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EX-23 - EXHIBIT 23 - SB ONE BANCORP | ex23.htm |
EX-32 - EXHIBIT 32 - SB ONE BANCORP | ex32.htm |
EX-21 - EXHIBIT 21 - SB ONE BANCORP | ex21.htm |
EX-31.1 - EXHIBIT 31.1 - SB ONE BANCORP | ex31_1.htm |
EX-31.2 - EXHIBIT 31.2 - SB ONE BANCORP | ex31_2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
T
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the
fiscal year ended December 31, 2009
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ________ to ________
Commission
File Number 0-29030
SUSSEX
BANCORP
(Exact
name of registrant as specified in its charter)
New Jersey
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22-3475473
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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200 Munsonhurst Rd., Franklin,
NJ
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07416
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(Address
of principal executive offices)
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(Zip
Code)
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(973) 827-2914
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||
(Registrant's
telephone number, including area code)
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Securities
Registered Pursuant to Section 12(b) of the Act:
Common Stock, no par value
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NASDAQ
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(Title
of each class)
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(Name
of exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No
T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
T
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 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 T No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes T No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company T
|
(Do not check if a smaller reporting company) |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No
T
The
aggregate market value of the voting stock held by non-affiliates of the Issuer
as of June 30, 2009 was $14,456,470. The number of shares of the
Issuer's Common Stock, no par value, outstanding as of March 11, 2010 was
3,317,548.
1
INDEX
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3
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ITEM 1.
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3
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ITEM 1A.
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7
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ITEM 1B.
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10
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ITEM 2.
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10
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ITEM 3.
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10
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ITEM 4.
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10
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11
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ITEM 5.
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11
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ITEM 6.
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12
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ITEM 7.
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13
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ITEM 7A.
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26
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ITEM 8.
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27
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28 |
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29 |
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30 |
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31 |
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32 |
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ITEM 9.
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58
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ITEM 9A(T).
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58
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ITEM 9B.
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58
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59
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ITEM 10.
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59
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ITEM 11.
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59
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ITEM 12.
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59
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ITEM 13.
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60
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ITEM 14.
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60
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60
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ITEM 15.
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60
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61
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PART I
ITEM
1.
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BUSINESS
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GENERAL
Sussex
Bancorp (the "Company" or "Registrant") is a one-bank holding company
incorporated under the laws of the State of New Jersey in January 1996 to serve
as a holding company for Sussex Bank (the "Bank"). The Company was
organized at the direction of the Board of Directors of the Bank for the purpose
of acquiring all of the capital stock of the Bank (the
"Acquisition"). Pursuant to the New Jersey Banking Act of 1948, as
amended, (the "Banking Act"), and pursuant to approval of the shareholders of
the Bank, the Company acquired the Bank and became its holding company on
November 20, 1996. As part of the Acquisition, shareholders of the
Bank received one share of common stock, no par value ("Common Stock") of the
Company for each outstanding share of the common stock of the Bank, $2.50 per
share par value ("Bank Common Stock"). The only significant asset of
the Company is its investment in the Bank. The Company's principal
executive offices are located at 200 Munsonhurst Road, Route 517, Franklin,
Sussex County, New Jersey 07416.
The Bank
is a commercial bank formed under the laws of the State of New Jersey in
1975. The Bank operates from its main office at 399 Route 23,
Franklin, New Jersey, and its nine branch offices located at 7 Church Street,
Vernon, New Jersey; 266 Clove Road, Montague, New Jersey; 33 Main Street,
Sparta, New Jersey; 378 Route 23, Wantage, New Jersey; 15 Trinity Street,
Newton, New Jersey; 100 Route 206, Augusta, New Jersey; 165 Route 206, Andover,
New Jersey; 20-22 Fowler Street, Port Jervis, New York; and 65-67 Main Street,
Warwick, New York. On March 24, 2006, the Bank acquired the Port
Jervis, New York branch office of NBT Bank, N.A. and expanded its branch network
outside of Sussex County New Jersey and into New York State for the first
time. The Company received regulatory approval to establish a branch
in Westfall Township, Pennsylvania in 2007, although this branch has not yet
opened.
On
October 1, 2001, the Company acquired all of the outstanding stock of Tri-State
Insurance Agency, Inc. (“Tri-State”). Tri-State is a full service
insurance agency located in Augusta, New Jersey. Tri-State’s operations are
considered a separate segment for financial disclosure purposes.
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 Deposit Insurance Fund ("DIF") 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 Tri-State are also subject to
supervision and regulation by Department. The principal executive
offices of the Company are located at 200 Munsonhurst Road, Route 517, Franklin,
New Jersey 07416, and the telephone number is (973) 827-2914.
The
Company has two business segments, banking and financial services and insurance
services. For Financial data on the segments see Part II, Item 8, “Financial
Statements,” Note 2 of the consolidated financial statements.
