-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LHyxqu+c2QSxeg/ORNu3koWJk2bYYHpBGLfgLqdns9PN3uuKnf8sQePb8WGe0erZ eGd6/PVMpmkjEH1lT81vag== 0000914317-03-002317.txt : 20030806 0000914317-03-002317.hdr.sgml : 20030806 20030806142412 ACCESSION NUMBER: 0000914317-03-002317 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSSEX BANCORP CENTRAL INDEX KEY: 0001028954 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223475473 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12569 FILM NUMBER: 03825899 BUSINESS ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 BUSINESS PHONE: 9738272914 MAIL ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 10QSB 1 form10qsb-53498_sussex.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------- FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 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 August 6, 2003 there were 1,701,217 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 15 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 June 30, 2003 December 31, 2002 ---------------------------------- Cash and due from banks $ 12,238 $ 9,186 Federal funds sold 9,140 16,910 -------- -------- Cash and cash equivalents 21,378 26,096 Interest bearing time deposits with other banks 3,500 3,600 Securities available for sale 74,709 72,720 Federal Home Loan Bank Stock, at cost 760 750 Loans receivable, net of unearned income 125,702 113,455 Less: allowance for loan losses 1,590 1,386 -------- -------- Net loans receivable 124,112 112,069 Premises and equipment, net 4,469 4,634 Accrued interest receivable 1,208 1,144 Goodwill 1,932 1,932 Other assets 3,331 2,959 -------- -------- Total Assets $235,399 $225,904 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing demand $ 32,317 $ 26,514 Savings and interest bearing demand 115,332 110,729 Time of less than $100,000 43,038 43,470 Time of $100,000 and over 9,740 9,145 -------- -------- Total Deposits 200,427 189,858 Borrowings 13,000 15,000 Accrued interest payable and other liabilities 2,546 2,366 Mandatory redeemable capital debentures 5,000 5,000 -------- -------- Total Liabilities 220,973 212,224 Stockholders' Equity: Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 1,699,981 in 2003 and 1,688,130 in 2002 7,978 7,869 Retained earnings 5,685 5,249 Accumulated other comprehensive income 763 562 -------- -------- Total Stockholders' Equity 14,426 13,680 -------- -------- Total Liabilities and Stockholders' Equity $235,399 $225,904 ======== ========
See Notes to Consolidated Financial Statements -3- SUSSEX BANCORP CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Share Data) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------ ------ ------ ------ INTEREST INCOME Loans receivable, including fees $2,033 $1,900 $3,972 $3,817 Securities: Taxable 445 499 968 947 Tax-exempt 169 116 334 216 Federal funds sold 36 112 81 237 Interest bearing deposits 12 33 25 50 ------ ------ ------ ------ Total Interest Income 2,695 2,660 5,380 5,267 ------ ------ ------ ------ INTEREST EXPENSE Deposits 535 710 1,095 1,539 Borrowings 146 125 295 249 Mandatory redeemable capital debentures 63 -- 126 -- ------ ------ ------ ------ Total Interest Expense 744 835 1,516 1,788 ------ ------ ------ ------ Net Interest Income 1,951 1,825 3,864 3,479 Provision for Loan Losses 120 75 245 150 ------ ------ ------ ------ Net Interest Income after Provision for Loan Losses 1,831 1,750 3,619 3,329 ------ ------ ------ ------ NON-INTEREST INCOME Service fees on deposit accounts 189 174 372 315 ATM fees 90 65 164 117 Insurance commissions and fees 523 434 1,087 862 Investment brokerage fees 75 76 138 148 Net gain on sale of loans held for sale 24 6 24 24 Net gain on sale of other real estate owned 63 -- 63 -- Other 58 77 169 131 ------ ------ ------ ------ Total Non-Interest Income 1,022 832 2,017 1,597 ------ ------ ------ ------ NON-INTEREST EXPENSE Salaries and employee benefits 1,341 1,138 2,627 2,229 Occupancy, net 149 149 324 296 Furniture and equipment 195 214 401 430 Stationary and supplies 50 41 97 79 Audit and exams 27 30 52 66 Advertising and promotion 94 131 175 242 Postage and freight 46 38 90 73 Amortization of intangible assets 39 32 77 65 Other 425 334 880 647 ------ ------ ------ ------ Total Non-Interest Expense 2,366 2,107 4,723 4,127 ------ ------ ------ ------ Income before Income Taxes 487 475 913 799 Provision for Income Taxes 127 144 240 237 ------ ------ ------ ------ Net Income $ 360 $ 331 $ 673 $ 562 ====== ====== ====== ====== Earnings per share ------ ------ ------ ------ Basic $ 0.21 $ 0.20 $ 0.40 $ 0.34 ====== ====== ====== ====== ------ ------ ------ ------ Diluted $ 0.21 $ 0.19 $ 0.39 $ 0.33 ====== ====== ====== ======
See Notes to Consolidated Financial Statements -4- SUSSEX BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended June 30, 2003 and 2002 (Unaudited)
Accumulated Number of Other Total Shares Common Retained Comprehensive Treasury Stockholders Outstanding Stock Earnings Income Stock Equity ----------- ----- -------- ------ ----- ------ (Dollars in thousands, except per share amounts) Balance December 31, 2001 1,659,057 $7,732 $4,509 $ 123 ($127) $12,237 Comprehensive income: Net income -- -- 562 -- -- 562 Change in unrealized gains (losses) on securities available for sale -- -- -- 224 -- 224 ------- Total Comprehensive Income 786 Treasury shares purchased (10,052) -- -- -- (105) (105) Issuance of common stock and exercise of stock options 4,090 25 -- -- -- 25 Issuance of common stock through dividend reinvestment plan 6,455 60 -- -- -- 60 Dividends on common stock ($.12 per share) -- -- (200) -- -- (200) ---------------------------------------------------------------------------------- Balance June 30, 2002 1,659,550 $7,817 $4,871 $ 347 ($232) $12,803 ================================================================================== Balance December 31, 2002 1,688,130 $7,869 $5,249 $ 562 $ 0 $13,680 Comprehensive income: Net income -- -- 673 -- -- 673 Change in unrealized gains (losses) on securities available for sale -- -- -- 201 -- 201 ------- Total Comprehensive Income 874 Treasury shares purchased (2,400) -- -- -- (25) (25) Treasury shares retired -- (25) -- -- 25 -- Issuance of common stock and exercise of stock options 5,186 40 -- -- -- 40 Shares issued through dividend reinvestment plan 9,065 94 -- -- -- 94 Dividends on common stock ($.14 per share) -- -- (237) -- -- (237) ---------------------------------------------------------------------------------- Balance March 31, 2003 1,699,981 $7,978 $5,685 $ 763 $ 0 $14,426 ==================================================================================
See Notes to Consolidated Financial Statements -5- SUSSEX BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Six Months Ended June 30, ------------------------- 2003 2002 -------- -------- (In Thousands) Cash Flows from Operating Activities Net income $ 673 $ 562 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 245 150 Provision for depreciation and amortization 264 290 Net amortization of securities premiums and discounts 580 228 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 (25) (28) (Increase) decrease in assets: Accrued interest receivable (64) (226) Other assets (445) 6 Increase (decrease) in accrued interest payable and other liabilities 180 (4) -------- -------- Net Cash Provided by Operating Activities 1,345 978 -------- -------- Cash Flows from Investing Activities Securities available for sale: Purchases (29,513) (24,628) Maturities, calls and principal repayments 27,279 11,849 Net (increase) decrease in loans (12,511) (1,469) Purchases of bank premises and equipment (99) (179) (Purchase) redemption of FHLB stock (10) 18 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 (14,504) (17,409) -------- -------- Cash Flows from Financing Activities Net increase in deposits 10,569 7,312 Repayment of borrowings (2,000) -- Proceeds from the issuance of common stock 40 25 Purchase of treasury stock (25) (105) Dividends paid, net of reinvestments (143) (140) -------- -------- Net Cash Provided by Financing Activities 8,441 7,092 -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents (4,718) (9,339) Cash and Cash Equivalents - Beginning 26,096 41,035 -------- -------- Cash and Cash Equivalents - Ending $ 21,378 $ 31,696 ======== ======== Supplementary Cash Flows Information Interest paid $ 1,549 $ 1,968 ======== ======== Income taxes paid $ 434 $ 128 ======== ======== Supplementary Schedule of Noncash Investing and Financing Activities Other real estate acquired in settlement of loans $ 223 $ 0 ======== ========
