- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 0-50055
SOMERSET HILLS BANCORP
(Exact name of Registrant as Specified in Its Charter)
NEW JERSEY
(State or other jurisdiction of incorporation or organization)
22-3768777
(I.R.S. Employer Identification Number)
155 MORRISTOWN ROAD
BERNARDSVILLE, NEW JERSEY 07924
(Address of Principal Executive Offices)
(908) 221-0100
(Issuer's Telephone Number, including area code)
(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 [__] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12(b)-2 of the Securities and Exchange Act of 1934.
Yes[ __] No [X]
As of December 1, 2002 there were 2,756,339 shares of common stock, no par
value, outstanding.
1
SOMERSET HILLS BANCORP
FORM 10-QSB
INDEX
Part I - Financial Information Page(s)
Item I. Financial Statements
Consolidated Balance Sheets
As of September 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Operations for the Three and
Nine months ended September 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
For the Nine months ended September 30, 2002 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine months
Ended September 30, 2002 and 2001 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of 11-16
Financial Condition and Results of Operations
Item 3. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
Certifications 19
Exhibit 99 20
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SOMERSET HILLS BANCORP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS September 30, 2002 December 31, 2001
- ------ ------------------ -----------------
(Unaudited)
Cash and due from banks $2,428 $4,313
Interest bearing deposits at other banks 1,045 2,816
Federal funds sold 0 3,900
------------------------ -------------------------
Total cash and cash equivalents 3,473 11,029
Loans held for sale 15,665 17,194
Investment securities available- for - sale 19,408 17,255
Loans receivable 86,589 68,576
Less allowance for Loan Losses (1,134) (882)
Deferred fees (92) (108)
------------------------ -------------------------
Net loans receivable 85,363 67,586
Premises and equipment, net 3,965 3,889
Goodwill, net 1,191 1,191
Accrued interest receivable 479 499
Other assets 328 102
------------------------ -------------------------
Total assets $129,872 $118,745
======================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Deposits:
Non-interest bearing deposits-demand $11,901 $13,272
Interest bearing deposits-NOW,
money market and savings 57,001 53,898
Certificates of deposit, under $100,000 27,488 26,911
Certificates of deposit, $100,000 and over 10,996 8,872
------------------------ -------------------------
Total deposits 107,386 102,953
------------------------ -------------------------
Federal Home Loan Bank advances 2,500 2,500
Federal funds purchased 6,600 0
Accrued interest payable 60 82
Other liabilities 705 882
------------------------ -------------------------
Total Liabilities 117,251 106,417
------------------------ -------------------------
STOCKHOLDERS' EQUITY:
Preferred stock - 1,000,000 shares authorized,
none issued
Common Stock-authorized 5,000,000 Shares
of no par value; issued and outstanding,
1,652,339 shares at September 30, 2002 and 15,866 15,866
December 31, 2001
Accumulated deficit (3,387) (3,538)
Accumulated other comprehensive income 142 0
------------------------ -------------------------
Total stockholders' equity 12,621 12,328
Total liabilities and stockholders'
equity $129,872 $118,745
======================== =========================
See accompanying notes to unaudited consolidated financial statements
s -3-
SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
INTEREST INCOME
Loans, including fees $1,482 $1,464 $4,231 $4,115
Federal funds sold 18 137 62 322
Investment securities 186 151 568 420
Interest bearing deposits with other banks 5 3 15 9
------------- --------------- -------------- -------------
Total interest income 1,691 1,755 4,876 4,866
INTEREST EXPENSE
Deposits 647 1,015 1,949 2,810
Federal funds purchased 2 0 3 7
Federal Home Loan Advances 27 19 86 19
------------- --------------- -------------- -------------
Total interest expense 676 1,034 2,038 2,836
Net interest income 1,015 721 2,838 2,030
Provision for loan losses 75 112 295 346
------------- --------------- -------------- -------------
Net interest income after provision for loan losses 940 609 2,543 1,684
------------- --------------- -------------- -------------
NON-INTEREST INCOME
Service fees on deposit accounts 31 24 77 49
Gains on sales of mortgage loans, net 620 739 2,130 1,817
Gain on sale of investment securities - 63 10 63
Other income 15 1 53 28
------------- --------------- -------------- -------------
Total non-interest income 666 827 2,270 1,957
------------- --------------- -------------- -------------
NON-INTEREST EXPENSE
Salaries and employee benefits 850 880 2,539 2,349
Occupancy expense 268 216 758 643
Other operating expense 470 399 1,299 1,107
------------- --------------- -------------- -------------
Total Non-Interest Expense 1,588 1,495 4,596 4,099
------------- --------------- -------------- -------------
Income (loss) before provision for taxes 18 (59) 217 (458)
Provision for Income Taxes 14 21 66 36
------------- --------------- -------------- -------------
Net income (loss) $ 4 $(80) $ 151 $ (494)
============= =============== ============== =============
Per share data
Net income (loss) basic and diluted $ 0.00 $ (0.05) $ 0.09 $ (0.30)
============= =============== ============== =============
See accompanying notes to unaudited consolidated financial statements
-4-
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands except share data)
(Unaudited)
Accumulated
other Total
Common Accumulated comprehensive Comprehensive Stockholders'
stock deficit income loss Equity
----------- --------------- -------------- ------------- ----------------
Balance December 31, 2000 15,866 (2,978) 13 12,901
Net loss for the period (494) $(494) (494)
Other comprehensive income, net of
reclassification adjustment 128 128 128
----------- --------------- -------------- ------------- ----------------
Total comprehensive loss $(366)
==============
Balance September 30, 2001 $15,866 $(3,472) $141 $12,535
=========== =============== ============= ==============
Accumulated
other Total
Common Accumulated comprehensive Comprehensive Stockholders'