BUSINESS
OF THE COMPANY
The
Company's primary business is ownership and supervision of the Bank and
Tri-State, a subsidiary of the Bank. The Company, through the Bank,
conducts a traditional commercial banking business, and offers services
including personal and business checking accounts and time deposits, money
market accounts and regular savings accounts. The Company structures
its specific services and charges in a manner designed to attract the business
of the small and medium sized business and professional community as well as
that of individuals residing, working and shopping in the northwest New Jersey,
northeast Pennsylvania and Orange County, New York trade areas. The
Company engages in a wide range of lending activities and offers commercial,
consumer, mortgage, home equity and personal loans. The Company is also a party
to a joint venture with PNC Mortgage, Inc., called SussexMortgage.com LLC which
originates one to four family mortgage loans for funding by third party
investors for sale into the secondary market. Servicing is released
to the third party investors.
Through
the Bank's subsidiary, Tri-State, the Company operates a full service general
insurance agency, offering both commercial and personal lines of
insurance. The Company considers this to be a separate business
segment.
SERVICE
AREA
The
Company's service area primarily consists of the Sussex County, New Jersey;
Orange County, New York; and Pike County, Pennsylvania markets; although the
Company makes loans throughout New Jersey. The Company operates its
main office in Franklin, New Jersey and nine branch offices in Vernon, Montague,
Sparta, Wantage, Newton, Andover and Augusta, New Jersey and Port Jervis and
Warwick, New York. Our market area is among the most affluent in the
nation.
COMPETITION
The
Company operates in a highly competitive environment competing for deposits and
loans with commercial banks, thrifts and other financial institutions, many of
which have greater financial resources than the Company. Many large
financial institutions in New York City and other parts of New Jersey compete
for the business of customers located in the Company's service
area. Many of these institutions have significantly higher lending
limits than the Company and provide services to their customers which the
Company does not offer.
Management
believes the Company is able to compete on a substantially equal basis with its
competitors because it provides responsive personalized services through
management's knowledge and awareness of the Company's service area, customers
and business.
PERSONNEL
At
December 31, 2009, the Company employed 105 full-time employees and 18 part-time
employees. None of these employees are covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
REGULATION AND
SUPERVISION
Bank
holding companies and banks are extensively regulated under both federal and
state law. These laws and regulations are intended to protect
depositors, not stockholders. Insurance agencies licensed in New
Jersey are regulated under state law by the New Jersey Department of Banking and
Insurance. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any
change in the applicable law or regulation may have a material effect on the
business and prospects of the Company and the Bank.
BANK
HOLDING COMPANY REGULATION
GENERAL
As a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended, (the BHCA), we are subject to the regulation and supervision
of the Board of Governors of the Federal Reserve System (FRB). We are
required to file with the FRB annual reports and other information regarding our
business operations and those of our subsidiaries.
The BHCA
requires, among other things, the prior approval of the FRB in any case where a
bank holding company proposes to (i) acquire all or substantially all of the
assets of any other bank, (ii) acquire direct or indirect ownership or control
of more than 5% of the outstanding voting stock of any bank (unless it owns a
majority of such bank's voting shares) or (iii) merge or consolidate with any
other bank holding company. The FRB will not approve any acquisition,
merger, or consolidation that would have a substantially anti-competitive
effect, unless the anti-competitive impact of the proposed transaction is
clearly outweighed by a greater public interest in meeting the convenience and
needs of the community to be served. The FRB also considers capital adequacy and
other financial and managerial resources and future prospects of the companies
and the banks concerned, together with the convenience and needs of the
community to be served when reviewing acquisitions or mergers.
The BHCA
also generally prohibits a bank holding company, with certain limited
exceptions, from (i) acquiring or retaining direct or indirect ownership or
control of more than 5% of the outstanding voting stock of any company which is
not a bank or bank holding company; or (ii) engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries, unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the FRB is required to weigh the expected benefits to the
public, such as, greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as, undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
In
addition, the BHCA was amended through the Gramm-Leach-Bliley Financial
Modernization Act of 1999 (the “GLBA”). Under the terms of the GLBA,
bank holding companies whose subsidiary banks meet certain capital, management
and Community Reinvestment Act standards, and which elect to become “financial
holding companies”, are permitted to engage in a substantially broader range of
non-banking activities than is permissible for bank holding companies under the
BHCA. These activities include certain insurance, securities and
merchant banking activities. In addition, the GLBA amendments to the
BHCA remove the requirement for advance regulatory approval for a variety of
activities and acquisitions by financial holding companies. As our
business is currently limited to activities permissible for a bank, we have not
elected to become a financial holding company.