See Notes to Consolidated Financial Statements -6- SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The consolidated financial statements include the accounts of Sussex Bancorp (the "Company") and its wholly-owned subsidiaries, Sussex Bank (the "Bank") and Sussex Capital Trust I. The Bank's wholly-owned subsidiaries are Sussex Bancorp Mortgage Company, Inc., SCB Investment Company, Inc., and Tri-State Insurance Agency, Inc. All inter-company transactions and balances have been eliminated in consolidation. The Bank operates eight banking offices all located in Sussex County, New Jersey and is the parent of Tri-State Insurance Agency, Inc., ("Tri-State") a full service insurance agency located in Sussex County, New Jersey. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "FRB"). The Bank's deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, FDIC and the New Jersey Department of Banking and Insurance (the "Department") and the operations of Tri-State are subject to the supervision and regulation by the Department. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for full year financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for the six-month period ended June 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. Net Income Per Common Share Basic net income per share of common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance 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 (dollars in thousands, except per share data):
Three Months Ended June 30, 2003 Three Months Ended June 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 $ 360 1,699 $ 0.21 $ 331 1,655 $ 0.20 ======== ======== Effect of dilutive securities: Stock options -- 18 -- 18 Deferred common stock payments for purchase of insurance agency 2 38 1 57 ----------------------- ---------------------- Diluted earnings per share: Net income applicable to common stock- holders and assumed conversions $ 362 1,755 $ 0.21 $ 332 1,730 $ 0.19 ====================================== ==================================== Six Months Ended June 30, 2003 Six Months Ended June 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 $ 673 1,696 $ 0.40 $ 562 1,657 $ 0.34 ======== ======== Effect of dilutive securities: Stock options -- 16 -- 18 Deferred common stock payments for purchase of insurance agency 5 38 3 57 ----------------------- ---------------------- Diluted earnings per share: Net income applicable to common stock- holders and assumed conversions $ 678 1,750 $ 0.39 $ 565 1,732 $ 0.33 ====================================== ====================================
-7- 3. Comprehensive Income The components of other comprehensive income and related tax effects for the three and six months ended June 30, 2003 and 2002 are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in Thousands) (in Thousands) Unrealized holding gains on available for sale securities $ 622 $ 569 $ 335 $ 377 Less: reclassification adjustments for gains included in net income -- -- -- -- ------- ------- ------- ------- Net unrealized gains 622 569 335 377 Tax effect 249 229 134 153 ------- ------- ------- ------- Other comprehensive income, net of tax $ 373 $ 340 $ 201 $ 224 ======= ======= ======= =======
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, 2003 Three Months Ended June 30, 2002 ----------------------------------------- ------------------------------------------- Banking and Insurance Banking and Insurance Financial Services Services Total Financial Services Services Total ------------------ -------- ----- ------------------ -------- ----- (In Thousands) (In Thousands) Revenues from external sources $3,194 $ 523 $3,717 $3,058 $ 434 $3,492 Income before income taxes 408 79 487 429 46 475 Six Months Ended June 30, 2003 Six Months Ended June 30, 2002 ----------------------------------------- ------------------------------------------- Banking and Insurance Banking and Insurance Financial Services Services Total Financial Services Services Total ------------------ -------- ----- ------------------ -------- ----- (In Thousands) (In Thousands) Revenues from external sources $6,310 $1,087 $7,397 $6,002 $ 862 $6,864 Income before income taxes 754 159 913 691 108 799
5. Stock Option Plans The Company accounts for stock option plans under the recognition and measurement principles of APB Opinion No. 25. "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation for the periods presented:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------- ------- ------- ------- (In Thousands) (In Thousands) Net income, as reported $ 360 $ 331 $ 673 $ 562 Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (11) (7) (17) (10) ------- ------- ------- ------- Pro forma net income $ 349 $ 324 $ 656 $ 552 ======= ======= ======= ======= Basic earnings per share: As reported $ 0.21 $ 0.20 $ 0.40 $ 0.34 Pro forma $ 0.21 $ 0.20 $ 0.39 $ 0.33 Diluted earnings per share: As reported $ 0.21 $ 0.19 $ 0.39 $ 0.33 Pro forma $ 0.20 $ 0.19 $ 0.38 $ 0.32
6. 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- 7. 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 $724,000 of standby letters of credit as of June 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 June 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 for the first fiscal year or interim period beginning after June15, 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 is not expected to 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 Six Months ended June 30, 2003 and June 30, 2002 CRITICAL ACCOUNTING POLICIES Disclosure of the Company's significant accounting policies is included in Note 1 to the consolidated financial statements of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses. Additional information is contained on pages 11 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. 9 OVERVIEW The Company realized net income of $360 thousand for the second quarter of 2003, an increase of $29 thousand from the $331 thousand reported for the same period in 2002. Basic earnings per share increased from $0.20 in the second quarter of 2002 to $0.21 for the second quarter of 2003. Diluted earnings per share were $0.19 in the second quarter of 2002 and increased to $0.21 in the second quarter of 2003. For the six months ended June 30, 2003, net income was $673 thousand, an increase of $111 thousand from the $562 thousand reported for the same period in 2002. Basic earnings per share were $0.40 for the six months ended June 30, 2003 compared to $0.34 for the six-month period ended June 30, 2002. Diluted earnings per share were $0.39 for the six months ended June 30, 2003, an increase from $0.33 from the first six months of 2002. The results reflect a substantial decrease in interest expense due to declining market rates of interest, coupled with increases in interest income due to growth of $21.8 million in average earning assets from the first six months of 2002 to the same period this year. RESULTS OF OPERATIONS Interest Income. Total interest income increased $35 thousand, or 1.3%, to $2.7 million for the quarter ended June 30, 2003 from the same period in 2002. This increase was primarily attributable to an increase of $21.9 million in average second quarter interest earning assets from $190.9 million in 2002 to $212.8 million in 2003, while the average yield declined 46 basis points, on a fully taxable equivalent basis, from 5.67% during the second quarter of 2002 to 5.21% in the second quarter of 2003. Although the average rate earned on investment securities declined by 133 basis points, the average