stock deficit income income equity
----------- --------------- ------------- ------------- ----------------
Balance December 31, 2001 15,866 (3,538) - 12,328
Net Income for the period - 151 - $151 151
Other comprehensive income, net of
Reclassification adjustment 142 142 142
------------------- ----------------
--------------
$293
==============
Balance September 30, 2002 $15,866 $(3,387) $142 $12,621
=========== =============== ============= ==============
See accompanying notes to unaudited consolidated financial statements
-5-
SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended
September 30,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income (loss) $151 $(494)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 315 329
Provision for loan losses 295 346
Gain on sale of equipment - (6)
Gain on sales of investment securities (10) (63)
Mortgage loans originated for sale (202,456) (153,104)
Proceeds from mortgage loan sales 206,115 149,164
Gain on sale of mortgage loans (2,130) (1,817)
Decrease in accrued interest receivable 20 41
(Increase) decrease in other assets (226) 266
Decrease) increase in accrued interest payable (22) 47
(Decrease) increase in other liabilities (177) 103
--------- ----------
Net cash provided by (used in) operating activities 1,875 (5,188)
--------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities available-for -sale (13,485) (10,237)
Purchases of other short term investments - (5,000)
Maturity and payments of investment securities available-for-sale 10,475 6,491
Proceeds from sale of investment securities available-for-sale 1,009 2,066
Cash paid to acquire business - (13)
Net increase in loans receivable (18,072) (9,605)
Proceeds from sale of equipment - 12
Purchases of premises and equipment (391) (35)
--------- ----------
Net cash used in investing activities (20,464) (16,321)
-------- ----------
FINANCING ACTIVITIES:
Net increase in demand deposit and savings accounts 1,732 25,110
Net increase in certificates of deposit 2,701 4,697
Increase in Federal Home Loan Bank advances, net - 2,000
Increase in federal funds purchased 6,600 -
Increase in other borrowings - 2
--------- ----------
Net cash provided by financing activities 11,033 31,809
--------- ----------
Net (decrease) increase in cash and cash equivalents (7,556) 10,300
Cash and cash equivalents at beginning of period 11,029 8,160
--------- ----------
Cash and cash equivalents at end of period 3,473 18,460
========= ==========
See accompanying notes to unaudited consolidated financial statements
-6-
SOMERSET HILLS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Somerset Hills Bancorp ("the Company") is a bank holding company, formed in
January 2001 to own all the common stock of Somerset Hills Bank (formerly known
as The Bank Of The Somerset Hills), a New Jersey chartered commercial bank that
opened for business in Bernardsville, Somerset County, New Jersey in December
1998. The only activity of Somerset Hills Bancorp is currently ownership of
Somerset Hills Bank. At September 30, 2002, the Bank operates two banking
offices, the main office, which is located in Somerset County, New Jersey and
the second in Morris County, New Jersey. Subsequent to quarter end, the bank
opened its third office, also in Morris County. The bank operates a licensed
mortgage company subsidiary, Sullivan Financial Services, Inc. The Company is
subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System (the "FRB"). The Bank's deposits are insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up
to applicable limits. The operations of the Company and the Bank are subject to
the supervision and regulation of the FRB, FDIC and the New Jersey Department of
Banking and Insurance (the "Department"). The operations of Sullivan Financial
Services are subject to the supervision and regulation by the U. S. Department
of Housing and Urban Development (HUD), the Veterans Administration, the
Department of Banking and Insurance in New Jersey and the Banking Departments in
New York and Florida.
The accompanying unaudited consolidated financial statements included
herein have been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America and pursuant to
the rules and regulations of the Securities and Exchange Commission and reflect
all adjustments which, in the opinion of management, are considered necessary
for a fair presentation of the financial condition and results of operations for
the periods presented. All adjustments made were of a normal and recurring
nature. Operating results for both the three months ended September 30, 2002 and
for the nine months ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002. These
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes there
to, included in the Company's Registration Statement on Form SB-2 effective
November 12, 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 net income per share is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
during the period plus the dilutive effect of potential common shares.
The following tables set forth the computations of basic and diluted
earnings per share (dollars and share data in thousands):
Three Months Ended, September 30, Three Months Ended, September 30, 2001
2002
----------------------------------------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------- ----------- ------------- ----------
Basic earnings per share:
Net income (loss) applicable to common
stockholders $4 1,652 $- ($ 80) 1,652 ($ 0.05)
Effect of dilutive securities:
Options - 15 - - - -
----- ----- ----- ----- ----- --------
Diluted EPS:
Net income (loss) applicable to common
stock-holders and assumed conversions $4 1,667 $- ($ 80) 1,652 ($ 0.05)
== ===== === ===== ===== ========
Nine Months Ended, September 30, Nine Months Ended, September 30, 2001
2002
----------------------------------------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------------
Basic earnings per share:
Net income (loss)applicable to common
stockholders $151 1,652 $0.09 ($494) 1,652 ($0.30)
Effect of dilutive securities
Options
- 12 - - - -
----------- --------- --------- --------- ----------- --------
Diluted EPS:
Income (loss) applicable to common
stock- holders and assumed conversions $151 1,664 $0.09 ($494) 1652 ($0.30)
=========== ========= ====== ========= =========== ========
Reflects 5% stock distribution paid on May 15, 2002.
