.0 million
at June 30, 2004 from $14.9 million at year-end 2003. Activity in
stockholders' equity consisted of a net increase in retained earnings of $507
thousand derived from $762 thousand in net income earned during the first six
months of 2004, offset by $255 thousand for the payments of cash dividends.
Other increases were $202 thousand in stock options exercised and $97 thousand
for shares issued through the dividend reinvestment plan. An unrealized loss
on securities available for sale, net of income tax, reduced stockholders'
equity by $667 thousand as well as the retirement of $2 thousand in treasury
shares.
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 July 7, 2004, the
new quarterly rate of interest on the debentures will be 5.25%. The rate is
capped at 12.5% through the first five years, and the securities may be called
at par any time after October 7, 2007, or if the regulatory capital or tax
treatment of the securities is substantially changed. These trust preferred
securities are included in the Company's and the Bank's capital ratio
calculations.
At June 30, 2004 the Company and the Bank both meet the well-capitalized
regulatory standards applicable to them. The table below presents the capital
ratios at June 30, 2004, for the Company and the Bank, as well as the minimum
regulatory requirements.
(Dollars in thousands) Amount Ratio Amount Minimum Ratio
---------------------- ------- ------- ---------- -------------
The Company:
Leverage Capital $ 17,805 7.24% $ >= 9,833 4%
Tier 1 - Risk Based 17,805 10.84% >= 6,570 4%
Total Risk-Based 19,763 12.03% >= 13,139 8%
The Bank:
Leverage Capital 17,255 7.03% >= 9,819 4%
Tier 1 Risk-Based 17,255 10.54% >= 6,548 4%
Total Risk-Based 19,213 11.74% >= 13,096 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-15. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are, as
of the end of the period covered by this report, effective in timely
alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's
periodic SEC filings.
8
(b) Changes in internal controls.
Not applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Bank are periodically involved in various legal
proceedings as a normal incident to their businesses. In the opinion of
management, no material loss is expected from any such pending lawsuit.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
There were no changes in securities. The Company did not have any common stock
repurchases during the second quarter of 2004. On April 16, 1999 the Company
announced a stock repurchase plan whereby the Company may purchase up to 50,000
shares of outstanding stock. There is no expiration date to this plan.
Item 3. Defaults upon Served Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On April 28, 2004, the Registrant held its annual meeting of shareholders to
elect members of the Company's Board of Directors whose terms expired.
Nominees for election to the Board of Directors received the following votes:
Nominees: For Withhold Authority
-------- --- ------------------
Irvin Ackerson 1,552,737 130,896
Terry H. Thompson 1,638,104 45,530
Item 5. Other Information
Not applicable
Item 6. Exhibits and Report on form 8-K
(a). Exhibits
Number Description
------ -----------
31.1 Certification of Donald L Kovach pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Candace A. Leatham pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b). Reports on Form 8-K
Filing Date Item Number Description
----------- ----------- -----------
April 23, 2004 7 & 12 Press release announcing first quarter
2004 results and 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:
9