balance increased by $21.7 million, or 40.9%, to $74.7 million in the second quarter of 2003 and resulted in a $25 thousand increase to interest income, on a fully taxable equivalent basis, for the same period. Similarly, while the average rate earned in the loan portfolio decreased 50 basis points to 6.65% for the second quarter of 2003 from 7.15% in the second quarter of 2002, the average loan balance increased 15.5% from $106.1 million to $122.6 million from second quarter 2002 to second quarter 2003 and the interest income earned on the loan portfolio increased $140 thousand. The interest earned on other interest bearing assets declined $97 thousand while the average balance in other interest earning assets decreased by $16.3 million, or 51.2%, to $15.5 million from $31.8 million from the second quarter of 2002, primarily reflecting a decline in federal funds sold. The impact of volume increases in average balances on interest income exceeded the market declines in interest rates, resulting in an increase in interest income for the second quarter of 2003 compared to the second quarter if 2002. For the six months ended June 30, 2003, interest income, on a fully taxable equivalent basis, increased $170 thousand, or 2.2%, to $5.5 million from the $5.3 million reported for the same period in 2002. During the first six months of 2003 average interest earning assets increased $21.8 million to $210.5 million from $188.8 million during the same period in 2002. The average balance in the loan portfolio increased $12.7 million, taxable securities increased $19.6 million and tax exempt securities increased $5.1 million, while the average balance of other interest-earning assets decreased $15.7 million during the first six 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 42 basis point decrease in the average yield on interest earning assets on a fully taxable equivalent basis from 5.71% from the first half of 2002 to 5.29% for the same period of 2003. Interest Expense. The Company's interest expense for the second quarter of 2003 decreased $91 thousand, or 10.9% to $744 thousand from $835 thousand in the second quarter of 2002. The average balance of interest bearing liabilities increased $18.7 million, or 11.2% to $185.0 million during the second quarter of 2003 from $166.3 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 1.61% for the second quarter of 2003 from 2.01% in the second quarter of 2002. NOW deposit average balances grew $13.6 million, or 43.1%, from $31.7 million during the second quarter 2002 to $45.3 million in the second quarter of 2003. However, the interest expense on NOW deposits increased only $10 thousand from the second quarter of 2002, as the average interest rate paid decreased 14 basis points from 0.75% to 0.61% during the same period. Average savings deposits increased $2.8 million, or 4.5%, while the average rate paid declined 45 basis points from 1.31% in the second quarter of 2002 to 0.86% in the second quarter of 2003. The average balance in time deposits decreased $6.0 million, or 10.1% in the second quarter of 2003 compared to the same period in 2002 as the interest expense on time deposits declined $121 thousand, or 37.8% to $320 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 increased to $18.3 million in the second quarter of 2003 from $10 million in the second 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 that were not present during the second quarter of 2002. The capital debentures bear a floating rate of interest, which averaged 4.98% in the second quarter of 2003, and the related interest expense was $63 thousand for the quarter ended June 30, 2003. For the six months ended June 30, 2003 interest expense decreased $272 thousand, or 15.2%, to $1.5 million from $1.8 million for the same period last year. This decrease was largely due to a decrease in interest expense on time deposits of $324 thousand, or 32.9%, from $1.0 million for the first half of 2002 to $660 thousand during the first six months of 2003. The average balance in time deposit accounts decreased $5.8 million, or 9.9%, over the same six-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 it's 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 $12.4 million, or 39.0%, from $31.7million during the first half of 2002 to $44.1 million in the first half of 2003. Savings deposits increased $4.0 million, or 6.7%, from $59.9 million during the first six months of 2002 to $63.9 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 half of 2003. The issuance of $5 million in capital debentures during July of 2002, which bore an average rate of 5.01% during the first six months of 2003, increased the Company's interest expense by $126 thousand during the first six months of 2003. The average rate paid on total interest bearing liabilities decreased 53 basis points from 2.19% in the first six months of 2002 to 1.66% 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 six months ended June 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. -10-
Six Months Ended June 30, (dollars in thousands) 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Earning Assets: Balance Interest(1) Rate(2) Balance Interest(1) Rate(2) - ---------------------------------------------------------------------------------------------------------------------------------- Securities: Tax exempt(3) $ 16,191 $ 474 5.90% $ 11,061 $ 298 5.43% Taxable 58,475 968 3.34% 38,886 947 4.91% - ---------------------------------------------------------------------------------------------------------------------------------- Total securities 74,666 1,442 3.89% 49,947 1,245 5.03% Taxable loans: (net of unearned income) Mortgage and construction 72,110 2,495 6.98% 61,306 2,301 7.57% Commercial 16,590 473 5.75% 11,738 344 5.91% Consumer 30,122 1,003 6.71% 33,069 1,172 7.15% - ---------------------------------------------------------------------------------------------------------------------------------- Total loans receivable(4) 118,822 3,971 6.74% 106,113 3,817 7.25% Other interest-earning assets 17,029 106 1.26% 32,707 287 1.77% - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 210,517 $ 5,519 5.29% 188,767 $ 5,349 5.71% Non-interest earning assets 21,191 18,496 Allowance for loan losses (1,472) (1,219) - -------------------------------------------------------------- --------- Total Assets $ 230,236 $ 206,044 ============================================================== ========= Sources of Funds: Interest bearing deposits: NOW $ 44,059 $ 136 0.62% $ 31,700 $ 131 0.83% Money market 4,302 18 0.84% 3,642 18 1.00% Savings 63,938 281 0.89% 59,908 406 1.37% Time 53,264 660 2.50% 59,093 984 3.36% - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 165,563 1,095 1.33% 154,343 1,539 2.01% Borrowed funds 13,779 295 4.26% 10,000 249 4.95% Capital debentures 5,000 126 5.01% 0 0 0.00% - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 184,342 $ 1,516 1.66% 164,343 $ 1,788 2.19% Non-interest bearing liabilities: Demand deposits 29,680 26,865 Other liabilities 2,296 2,435 - -------------------------------------------------------------- --------- Total non-interest bearing liabilities 31,976 29,300 Stockholders' equity 13,918 12,401 - -------------------------------------------------------------- --------- Total Liabilities and Stockholders' Equity $ 230,236 $ 206,044 ============================================================== ========= - ------------------------------------- --------------------- --------------------- Net Interest Income and Margin(5) $ 4,003 3.83% $ 3,561 3.80% ===================================== ===================== =====================