-7-
3. Comprehensive Income
The components of other comprehensive income for the three and nine months ended
September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $4 $(80) $151 $(494)
Unrealized holding (losses) gains on available for (2) 94 152 191
sale securities
Less: reclassification adjustments for gains included - 63 10 63
in net income
------------- -------------- ------------- --------------
Net unrealized (losses)gains (2) 31 142 128
------------- -------------- ------------- --------------
Other comprehensive income (losses) $2 $(49) $293 $(366)
============= ============== ============= ==============
4. Recent Accounting Pronouncements
SFAS No. 142
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No.
142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company adopted SFAS No. 142 effective
January 1, 2002.
As of December 31, 2001, the Company had unamortized goodwill in the amount
of $1,191,000 as a result of the acquisition of Sullivan Financial Services
Inc. for which the amortization ceased upon the adoption of Statement No.
142. If SFAS No. 142 had been adopted on January 1, 2001, net income before
income taxes would have increased as a result of ceasing the amortization
of goodwill by the three and nine months ended September 30, 2001 and the
basic and diluted net income (loss) per common share would have been as
follows:
For the three months ended September 30, For the nine months ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income(loss) $4 $(80) $151 $(494)
Add back: Goodwill Amortization - 16 - 49
----------- ------------- ----------- -----------
Adjusted net income(loss) $4 $(64) $151 $(445)
Basic earnings per share
Reported net income(loss) $0.00 $(0.05) $0.09 $(0.30)
Goodwill Amortization - 0.01 - 0.03
----------- ------------- ------------- -----------
Adjusted net income $0.00 $(0.04) $0.09 $(0.27)
SFAS No. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." The Statement was issued to eliminate an
inconsistency in the required accounting for sale-leaseback
transactions and certain lease modifications that were similar to
sale-leaseback transactions and to rescind FASB Statement No. 44, as
well as amending other existing authoritative pronouncements to make
various technical corrections.
SFAS No. 145 also rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt and SFAS No. 64, Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements." Under SFAS No. 4, as
amended by SFAS No. 64, gains and losses from the extinguishment of
debt were required to be classified as an extraordinary item, if
material. Under SFAS No. 145, gains or losses from the extinguishment
of debt are to be classified as a component of operating income,
rather than as an extraordinary item. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002, with early adoption of the
provisions related to the rescission of SFAS No. 4 encouraged. Upon
adoption, companies must reclassify prior period amounts previously
classified as an extraordinary item. Management does not anticipate
that the initial adoption of SFAS No. 145 will have a significant
impact on the Company's consolidated financial statements.
SFAS No. 146
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The Statement is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002.
-8-
SFAS No. 147
In October, 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions- an amendment of FASB Statements No. 72
and 144 and FASB Interpretation No. 9." This Statement removes
acquisitions of financial institutions from the scope of both
Statement No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with FASB Statements No.
141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." The provisions of Statement No. 147 that relate to
the application of the purchase method of accounting apply to all
acquisitions of financial institutions, except transactions between
two or more mutual enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business
combination, otherwise the transaction should be accounted for as an
acquisition of net assets that does not result in the recognition of
goodwill. The provisions of Statement No. 147 will be effective
October 1, 2002. This statement will not have any impact on the
Company's consolidated financial statements.
Reclassification
Certain amounts in the 2001 consolidated financial statements have
been reclassified in order to conform with the 2002 presentation.
5. Subsequent Events
Subsequent to quarter end, the Company completed a public offering of its
securities. Pursuant to the offering the Company issued 1,104,000 units at a
public offering price of $8.25 per unit, raising proceeds of approximately $8.0
million, net of offering expenses of approximately $1.1 million. Each unit
consists of one share of common stock and one common stock purchase warrant,
entitling the holder to purchase a share of stock at an exercise price of $ 9.65
per share at any time until November 30, 2006.
6. Segment Information
The Company's mortgage operations are managed separately from the
traditional banking and related financial services that the Company also offers.
The mortgage company originates, for resale in the secondary market,
conventional and non-conventional 1-4 family residential mortgages, Veteran
Administration guaranteed mortgages, Department of Housing and Urban Development
guaranteed mortgages and non-conventional programs, such as jumbo mortgages and
a wide variety of adjustable products.
The following table sets forth certain information about and the reconciliation
of reported net income for each of the reportable segments for the three months
ended September 30, 2002 (in thousands)
Sullivan Financial Eliminating Consolidated
The Bank Services, Inc. entries
Interest income $1,638 $146 (93) $1,691
Interest expense 676 93 (93) 676
Provision for loan losses 75 - - 75
Non-interest income 67 620 (21) 666
Non-interest expense 1,068 555 (21) 1,602
Net income/loss (114) 118 - 4
Total loans, net $85,363 - - 85,363
Total deposits 107,386 - - 107,386
Total assets 106,852 23,020 - 129,872
The following table sets forth certain information about and the reconciliation
of reported net income for each of the reportable segments for the three months
ended September 30, 2001 (in thousands)
Sullivan Financial Eliminating Consolidated
The Bank Services, Inc. entries
Interest income $1,746 $223 (214) $1,755
Interest expense 1,034 214 (214) 1,034
Provision for loan losses 112 - - 112
Non-interest income 103 739 (15) 827
Non-interest expense 974 557 (15) 1,516
Net income/loss (271) 191 - (80)
Total loans, net 64,512 - - 64,512
Total deposits 98,671 - - 98,671
Total assets 102,146 11,708 - 113,854
-9-
The following table sets forth certain information about and the reconciliation
of reported net income for each of the reportable segments for the nine months
ended September 30, 2002 (in thousands).
Sullivan Financial Eliminating Consolidated
The Bank Services, Inc. entries
Interest income $4,712 $454 ($290) $4,876
Interest expense 2,038 290 (290) 2,038
Provision for loan losses 295 - - 295
Non-interest income 194 2,143 (67) 2,270
Non-interest expense 3,051 1,678 (67) 4,662
Net income/loss (478) 629 - 151
Total loans, net $85,363 - - 85,363
Total deposits 107,386 - - 107,386
Total assets 106,852 23,020 - 129,872
The following table sets forth certain information about and the reconciliation
of reported net income for each of the reportable segments for the nine months
ended September 30, 2001(in thousands)
Sullivan Financial Eliminating Consolidated
The Bank Services, Inc. entries
Interest income $4,878 $528 (540) $4,866
Interest expense 2,836 540 (540) 2,836
Provision for loan losses 346 - - 346
Non-interest income 183 1,817 (43) 1,957
Non-interest expense 2,677 1,501 (43) 4,135
Net income/loss (798) 304 - (494)
Total loans, net 64,512 - - 64,512
Total deposits 98,671 - - 98,671
Total assets 102,146 11,708 - 113,854
-10-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 2002 and September 30, 2001
CRITICAL ACCOUNTING POLICIES
Disclosure of the Company's significant accounting policies is included in
Note C to the consolidated financial statements of the Company for the year
ended December 31, 2001 included in it's Registration Statement on Form SB-2
filed under the Securities Act of 1933. Some of these policies are particularly
sensitive, requiring significant judgments, estimates and assumptions to be made
by management. Management believes the Company's policy with respect to the
methodology for the determination of the allowance for loan losses involves a
higher degree of complexity and requires management to make difficult and
subjective judgements which often require assumptions or estimates about highly
uncertain matters. Changes in these judgements, assumptions or estimates could
materially impact results of operations. This critical policy and its
application is periodically reviewed with the Audit Committee and the Board of
Directors of the Company. The allowance for loan losses is based upon
management's evaluation of the adequacy of the allowance, including an
assessment of known and inherent risks in the portfolio, giving consideration to
the size and composition of the loan portfolio, actual loan loss experience,
level of delinquencies, detailed analysis of individual loans for which full
collectibility may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and
current economic and market conditions. Although management uses the best
information available, the level of the allowance for loan losses remains an
estimate, which is subject to significant judgment and short- term change.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for loan losses based upon
information available to them at the time of their examination. Furthermore, the
majority of the Company's loans are secured by real estate in the state of New
Jersey. Accordingly, the collectibility of a substantial portion of the carrying
value of the Company's loan portfolio is susceptible to changes in local market
conditions and may be adversely affected should real estate values decline or
the Central New Jersey area experience an adverse economic shock. Future
adjustments to the allowance for loan losses may be necessary due to economic,
operating, regulatory and other conditions beyond the Company's control.
Additional information is contained on pages 13 and 16 of this Form 10-QSB for
the provision and allowance for loan losses.
OVERVIEW
The Company realized net income of $4 thousand for the third quarter of
2002 versus a loss of $80 thousand reported for the same period in 2001. Basic
and diluted earnings per share were $0.0 for the third quarter of 2002 versus a
loss of ($0.05) for the same period in 2001.
For the nine months ended September 30, 2002, net income was $151 thousand
versus a loss of $494 thousand reported for the same period in 2001. Basic and
diluted earnings per share were $0.09 for the nine months ended September 30,
2002 compared to basic earnings per share of ($0.30) for the nine-month period
ended September 30, 2001.
The results reflect a substantial decrease in interest expense due to
declining market interest rates as well as a change in deposit mix. We also
recognized an increase in non-interest income, specifically from our mortgage
operation. These increases were partially off-set by an increase in non-interest
expense.
At September 30, 2002, total assets were $129.9 million, an increase of $11.2
million from total assets of $118.7 million at year end 2001. Increases include
an increase of $2.2 million in securities available for sale and $17.8 million
in net loans.
RESULTS OF OPERATIONS
Interest Income. Total interest income decreased $64 thousand, or 3.6%, to
$1.7 million for the quarter ended September 30, 2002 from $1.8 million for the
same period in 2001. This decrease was primarily attributable to a 93 basis
point decrease in average rate earned, from 6.82% during the third quarter of
2001 to 5.89% in the third quarter of 2002. Offsetting the rate decrease was an
increase of $11.8 million in average third quarter interest earning balances
from $102.1 million in 2001 to $113.9 million in 2002. The decline in rates had
the greatest effect on due from banks and federal funds sold. The average rate
earned on due from banks decreased by 202 basis points to 1.52% in the third
quarter of 2002 from 3.54% during the third quarter of 2001. Federal funds sold
decreased 164 basis points to 1.69% in the third quarter of 2002 from 3.33%
during the third quarter of 2001. In response, we reduced our average balance of
federal funds sold by 74.2% to $4.2 million for the third quarter of 2002
compared to $16.3 million in the third quarter last year, as excess liquidity
was used to purchase investment securities and meet an increase in loan demand.
The average rate earned on the loan portfolio decreased 147 basis points to
6.36% for the third quarter of 2002 from 7.83% in the third quarter of 2001 and
the average loan balance increased 32.4% from $62.9 million to $83.3 million
from third quarter 2001 to third quarter 2002. Although the average rate earned
on taxable investment securities declined by 147 basis points, the average
balance increased by $7.1 million, or 70.3%, to $17.2 million in the third
quarter of 2002 and resulted in a $39 thousand increase to interest income for
the same period.