(1) Includes loan fee income (2) Average rates on securities are calculated on amortized costs (3) Full taxable equivalent basis, using a 34% 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 2003 increased $159 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 10 basis points to 3.81% in the second quarter of 2003 compared to 3.91% the year earlier due to the average rate earned on total earning assets declining 46 basis points compared to the average rate paid on total interest bearing liabilities declining only 40 basis points. Net interest income for the six months ended June 30, 2003 increased $442 thousand, or 12.4%, over the same period last year. The net interest margin increased, on a fully taxable equivalent basis, 3 basis points from 3.80% for the first six months of 2002 to 3.83% for the first half of 2003. Comparing the first six months of 2002 to the first six months of 2003, the average rate paid on interest bearing liabilities repriced faster and lower than the average rate earned on interest earning assets. Provision for Loan Losses. For the three months ended June 30, 2003 the provision for loan losses was $120 thousand compared to $75 thousand for the second quarter ended June 30, 2002. The provision for loan losses was $245 thousand for the six months ended June 30, 2003 as compared to $150 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 for additional provisions, as management may deem necessary. 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 June 30, 2003. As commercial loans may be deemed more risky than residential lending, the Company allocated additional provisions to the allowance during the first six months of 2003. -11- Non-Interest Income. For the second quarter of 2003, total non-interest income increased $190 thousand, or 22.8%, from the same period in 2002. In the second quarter of 2003 insurance commissions and fees increased $89 thousand, or 20.5%, from $434 thousand reported in the second quarter of 2002 to $523 thousand for the quarter ended June 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 $27 thousand of the second quarter increase and industry-wide insurance premium increases of 10% to 15% account for the balance of the increase. Service charges on deposit accounts increased $15 thousand and ATM fees increased $25 thousand for the quarter ended June 30, 2003 compared to the same period in 2002. Both of these increases are attributable to the growth in the Company's deposits. Other factors effecting non-interest income include an increase of $18 thousand in the sale of loans held for sale in the second quarter of 2003 compared to the second quarter of 2002 and a net gain on the sale of other real estate owned of $63 thousand recorded in the second quarter of 2003. For the six months ended June 30, 2003, non-interest income increased $420 thousand, or 23.3%, from the same period in 2002. Insurance commissions and fees increased $225 thousand, a 26.1% increase over the first half of 2002. Service charges on deposit accounts increased $57 thousand, or 18.1%, and ATM fees increased $47 thousand, or 40.2%, for the six-month period ending June 30, 2003 over the same period in 2002. Mortgage banker fees, which are included in other income, increased in the first half of 2003 to $44 thousand from $14 thousand during the first six months of 2002. In the first six 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 six months of 2002. Non-Interest Expense. For the quarter ended June 30, 2003, non-interest expense increased $259 thousand from the same period last year. The Company's salaries and employee benefits increased $203 thousand, or 17.8%, from the addition of thirteen full time equivalent employees, a 12% increase in medical insurance premiums effective April 1, 2003 and $14 thousand for reinstating the funding of the Company's ESOP plan. Other non-interest expense increases from second quarter 2002 to second quarter 2003 were education and training expenses of $15 thousand due to a new Company commitment to a comprehensive employee training program which began in the fourth quarter of 2002, a $15 thousand increase in internet banking fees due to the increased activity in the Company's internet banking product and increased legal and professional fees of $28 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. For the six months ended June 30, 2003, non-interest expense increased $596 thousand, to $4.7 million, from the first six months of 2002. Salaries and employee benefits increased $398 thousand, or 17.9%, 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 six months of 2002 were professional fees increases of $75 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 and legal expenses increases of $31 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 $67 thousand over the first six 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. Income Taxes. Income tax expense decreased $17 thousand to $127 thousand for the three months ended June 30, 2003 as compared to $144 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 increased $3 thousand for the six months ended June 30, 2003 to $240 thousand as compared to $237 thousand for the six months ended June 30, 2002. The small increase in income taxes resulted from a higher level of income before income taxes in combination with an increased level of tax-exempt income. FINANCIAL CONDITION June 30, 2003 as compared to December 31, 2002 Total assets increased to $235.4 million at June 30, 2003, a $9.5 million increase from total assets of $225.9 million at December 31, 2002. Increases in total assets include increases of $12.0 million in net loans and $2.0 million in securities available for sale, partially offset by a $4.7 million reduction in cash and cash equivalents. Asset increases were financed through an increase in total deposits of $10.5 million from $189.9 million at year-end 2002 to $200.4 million on June 30, 2003, offset by a $2 million decrease in borrowings. Total stockholder's equity increased $746 thousand from $13.7 million at December 31, 2002 to $14.4 million at June 30, 2003. Total loans at June 30, 2003 increased $12.3 million to $125.7 million from $113.4 million at year-end 2002. During the six-month period ending June 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 balance in non-residential real estate loans increased $12.4 million from $41.0 million at December 31, 2002 to $53.4 million on June 30, 2003 and other loans, which include loans secured by farmland, increased $3.7 million over the same six-month period. Construction and land development loans have decreased $2.5 million and residential 1-4 family real estate loans have decreased $1.0 million from December 31, 2002 to June 30, 2003. Other minor shifts in ending balances occurred between December 31, 2002 and June 30, 2003 according to loan demand. Federal funds sold decreased by $7.8 million to $9.1 million at June 30, 2003 from $16.9 million on December 31, 2002. During the first six months of 2003, these funds were used fund loan demand and to purchase higher yielding investment securities. Securities, available for sale, at market value, increased $2.0 million, or 2.7%, from $72.7 million at year-end 2002 to $74.7 million at June 30, 2003. The Company purchased $29.5 million in new securities in the first six months of 2003 and $27.3 million in available for sale securities matured, were called and were repaid. There was a $335 thousand increase in unrealized gains in the available for sale portfolio and $580 thousand in net amortization expenses recorded during the first six months of 2003. There were no held to maturity securities at June 30, 2003 or at December 31, 2002. -12- Total deposits increased $10.5 million, or 5.6%, to $200.4 million during the first six months of 2003 from $189.9 million at December 31, 2002. Non-interest bearing deposits increased $5.8 million, or 21.9%, interest-bearing and savings deposits increased $4.6 million, or 4.2% and time deposits increased $164 thousand from December 31, 2002 to June 30, 2003. Business non-interest bearing demand accounts account for $4.8 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 June 30, 2003, non-accrual loans decreased $355 thousand to $903 thousand, 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 June 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:
June 30, 2003 December 31, 2002 ---------------------------------- Non-accrual loans $903,000 $ 1,258,000 Non-accrual loans to total loans 0.72% 1.11% Non-performing assets to total assets 0.48% 0.67% Allowance for loan losses as a % of non-performing loans 176.08% 107.11% Allowance for possible loan losses to total loans 1.26% 1.22%
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. The level of the allowance is based on management's evaluation of potential losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Provisions charged to expense and reduced by charge-offs, net of recoveries, increase the allowance for loan losses. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers' credit worthiness, and the impact of examinations by regulatory agencies all could cause changes to the Company's allowance for loan losses. At June 30, 2003, the allowance for loan losses was $1.6 million, an increase of 14.7% from the $1.4 million at year-end 2002. There were $43 thousand in charge offs and $1 thousand in recoveries reported in the first six months of 2003. The allowance for loan losses as a percentage of total loans was 1.26% at June 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 an earnings at risk analysis to forecast the impact on our net interest income of instantaneous 100 and 200 basis point increases and decreases in market rates. In assessing the impact on earnings, the rate shock analysis assumes that no change occurs in our funding sources or types of assets in response to the rate change. The interest rate sensitivity of the Company's assets and liabilities, and the impact on net interest income would vary substantially if different assumptions were used or if actual experience differs from that indicated by the assumptions. The following table sets forth the Company's interest rate risk profile at June 30, 2003 and 2002.
June 30, 2003 June 30, 2002 - ------------------------------------------------------------------------------------------------------------------------------- Change in % Change Change in % Change Net Interest in Net Interest Net Interest in Net Interest (Dollars in Thousands) Income Income Income Income - ------------------------------------------------------------------------------------------------------------------------------- Down 200 basis points ($154) 3.27% ($337) 7.98% Down 100 basis points (33) 1.39% (125) 5.94% Up 100 basis points (213) -9.05% 27 1.26% Up 200 basis points (517) -10.99% (39) -0.92% - -------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT At June 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 June 30, 2003, liquid investments totaled $21.4 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 June 30, 2003, had the ability to borrow up to $16.8 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 June 30, 2003 had borrowings totaling $13 million secured by the pledge of its one to four family mortgages and selected securities. Three short-term borrowings have maturities from July 2003 through July 2004 with interest rates ranging from 2.23% 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%. 13 CAPITAL RESOURCES Total stockholders' equity increased $746 thousand to $14.4 million at June 30, 2003 from $13.7 million at year-end 2002. Activity in stockholder's equity consisted of a net increase in retained earnings of $436 thousand derived from $673 thousand in net income earned during the first six months of 2003, offset by $237 thousand in payments for cash dividends. Other increases were $40 thousand in stock options exercised, $94 thousand for shares issued through the dividend reinvestment plan, an unrealized gain on securities available for sale, net of income tax, of $201 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 July 7, 2003, the new quarterly rate of interest on the debentures will be 4.76%. 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 June 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 June 30, 2003, for the Company and the Bank, as well as the minimum regulatory requirements.
Amount Ratio Amount Minimum Ratio ------ ----- ------ ------------- The Company: Leverage Capital $15,667 6.82% $ 9,185 4% Tier 1 - Risk Based 15,667 11.08% 5,657 4% Total Risk-Based 17,703 12.52% 11,314 8% The Bank: Leverage Capital 15,757 6.87% 9,178 4% Tier 1 Risk-Based 15,757 11.16% 5,646 4% Total Risk-Based 17,347 12.29% 11,292 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 Not applicable Item 4. Submission of Matters to a Vote of Security Holders On April 23, 2003, 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 --------- --- ------------------ Mark Hontz 1,245,551 116,678 Donald L. Kovach 1,342,433 19,796 Edward Leppert 1,342,488 19,742 Joel Marvil 1,339,120 23,111 -14- Item 5. Other Information Not applicable Item 6. Exhibits and Report on form 8-K (a). Exhibits Number Description ------ ----------- 10 Employment Agreement between Sussex Bank and Samuel Chazanow 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 ----------- ----------- ----------- April 21, 2003 5 & 9 Press release announcing first quarter 2003 results and cash dividend. April 24, 2003 9 Press release setting forth comments made by Chairman and Chief Executive Officer at the Registrant's 2003 Annual Meeting of Shareholders on April 23, 2003. 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: EX-10 3 exhibit10.txt Exhibit 10 - ---------- EMPLOYMENT AGREEMENT - -------------------- EMPLOYMENT AGREEMENT (this "Agreement") made as of the 1st day of August, 2003, by and between SUSSEX BANK, a New Jersey commercial bank with its principal place of business at 399 State Highway 23, Franklin, NJ 07416 ("Employer"), and SAMUEL M. CHAZANOW, an individual residing at 7200 Fiddler Bay Lane, Chincoteague Island, VA 233335 (the "Executive"). W I T N E S S E T H: WHEREAS, Executive has extensive experience in the mortgage banking industry, both as a manager of mortgage banking operations and as a loan originator; WHEREAS, Employer wishes to obtain the services of Executive to serve as Vice President and head of residential mortgage banking operations of Employer; WHEREAS, Executive is willing to accept employment with the Employer on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties hereto, intending to be legally bound, agree as follows: NOW, THEREFORE, in consideration of the mutual promises and undertankings herein contained, the parties hereto, intending to be legally bond, agree as follows: 1.Employment and Term. -------------------- (a) Employer hereby employs the Executive as Vice President and head of residential mortgage banking operations of Employer (the "Position") and the Executive agrees, subject to the termination provisions hereof, to serve in the Position, for a term of five (5) years (the "Term"), which shall commence on the date hereof (the "Effective Date"), and which, subject to paragraphs 1(b), (c) and (d) hereof, shall terminate on the fifth anniversary of the Effective Date, unless extended by the mutual agreement of Executive and Employer. (b) Employer shall have the right to terminate the Executive's employment hereunder prior to the fifth anniversary of the Effective Date; provided, however, that unless such termination is for "cause", as defined below, Executive shall be entitled to receive (i) his Base Salary (as defined herein), (ii) continuation of all insurance benefits provided on the date of such termination, (iii) an annual payment equal to the average Bonus (as defined below) for the term of this Agreement up till such termination, calculated by adding the value of all Bonuses actually paid, less any Shortfall (as defined below), including any Shortfall in the year of such termination based upon the profitability of Employer's residential mortgage banking operations through the date of such termination, and dividing it by the number of Years (as defined below) of this Agreement which have elapsed prior to such termination, and including any partial Years completed before termination, and (iv) continuation of the tuition reimbursement provided for under Section 3(f) hereof, all for the remaining term of this Agreement. Such payments shall be made by periodic payments in accordance with Section 3 hereof. In addition, upon such a termination, Executive shall be entitled to receive Override Commissions (as defined below) due for any loans which are actually closed within 90 days of such termination; further provided, however, that the amount of any Override Commission payable pursuant to this provision shall be reduced by any outstanding Shortfall, including any Shortfall which may exist in the year of termination based upon the profitability of Employer's residential mortgage banking operations through the date of such termination. If such termination is for "cause", Executive shall not be entitled to receive any compensation from and after the date of such termination; provided, however, that Executive shall be entitled to his Base Salary and any benefits due for periods, or partial periods, that occurred prior to the date of termination and -15- for which Executive has not yet been paid. For purposes of this Agreement, "cause" means (i) the Executive's willful and continued failure substantially to perform the duties of the Position, (ii) fraud, material misappropriation or other deliberate dishonesty of Executive with respect to Employer's business or property, (iii) the Executive's plea of guilty to or conviction of, or plea of nolo contendere to, any felony that adversely affects Employer's reputation or the Executive's ability to perform his duties hereunder; (iv) Executive's willful violation of (A) any law, rule or regulation materially effecting the business of Employer, or its parent, Sussex Bancorp (the "Company")or (B) final cease-and-desist order issued by or regulatory consent agreement with any regulatory agency having jurisdiction over the Employer and/or the Company or (v) the failure of Employer's residential mortgage banking operations to achieve at least 80% of the annual budgeted net income mutually set by Executive and Employer no less than thirty (30)days prior to the commencement of each Year (as such term is defined below); provided, however, that the agreed upon annual budget and net income for the first Year is attached hereto as Exhibit A. This Agreement shall terminate upon Executive's death or his disability, as defined herein. Upon Executive's death or his disability, the obligation of Employer hereunder to pay Executive the compensation called for under Section 3 hereof shall terminate, and Employer's only obligation shall be to pay Executive any and all benefits to which Executive was entitled at the time of such death or disability under any benefit plans of Employer then in place. For purposes of this Agreement, the term "disability" shall mean Executive's inability to substantially perform his material duties as prescribed in this Agreement due to his incapacity or disability, physical or mental, for a period of six (6) consecutive months. Executive shall have the right to terminate his employment hereunder prior to the fifth anniversary of this Agreement only for "good reason". For purposes hereof, "good reason" shall mean (i) Employer's demotion of Executive to a position of lesser rank and authority than the Position, or (ii) Employer's breach of this Agreement; provided, however, that a purported breach of this Agreement by Employer shall not constitute "good reason" hereunder unless and until Executive has provided Employer written notice setting forth with specificity the alleged breach and Employer has failed to cure such breach within thirty (30) days of such notice; further provided, however, that in the event such breach is of a nature that it can not, in good faith, be cured within thirty (30) days, such breach shall not constitute "good reason" hereunder as long as Employer commences curing such breach within such thirty (30) day period and diligently continues to pursue such cure. 2. Duties. ------ (a) Subject to the ultimate reasonable control and discretion of the Board of Directors of Employer and the Chief Executive Officer and the President of the Employer, the Executive shall serve in the Position and perform all duties and services as Vice President and head of residential mortgage banking operations of the Employer and shall have full authority and responsibility to undertake and carry out the functions and activities of the Position. (b) Subject to Section 3(f), the Executive shall devote all of the Executive's professional time and attention to the performance of the Executive's duties hereunder and, during the term of the Executive's employment hereunder, shall not engage in any other business enterprise which requires more than five hours per week of the Executive's personal time or attention, unless granted the prior permission of the Board. The foregoing shall not prevent the Executive's purchase, ownership or sale of investment securities or of any interest in, any business which competes with the business of Employer (although Executive shall not be allowed to actively participate in the management or operation of such enterprise), provided that such ownership or investment constitutes not more than five percent of the outstanding shares of a corporation whose stock is listed on a National Securities Exchange or on the National Association of Securities Dealers Automated Quotation System, or the Executive's involvement in charitable or community activities, provided that the time and attention which the Executive devotes to such activities does not materially interfere with the performance of the Executive's duties hereunder. 3. Compensation. ------------ (a) For all services to be rendered by the Executive under this Agreement, Employer agrees to pay the Executive as follows: (i) a salary of $100,000 annually, to be paid in accordance with the Employer's existing payroll policies (the "Base Salary"); (ii) a bonus (the "Bonus") to be paid annually as provided for under paragraph (b) and subject to adjustment as provided for under paragraph (c), equal to twenty percent (20%) of the net pre-tax income of the residential mortgage banking operations of the Employer for each consecutive twelve (12) month period of operation of the Employer commencing the Effective Date hereof and continuing in each succeeding consecutive twelve (12) month period of operation of the Employer commencing on each anniversary date of the Effective Date (each, a "Year"); and (iii) a production bonus equal to ten (10) basis points of the original principal amount of all residential mortgage loans actually closed and funded by the Employer's residential mortgage banking operations (the "Override Commission") paid in accordance with paragraph (d) hereof. The net pre-tax income of the residential mortgage banking operations of Employer shall be determined consistent with generally accepted accounting principals, including as expenses the value of the Base Salary, Bonus and the Override Commission, as well as all other compensation expense and other expenses to be properly accrued under GAAP, including but not limited to the value of the tuition expense reimbursement provided for under paragraph (f) hereof. In calculating the net pre-tax income of the residential mortgage banking operations of the Employer, the Employer shall allocate only those administrative expenses incurred by the Employer directly related to the residential mortgage banking operations for such items as bookkeeping, human resources administration, payroll and like administrative services. Such administrative charges will be allocated at cost, without any markup or profit. All use of the Employer's funds or credit will be upon arm's length terms and shall have rates and charges comparable to those otherwise available from unaffiliated, third party lenders at fully phased in, non-discounted or non-promotional rates. (b) The Bonus shall be paid at the following times and in the following manner: Upon the Effective Date of this Agreement, Employer shall pay Executive the sum of $75,000 as a draw (the "Draw") against the Bonus for the Year of the Term. In each subsequent