For the nine months ended September 30, 2002, interest income remained
level at $4.9 million compared to the same period last year. While market rates
of interest fell during the first nine months of 2002, average interest earning
assets increased $17.9 million to $107.6 million from $89.7 million during the
same period in 2001. The average balance in the loan portfolio increased $17.4
million, securities increased $6.5 million and cash due from banks increased
$871 thousand while federal funds sold decreased $5.5 million and loans held for
sale decreased by $1.5 million during the first nine months of 2002 over the
same period in 2001. As a result of both declining market rates and larger
average balances in lower yielding assets, the average yield on interest earning
assets decreased 119 basis points from 7.25% from the first nine months of 2001
to 6.06% for the same period of 2002.
Interest Expense. The Company's interest expense for the third quarter of
2002 decreased $358 thousand, or 34.6% to $676 thousand from $1.0 million in the
third quarter of 2001. The decline occurred despite an increase in the average
balance of interest bearing liabilities of $9 million, or 10.2% to $96.9 million
during the third quarter of 2002 from $87.9 million in the same period of 2001.
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
2.77% for the third quarter of 2002
-11-
from 4.67% in the third quarter of 2001. Interest expense on time deposits, the
largest component of the decrease, declined $246 thousand, or 39.2% to $381
thousand as the average balance in time deposits decreased $6.9 million, or
15.7% in the third quarter of 2002 compared to the same period in 2001. As a
result of our continued marketing promotion for low cost deposits, which began
in April of 2001, NOW deposit average balances have grown $17.2 million, or
53.6%, from $32.0 million during the third quarter 2001 to $49.2 million in the
third quarter of 2002. The interest expense on NOW deposits decreased $70
thousand from the third quarter of 2001, while the average interest rate paid
decreased 188 basis points from 3.77% to 1.89% during the same periods. Average
savings deposits reflect an increase of $794 thousand, or 32.8%, in average
balances while the average rate paid declined 90 basis points from 2.50% in the
third quarter of 2001 to 1.60% in the third quarter of 2002. Average borrowed
funds increased to $2.6 million in the third quarter of 2002 from $1.6 million
in the third quarter of 2001.
For the nine months ended September 30, 2002 interest expense decreased
$798 thousand, or 28.1%, to $2 million from $2.8 million for the same period
last year. This decrease was largely due to a decrease in interest expense on
time deposits of $632 thousand, or 34.3%, from $1.8 million for the first nine
months of 2001 to $1.2 million during the first nine months of 2002. In addition
the average balance in time deposit accounts decreased $5.4 million, or 13.3 %,
over the same nine-month periods. The Company shifted its focus from drawing
time deposits on the basis of rate to attracting customers through its continued
promotion of lower cost core deposits. The average balance of NOW deposits
increased $23.6 million, or 108.5%, from $21.7 million during the first nine
months of 2001 to $ 45.3 million in the first nine months of 2002. For the first
nine months of 2002, the Company's average cost of time deposits was 4.55%,
while the average cost of NOW accounts was 1.87% compared to 6.01% and 3.89%
respectively from the first nine months of 2001. During the first nine months of
2002 savings deposits increased $649 thousand, or 25.8%, from $2.5 million
during the first nine months of 2001 to $ 3.2 million during the same period of
2002. The increase is primarily attributable to increased cross marketing of
existing customers and the Company's overall increased level of marketing
activity. The Company's average borrowed funds increased to $2 million during
the first nine months of 2002 compared to $500 thousand in the first nine months
of 2001, with the purchases of $2.0 million in Federal Home Loan Bank advances
in the third and fourth quarters of 2001. The average rate paid on total
interest bearing liabilities decreased 207 basis points from 5.05% in the first
nine months of 2001 to 2.98% during the same period in 2002. This decrease in
the average cost of funds was mostly due to the decline in market rates and the
Company's strategy of attracting lower cost deposits and repricing its higher
costing time deposit portfolio.
The following table presents, on a tax equivalent basis, a summary of the
Company's interest-earning assets and their average yields, and interest-bearing
liabilities and their average costs and shareholders' equity for the nine months
ended September 30, 2002 and 2001. The average balance of loans includes
non-accrual loans, and associated yields include loan fees, which are considered
adjustment to yields.
Comparative Average
Balance Sheet
Nine Months Ended September 30,
2002 2001
Interest Average Rates Interest Average Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
Assets (Dollars in Thousands)
Cash and Due from Banks $1,263 $15 1.64% $392 $13 4.32%
Loans 77,308 3,777 6.53% 59,901 3,590 8.01%
Loans Held for Sale 8,152 454 7.45% 9,612 525 7.30%
Investment Securities Available for Sale 16,076 568 4.72% 9,546 416 5.83%
Fed Funds Sold 4,843 62 1.71% 10,298 322 4.18%
------------ ---------- ----------- ------------
Total Interest Earning Assets $107,642 $4,876 6.06% $89,749 $4,866 7.25%
Non-Interest Earning Assets 9,784 7,667
Allowance for Loan Losses (1,044) (548)
------------ -------------
Total Assets $116,382 $96,867
============ =============
Liabilities and Equity
Fed Funds Purchased $186 $3 2.15% $186 $7 4.92%
Interest Bearing Demand Deposits 45,348 636 1.87% 21,745 632 3.89%
Savings 3,167 37 1.57% 2,518 51 2.72%
Money Market 5,252 67 1.70% 9,152 284 4.15%
Time Deposits 35,563 1,210 4.55% 41,003 1,842 6.01%
FHLB Advances/ Other Borrowings 2542 85 4.50% 532 20 4.89%
------------- --------- ----------- ---------
Total Interest Bearing Liabilities 92,058 2,038 2.96% 75,136 $2,836 5.05%
Non-Interest Bearing Liabilities:
Demand Deposits 11,296 8,421
Other Liabilities 586 615