Year, Employer shall, within forty-five (45)days of the end of such Year, pay Executive a Draw of $75,000 against the Bonus for such Year, subject to any adjustments required pursuant to paragraph (c) below. In the event the Bonus that Executive would be entitled to pursuant to subparagraph (a) hereof for any Year is more than $75,000, Employer shall pay to Executive the difference between $75,000 and the amount of the Bonus within forty-five (45) days of the end of such Year. (c) Starting with the Draw for the second Year, the actual dollar amount of the Draw will be subject to adjustment as follows: Any shortfall between the amount of the Draw and the actual amount of the Bonus to which Executive should have been entitled in any Year, as calculated under paragraph (a) above (a "Shortfall"), shall be deducted from the next year's Draw, starting with the Draw for the second Year based upon the Employer's net pre-tax profit for the first Year hereunder. Such Shortfall reimbursement shall be deemed to have been paid to Executive as part of the Draw for purposes of determining the Bonus to be paid at Year-end under paragraph (b). For example, in the event the Employer's net pre-tax profit for the first Year is $100,000, the amount of the Bonus calculated pursuant to paragraph (a) above would have been $20,000. Therefore, the Shortfall to be applied against the Draw for the Second Year would equal $55,000. The Draw would therefore be $20,000 (i.e., $75,000 less the $55,000 Shortfall.) Assuming net pretax income of the mortgage banking operations was $375,000 for the second Year, Executive would be entitled to no additional Year-end payment ( i.e., the amount of the Bonus (20% of $375,000) = $75,000 - $55,000 Shortfall - $20,000 Draw = 0), and the Draw for the third Year would be $75,000. (d) The Override Commission will be paid on a quarterly basis, within thirty (30) days of the end of each quarter. (e) In addition to the compensation provided for under subparagraphs (a) and (b) hereof, on the Effective Date hereof, Executive shall be entitled to a grant of options to purchase 50,000 shares of the common stock of the Company. The exercise price for such shares will be 100% of the fair market value of common stock of the Company, determined by taking the average closing price of the Company's common stock on the American Stock Exchange for the ten trading days preceding the Effective Date of this Agreement. -16- The grant of such option shall be subject to the terms of a separate grant agreement, which, in addition to having other provisions substantially similar to those included in the Company's existing stock option agreements for employees, will provide that the option shall vest, and become exercisable, ratably in annual installments over a five year period commencing on the Effective Date, and that, in the event of a change in control of the Company (as defined in the Grant Agreement), such vesting period shall accelerate and all such options shall become exercisable. (f) Commencing in the second Year, Employer shall, at Executive's request, pay the tuition and expenses incurred by Executive in connection with his attendance, on a part-time basis, of a masters of business administration program at an accredited university. Such tuition and expenses shall be paid directly by Employer to the accredited institution offering the program, and shall not exceed $25,000 annually; provided, however, that in the event Executive's permitted tuition and expenses in any given year are less than $25,000, Executive shall be entitled to apply such difference to his permitted tuition and expenses to any subsequent year during the term of this Agreement. Executive shall be permitted to attend such a program on a part-time basis, provided that such attendance does not substantially interfere with Executive's ability to undertake the obligations of the Position. In the event Executive ceases to serve as an employee of the Employer prior to the termination of the term of this Agreement for any reason, Executive agrees that he shall be liable to repay to Employer all amounts paid by Employer under this provision, along with interest thereon at a rate equal to the rate then charged by Sussex Bank for a three-year unsecured loan. (g) In addition to the compensation provided for under subparagraphs (a) - (f) hereof, Executive shall be entitled to receive insurance of the type provided under the Employer's existing and future benefit plans available to Employer's executive employees generally, which shall include supplemental term life insurance coverage to provide, in the aggregate with the standard life insurance benefits available to Employer's executive employees generally, life insurance in the amount of $250,000 at no premium expense to Executive. (h) In addition to the other compensation provided for herein, Executive shall be entitled to a car allowance equal to $7,000 annually which shall be paid at least monthly. 4. Additional Covenants. --------------------- (a) Confidential Information. Except as required in the performance of his ----------------------- duties hereunder, the Executive shall not use or disclose to any third party any Confidential Information (as hereinafter defined) or any know-how or experience related thereto without the express prior written authorization of the Employer, either during the term of this Agreement or thereafter. Upon termination of his employment, the Executive shall leave with Employer all documents and other items in his possession which contain Confidential Information, and shall be prohibited from disclosing to any third party any Confidential Information. For purposes of this paragraph 4(a), the term "Confidential Information" shall mean all information about Employer and/or the Company or relating to any of their respective services or any phase of their respective operations not generally known to any of their respective competitors and which is treated by Employer and/or the Company as confidential information, and shall specifically include all customer lists of any of Employer or Company. The term "Confidential Information" shall not include any of the foregoing which (i) is in the public domain, (ii) is in Executive's lawful possession prior to a disclosure thereof and not subject to a confidentiality agreement or (iii) is hereafter lawfully disclosed to Executive by a third party who or which did not acquire the information under an obligation of confidentiality to Employer. (b) Non-Compete. Executive hereby agrees that during the term of this ----------- Agreement and, for a period of one year following the termination of Executive's employment hereunder (the "Covenant Term"), he will not work for any entity which is engaged in the residential mortgage origination business in geographic areas served by Employer or the Company as of the Term of this Agreement and as of the date of its termination nor himself so engage during such Covenant Term, directly or indirectly, as principal, agent, partner, shareholder, consultant, or employee, in any such business and further that during such period he will not directly or indirectly solicit, cause any other person to solicit, or assist any other person with soliciting any customer, depositor or borrower of Employer or the Company to become a customer, depositor or borrower of another financial institution. Executive further agrees that during the term of his employment and during the Covenant Term, he will not directly or indirectly participate in the solicitation of any person, entity, customer or client having a relationship with Employer or the Company prior to or during the Covenant Term; provided, however, that this covenant will not survive the termination of Executive's employment hereunder if such termination: is by Executive for "good reason" pursuant to Section 1(d) hereof; is by Employer without "cause" pursuant to Section 1(b) hereof; or occurs upon the termination of this Agreement at the end of the Term; provided, however, that in the event Employer has