------------ -------------
Total Liabilities 103,940 84,172
Stockholders' Equity 12,442 12,695
------------ --------------
Total Liabilities and Stockholders' Equity $116,382 $96,867
============ =============
Net Interest Income $2,838 $2,030
=========== ===========
Net Interest Spread 3.10% 2.20%
Net Interest Margin 3.52% 3.02%
-12-
Comparative Average
Balance Sheets
Three Months Ended September 30,
2002 2001
Interest Average Rates Interest Average Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ----
(Dollars in Thousands)
Assets
Cash and due from Banks $1,429 $5 1.52% $760 $7 3.54%
Loans 83,342 1,336 6.36% 62,912 1,242 7.83%
Loans Held for Sale 7,726 146 7.51% 11,980 222 7.36%
Investment Securities Available-for-Sale 17,214 186 4.28% 10,112 147 5.75%
Fed Funds Sold 4,155 18 1.69% 16,323 137 3.33%
------------ ------- ---------- ---------
Total Interest Earning Assets 113,866 $1,691 5.89% 102,087 $1,755 6.82%
Non-Interest Earning Assets 8,957 8,352
Allowance for Loan Losses (1,114) (644)
------------ -------------
Total Assets $121,709 $109,795
============ =============
Liabilities and Equity
Fed Funds Purchased $377 2 2.17% $0 $0 0%
Interest Bearing Demand Deposits 49,228 234 1.89% 32,051 305 3.77%
Savings 3,214 13 1.60% 2,420 15 2.50%
Money Market 4,359 19 1.71% 7.883 68 3.39%
Time Deposits 37,069 381 4.07% 43,958 627 5.66%
FHLB Advances/other borrowings 2,623 27 4.14% 1,562 19 4.89%
--------- ------ ----------- --------
Total Interest Bearing Liabilities 96,870 $676 2.77% 87,874 $1,034 4.67%
Non-Interest Bearing Liabilities:
Demand Deposits 11,666 8,651
Other Liabilities 579 693
------------ -----------
Total Liabilities 109,115 97,218
Stockholders' Equity 12,594 12,577
------------ -----------
Total Liabilities and Stockholders' Equity $121,709 $109,795
============ ===========
Net Interest Income 1,015 721
=========== ===========
Net Interest Spread 3.12% 2.15%
Net Interest Margin 3.54% 2.80%
-13-
Net-Interest Income. The net interest income for the third quarter of 2002
increased $295 thousand over the same period last year. This increase was the
result of liabilities repricing faster and lower then earning assets in a
declining market rate environment and the Company's ability to shift it's
average balances to lower costing interest bearing liabilities, thereby further
reducing its cost of funds. The net interest spread increased, by 97 basis
points to 3.12% and the net yield on interest-bearing assets increased 74 basis
points to 3.54% in the third quarter of 2002 compared to the same period last
year.
Net interest income for the nine months ended September 30, 2002 increased $808
thousand, or 39.8%, over the same period last year. The net interest spread
increased 90 basis points and the net yield on interest-bearing assets improved
by 50 basis points between the first nine-month periods of 2001 and 2002. This
comparison displays the effect of declining market rates of interest repricing
deposit liabilities faster than interest earning assets during the first
nine-month periods of 2002 compared to the first nine months of 2001.
Provision for Loan Losses. For the three months ended September 30, 2002 the
provision for loan losses was $75 thousand compared to $112 thousand for the
third quarter ended September 30, 2001. The provision for loan losses was $295
thousand for the nine months ended September 30, 2002 as compared to $346
thousand for the same period last year. The change in the provision for loan
losses reflects management's judgement concerning the risks inherent in the
Company's existing portfolio and the size of the allowance necessary to absorb
the risks, as well in the average balance of the portfolio over both periods.
Management reviews the adequacy of its allowance on an ongoing basis and will
provide for additional provision in future periods, as management may deem
necessary.
-13-
Non-Interest Income. Non-interest income decreased by 19.5% or $ 161
thousand in the third quarter of 2002 to $ 666 thousand and increased by 16.0%
or $ 313 thousand to $2.3 million for the nine months ended September 30, 2002
compared to the prior year periods. The decline in non-interest income in the
third quarter of 2002 compared to the same period last year is attributable to
reductions in gains on the sale of mortgage loans. Although loans held for sale
are subject to commitments from third party purchasers, the Company does not
recognize income until a third party sale is consummated. During the third
quarter of 2002, the time between loan closings and sales to third party
investors lengthened, reflecting the overall increase in activity in the
secondary loan market. In the second quarter of 2002, the Company originated
$67.3 million in mortgage loans. Mortgage volume stayed strong in the third
quarter of 2002, as the Company originated $76.0 million in mortgage loans and
has applications for $131.0 million in loans in process, compared with
originations of $53.5 million and applications for $66.3 million in loans in
process in the third quarter of 2001. Gains on the sale of loans originated in
the third quarter of 2002 will be recognized as sales to third party investors
are funded. A significant percentage of our revenue, and all of our profit for
the first nine months of 2002, has been derived from non-interest income
activities, primarily the origination and sale of mortgages through our
subsidiary, Sullivan Financial Services, Inc. The business of originating
mortgage loans is heavily dependent on general economic condition in the local
area, as well as nationwide, and upon various other factors including the level
of and changes in interest rates, the housing market and unemployment. The
origination of residential mortgage loans, both for purchase of new properties
and refinancing of existing loans, is particularly sensitive to movements in and
the level of interest rates. Rising interest rates generally reduce the demand
for mortgage loans and we would expect to originate and sell fewer loans in a
rising interest rate environment. A significant decrease in the number of
mortgages originated by the mortgage company or a downturn in the secondary
market for mortgages could have an adverse effect on our results.
For the nine months ended September 30, 2002, non-interest income increased
$313 thousand, or 16%, from the same period in 2001. Gain on sale of mortgages
increased $313 thousand for the nine-month period ending September 30, 2002 over
the same period in 2001. This increase is mainly attributable to continued
refinancing activity. Service charges on deposit accounts increased $28 thousand
for the nine-month period ended September 30, 2002 over the same period in 2001.
This increase was due to growth in deposit account activity during the first
nine months of 2002 over the first nine months of 2001. Other miscellaneous
income increased $25 thousand, or 89.3%, while gain on sale of securities
decreased $53 thousand or 84.1%, from the nine months ended September 30, 2001
to the current year period.
Non-Interest Expense. For the quarter ended September 30, 2002,
non-interest expense increased $93 thousand from the same period last year. The
additional non-interest expense in the third quarter 2002 was attributable to an
increase of $52 thousand in occupancy expense and $71 in other operating expense
for the comparable period. These increases were somewhat off-set by a decrease
in salaries and benefits of $30 thousands dollars.
For the nine months ended September 30, 2002, non-interest expense
increased $497 thousand, to $4.6 million. Salaries and employee benefits
increased $190 thousand, or 8.1%, occupancy expense increased $115 thousand, or
17.9%, and other operating expense increased $192 or 17.3% during the first nine
months of 2002 as compared to the first nine months of 2001. The Company's
assets have grown over 9% since the year ended December 31, 2001 and these
related non-interest expense increases are the result of management's strategies
to increase loan balances outstanding, changing our deposit mix while growing
deposits, and by introducing new products and services.
Income Taxes. Income tax expense decreased $7 thousand to $14 thousand for
the three months ended September 30, 2002 as compared to $21 thousand for the
same period in 2001. The decrease resulted from less income for the quarter in
2002 compared to the same period in 2001. For the nine months ended September
30, 2002 taxes increased by $30 thousand to $66 thousand as compared to $36
thousand for the nine months ended September 30, 2001. The increase in income
taxes resulted from a higher level of income before income taxes in 2002
compared to 2001.
-14-
FINANCIAL CONDITION
September 30, 2002 as compared to December 31, 2001
Total assets increased to $129.9 million at September 30, 2002, an $11.2
million increase from total assets of $118.7 million at December 31, 2001.
Increases in total assets include net increases of $2.2 million in securities
available for sale and $17.8 million in net loans, partially offset by a $7.6
million reduction in cash and cash equivalents and $1.5 million decrease in
loans held for sale. Asset increases were financed through an increase in total
deposits of $4.4 million from $103 million at year-end 2001 to $107.4 million on
September 30, 2002, and a $6.6 million increase in federal funds purchased.
Total loans at September 30, 2002 increased $18 million to $86.6 million
from $68.6 million at year-end 2001. The increase in and composition of the loan
portfolio, by category, as of September 30, 2002 from December 31, 2001 is as
follows: Commercial loans increased by $11.8 million or 54.1% to $33.5 million,
and home equity loans increased by $7.1 million, or 88.4% to $15.1 million,
while commercial real estate loans increased by $5.8 million, or 28.5%, to $26.3
million, residential mortgage loans decreased by $1.1 million, or 26.8%, to
$2.9 million and installment loans decreased by $5.6 million, or 39.4%, to $8.7
million. The increase in the loan portfolio primarily reflect our efforts to
continue to penetrate our original Bernardsville, New Jersey market and the
continued success of our Mendham branch, which opened in 2000, in establishing
ourselves in that community, as well as the success of our new business
development program, which includes the calling of third-party referral sources,
such as law firms and accounting firms in our market area, as well as the
banking contacts of our executive management.
The following schedule presents the components of loans, net of unearned
income, for each period presented:
September 30, 2002 December 31, 2001
Amount Percent Amount Percent
(Dollars In Thousands)
Commercial and Industrial $33,534 38.7% $21,762 31.7%
Real Estate-Non Residential Properties 26,328 30.4% 20,486 29.9%
Residential Properties (1-4 Family) 2,900 3.3% 3,961 5.8%
Consumer and installment 8,673 10.1% 14,322 20.9%
Home equity 15,154 17.5% 8,045 11.7%
----------- -------- ----------- --------
Gross loans 86,589 100% 68,576 100.0%
=========== ==========
Less: Net deferred fees 92 108
----------- ------------
Total loans 86,497 68,468
Less: Allowance for loan losses 1,134 882
----------- ------------
Net Loans $85,363 $67,586
=========== ============
Federal funds sold decreased by $3.9 million to zero at September 30, 2002
from $3.9 million on December 31, 2001. During 2002 deposits increased faster
than investment opportunities and the excess funds were invested in short-term
federal funds. These funds were used to purchase investment securities and time
deposits in other banks and to fund increased loan demand during the first nine
months of 2002.
Securities, available for sale, at market value, increased $2.1 million, or
12.5 %, from $17.3 million at year-end 2001 to $19.4 million on September 30,
2002. The Company purchased $13.5 million in new securities in the first nine
months of 2002 and $10.5 million in available for sale securities matured, were
called and were repaid. There were $142 thousand in recorded unrealized gains in
the available for sale portfolio and $128 thousand in net amortization expenses
during the first nine months of 2002. There were no held to maturity securities
at September 30, 2002 or at year-end 2001.
Total year to date average deposits increased $13.5 million, or 15.4%, to
$100.6 million during the first nine months of 2002 from the twelve-month
average of $87.2 million for the year ended December 31, 2001. NOW deposits
increased by $19.3 million, savings deposits increased by $0.6 million, and
demand deposits increased by $2.4 million. Offsetting these increases were
decreases in money market deposits of $4.0 million and time deposits of $4.8
million. As discussed earlier, the increase in demand, NOW and savings deposits
was due to an ongoing deposit promotion begun in the second quarter of 2001.