made a good faith offer to continue Executive's employment after the end of the Term on terms and conditions substantially comparable to those contained herein, and Executive declines such offer, this covenant shall be effective for the one-year period after termination described above. (c) Non-Solicitation. Executive agrees that for the Covenant Term, he will ---------------- not recruit for employment or induce to terminate his or her employment with Employer or the Company any person who is, at the time of such solicitation, or who was within thirty (30) days of such solicitation, an employee of Employer or the Company. Executive further agrees that for the Covenant Term, he will not directly or indirectly solicit, cause any other person to solicit, or assist any other person with soliciting any customer, depositor or borrower of the Employer or the Company to become a customer, depositor or borrower of another financial institution. (d) Modification. If a court of competent jurisdiction determines that the ------------ scope, time duration or other limitations of any of the restrictive covenants contained in this Section 4 is not reasonably necessary to protect the legitimate business interests of Employer or the Company then such scope, time duration or other limitations will be deemed to become and thereafter will be the maximum time period or scope which such court deems reasonable and enforceable. (e) Definitions. For purposes of this Section 4, to act "directly or ----------- indirectly" means to act personally or through an associate, affiliate, family member or otherwise, as proprietor, partner, shareholder, director, officer, employee, agent, consultant or in any other capacity or manner whatsoever. (f) Specific Performance. Employer and the Executive agree that in the -------------------- event of a breach of the provisions of this Section 4 the injury which would be suffered by Employer and/or the Company would be of a character which could not be fully compensated for solely by a recovery of monetary damages. Accordingly, Executive agrees that in the event of a breach of the terms of this Section 4, in addition to and not in lieu of any other remedies which Employer may pursue, Employer shall have the right to equitable relief, including issuance of a temporary or permanent injunction by any court of competent jurisdiction against the commission or continuance of any breach of this Section 4. 5. Notices. Any and all notices, demands or requests required or permitted ------- to be given under this Agreement shall be given in writing and sent, (i) by registered or certified U.S. mail, return receipt requested, (ii) by hand, (iii) by overnight courier or (iv) by telecopier addressed to the parties hereto at their addresses set forth above or such other addresses as they may from time-to-time designate by written notice, given in accordance with the terms of this Section, together with copies thereof as follows: In the case of Executive, with a copy to: Weinstein, Schneider, Kannebecker & Lokuta 104 W. High Street Milford, Pennsylvania 18337 Telecopier No. (570) 296-2653 Attention: John J. Schneider In the case of Employer, with a copy to: 17 Windels Marx Lane & Mittendorf, LLP 120 Albany Street Plaza New Brunswick, New Jersey 08901 Telecopier No. (732) 846-8877 Attention: Robert A. Schwartz Notice given as provided in this Section shall be deemed effective: (i) on the date hand delivered, (ii) on the first business day following the sending thereof by overnight courier, (iii) on the seventh calendar day (or, if it is not a business day, then the next succeeding business day thereafter) after the depositing thereof into the exclusive custody of the U.S. Postal Service or (iv) on the date telecopied. 6. Assignability. The services of the Executive hereunder are personal in ------------- nature, and neither this Agreement nor the rights or obligations of Executive hereunder may be assigned , whether by operation of law or otherwise. This Agreement shall be binding upon, and inure to the benefit of, Employer and its successors and assigns. 7. Waiver. The waiver by Employer or the Executive of a breach of any ------ provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent or other breach hereof. 8. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of New Jersey without giving effect to principles of conflict of laws. 9. Entire Agreement. This Agreement contains the entire agreement of the ---------------- parties hereto with respect to the subject matter hereof and may not be amended, waived, changed, modified or discharged, except by an agreement in writing signed by the parties hereto. 10. Counterparts. This Employment Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument. 11. Amendment. This Employment Agreement may be modified or amended only by ---------- an amendment in writing signed by both parties. 12. Severability. If any provision of this Employment Agreement shall be ------------ held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision, only to the extent it is invalid or unenforceable, and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. 13. Section Headings. The headings contained in this Agreement are solely ---------------- for convenience of reference and shall be given no effect in the construction or interpretation of this Employment Agreement. 14. Fees and Expenses. If any party to this Employment Agreement institutes ----------------- any action or proceeding to enforce this Employment Agreement, the prevailing party in such action or proceeding shall be entitled to recover from the non-prevailing party all legal costs and expenses incurred by the prevailing party in such action, including, but not limited to, reasonable attorneys' fees and other reasonable legal costs and expenses. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under their respective hands and seals as of the day and year first above written. ATTEST: SUSSEX BANK ___________________________ By: /s/Donald L.Kovach ------------------ WITNESS: EXECUTIVE: ___________________________ /s/Samuel M.Chazanow -------------------- SAMUEL M. CHAZANOW EX-99.1 4 exhibit99-1.txt Exhibit 31.1 I, Donald L. Kovach, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Sussex Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; 4. The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and -18- 5. The issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. By:/s/ Donald L. Kovach -------------------- DONALD L. KOVACH President and Chief Executive Officer Date: EX-99.2 5 exhibit99-2.txt Exhibit 31.2 I, Candace Leatham, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Sussex Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; 4. The issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 5. The issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. By: /s/ Candace A. Leatham ----------------------- CANDACE A. LEATHAM Executive Vice President and Chief Financial Officer Date: EX-99.3 6 exhibit99-3.txt Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 -19- The undersigned, Donald L. Kovach and Candace A. Leatham hereby jointly certify as follows: They are the Chief Executive Officer and the Chief Financial Officer, respectively, of Sussex Bancorp (the "Company"); To the best of their knowledge, the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003 (the "Report") complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and To the best of their knowledge, based upon a review of the Report, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Donald L. Kovach --------------------- DONALD L. KOVACH President and Chief Executive Officer Date: By: /s/ Candace A. Leatham ----------------------- CANDACE A. LEATHAM Executive Vice President and Chief Financial Officer Date: (A signed original of this written statement required by Section 906 has been provided to Sussex Bancorp and will be retained by Sussex Bancorp and furnished to the Securities Exchange Commission or its staff upon request.) -20- -----END PRIVACY-ENHANCED MESSAGE-----