After aggressively pricing time deposits in the first quarter of 2001, many of
those deposits have since repriced at lower market rates of interest or left the
bank and the decrease in the average balance of time deposits during the first
nine months of 2002 reflects the withdrawal of some of the matured, higher
priced time deposits. Management continues to monitor the shift in deposits
through its Asset/Liability Committee.
ASSET QUALITY
At September 30, 2002, non-accrual loans increased $151 thousand to $158
thousand, as compared to $7 thousand at December 31, 2001. Management continues
to monitor the Company's asset quality and believes that the non-accrual loans
of the Bank are adequately collateralized and does not anticipate any material
losses.
The following table provides information regarding risk elements in the loan
portfolio:
September 30, 2002 December 31, 2001
(dollars in thousands)
Non-accrual loans $158 $7
Non-accrual loans to total loans 0.19% 0.01%
Non-performing assets to total assets 0.12% 0.01%
Allowance for loan losses
as a % of non-performing loans 717.72% NM
Allowance for possible loan losses to
total loans 1.31% 1.29%
-15-
Non-Performing Assets
Loans are considered to be non-performing if they are (i) on a non-accrual
basis, (ii) are past due ninety (90) days or more and still accruing interest,
or (iii) have been renegotiated to provide a reduction of deferral of interest
because of a weakening in the financial position of the borrowers. A loan which
is past due ninety (90) days or more and still accruing interest remains on
accrual status only where it is both adequately secured as to principal and is
in the process of collection. The Bank had no non-performing loans at either
September 30, 2002 or December 31, 2001.
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 are charged to expense and the
allowance is reduced by charge-offs, net of recoveries, and is increased by the
provision. Although management strives to maintain an allowance it deems
adequate, future economic changes, deterioration of borrowers' credit
worthiness, and the impact of examinations by regulatory agencies all could
cause changes to the Company's allowance for loan losses.
At September 30, 2002, the allowance for loan losses was $1.1 million, an
increase of 28.6.% from the $0.9 million at year-end 2001. There were $47
thousand in charge offs and $3 thousand in recoveries reported in the first nine
months of 2002. The allowance for loan losses as a percentage of total loans was
1.31% at September 30, 2002 compared to 1.29% on December 31, 2001.
LIQUIDITY MANAGEMENT
At September 30, 2002, the amount of liquid assets remained at a level
management deemed adequate to ensure that contractual liabilities, depositors'
withdrawal requirements, and other operational and customer credit needs could
be satisfied.
At September 30, 2002, liquid assets (cash and due from banks, federal
funds sold, and investment securities available for sale) were approximately
$22.9 million, which represents 17.6% of total assets and 19.7% of total
deposits and borrowings.
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 had the ability to borrow a total of $30.0 million (subject to
available qualified collateral, with current borrowings of $2.5 outstanding from
the FHLB at September 30, 2002). At September 30, 2002 outstanding commitments
to extend credit were $33.8 million and available line of credit balances
totaled $6.0 million. Management believes that our combined aggregate liquidity
position is sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals over the next twelve months.
Total stockholders' equity increased to $12.6 million at September 30, 2002
from $12.3 million at year-end 2001. Activity in stockholder's equity consisted
of a net increase in retained earnings of $151 thousand derived from $151
thousand in net income earned during the first nine months of 2002 and
unrealized gain on securities, available for sale of $142 thousand.
Subsequent to quarter end, the Company completed a public offering of its
securities. Pursuant to the offering the Company issued 1,104,000 units at a
public offering price of $8.25 per unit, raising proceeds of approximately $8.0
million, net of offering expenses of approximately $1.1 million. Each unit
consists of one share of common stock and one common stock purchase warrant,
entitling the holder to purchase a share of stock at an exercise price of $ 9.65
per share at any time until November 30, 2006. This additional capital will
enhance our liquidity while it helps us to grow.
At September 30, 2002 the Company and the Bank exceeded each of the
regulatory capital requirements applicable to them. The table below presents the
capital ratios at September 30, 2002, for the Company and the Bank, as well as
the minimum regulatory requirements.
Amount Ratio Amount Minimum Ratio
------ ----- ------ -------------
The Company:
Leverage Capital $11,288 9.37% $4,821 4%
Tier 1 - Risk 11,288 10.41% 4,337 4%
Based
Total Risk-Based 12,422 11.46% 8,673 8%
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC
filings.
(b) Changes in internal controls.
Not applicable
-16-
Part II Other Information
-------------------------
-------------------------
Item 1. Legal Proceedings
-----------------
The Company and the Bank are periodically involved in various legal
proceedings as a normal incident to their businesses. In the opinion of
management, no material loss is expected from any such pending lawsuit.
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults Upon Served Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
Exhibits
Exhibit 99-Certification Pursuant to Section 906 of the Sarbanes
-Oxley Act of 2002
-17-
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOMERSET HILLS BANCORP
Date: December 24, 2002 By: /s/ Gerard Riker
----------------------------
GERARD RIKER
Executive Vice President and
Chief Financial Officer
-18-
CERTIFICATIONS
- --------------
I, Stewart E. McClure, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Somerset Hills
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Stewart E. McClure, Jr.
----------------------------
STEWART E. MCCLURE, JR.
President and
Chief Executive Officer
Date: December 24, 2002
-19-
I, Gerard Riker, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Somerset Hills
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Gerard Riker
----------------------------
GERARD RIKER
Executive Vice President and
Chief Financial Officer
Date: December 24, 2002
-20-