There are
a number of obligations and restrictions imposed on bank holding companies and
their depository institution subsidiaries by law and regulatory policy that are
designed to minimize potential loss to the depositors of such depository
institutions and the FDIC insurance fund in the event the depository institution
becomes in danger of default. Under a policy of the FRB with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under
the BHCA to require a bank holding company to terminate any activity or to
relinquish control of a non-bank subsidiary upon the FRB's determination that
such activity or control constitutes a serious risk to the financial soundness
and stability of any bank subsidiary of the bank holding company.
CAPITAL
ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES
The FRB
has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid
assets. Under these guidelines, assets and off-balance sheet items
are assigned to broad risk categories each with appropriate
weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $500 million or more, and to certain bank holding
companies with less then $500 million in assets if they are engaged in
substantial non-banking activity or meet certain other criteria. We do not meet
these criteria, and so are not subject to a minimum consolidated capital
requirement. In addition to the risk-based capital guidelines, the
FRB has adopted a minimum Tier I capital (leverage) ratio, under which a bank
holding company must maintain a minimum level of Tier I capital to average total
consolidated assets of at least 3% in the case of a bank holding company that
has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
the stated minimum. The leverage requirement also only applies on a consolidated
basis if the risk based capital requirements discussed above apply to a holding
company on a consolidated basis. We do not have a minimum consolidated capital
requirement at the holding company level at this time.
BANK
REGULATION
As a New
Jersey-chartered commercial bank, the Bank is subject to the regulation,
supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the
FDIC and the Department impact virtually all activities of the Bank, including
the minimum level of capital the Bank must maintain, the ability of the Bank to
pay dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
INSURANCE
OF DEPOSITS
During
the third quarter of 2008, Congress instituted the Emergency Economic
Stabilization Act (the "EESA") to address the dysfunctional credit
markets. Among other things, the Act authorized a temporary increase
in the FDIC insurance limit to $250 thousand from $100 thousand per
account. The increase in deposit insurance will expire on December
31, 2013. In addition, the FDIC implemented an optional program to
insure all deposits held in noninterest-bearing transactional accounts,
regardless of amount, at institutions which do not opt out of the program and
which pay an additional assessment to the FDIC. The Bank elected not to opt out
of this program, and is paying the required additional
assessment. This increase in deposit insurance will expire on June
30, 2010. If either of these programs is not extended, the prior
limits described below, will go back into effect.
Prior to
the fall of 2008, the Bank's deposits were insured up to a maximum of $100
thousand per depositor ($250 thousand per IRA account) under the Deposit
Insurance Fund of the FDIC. Pursuant to the Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA"), the FDIC has established a
risk-based assessment system. Premium assessments under this system
are based upon: (i) the probability that the insurance fund will incur a loss
with respect to the institution; (ii) the likely amount of the loss; and (iii)
the revenue needs of the
insurance
fund. To effectuate this system, the FDIC has developed a matrix that
sets the assessment premium for a particular institution in accordance with its
capital level and overall rating by the primary regulator.
The FDIC
significantly increased deposit insurance assessment rates, commencing in the
second quarter of 2009. As increased, the adjusted base assessment
rates range from 7 to 77.5 basis points of deposits, a significant increase over
premium rates for the past several years. In addition, the Bank will pay a
special assessment of 10 basis points of the amount of deposits in excess of
$250,000 held in non-interest bearing transactional accounts under the enhanced
insurance program discussed above.
The FDIC
also imposed a special assessment during 2009 equal to the lesser of 10 basis
points on deposits or 5 basis points on total assets less Tier I
capital. The Company paid $211,411 on September 30, 2009 on adjusted
assets as of June 30, 2009. Finally, the FDIC Board adopted a prepaid
assessment plan to recapitalize the Deposit Insurance Fund (DIF) by requiring
all institutions to prepay their estimated risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012 on December 30,
2009. The Company’s prepaid assessment was $3.1 million. This
assessment will be expensed by the Company over the period the premiums would
otherwise have been paid.
DIVIDEND
RIGHTS
Under the
Banking Act, a Bank may declare and pay dividends only if, after payment of the
dividend, the capital stock of the Bank will be unimpaired and either the Bank
will have a surplus of not less than 50% of its capital stock or the payment of
the dividend will not reduce the Bank's surplus.
LEGISLATIVE
AND REGULATORY CHANGES
On
October 8, 2008, the Emergency Economic Stabilization Act (the “EESA”) was
signed into law. Among other things, the EESA provided for the United States
Treasury (the “UST”) to implement the Troubled Assets Relief Program (“TARP”)
Capital Purchase Program (“CPP”). Under the CPP, the UST purchased shares of
senior preferred stock in insured depository institutions or their holding
companies, bearing a dividend rate of 5%, increasing to 9% if the preferred
stock is not redeemed within five (5) years of the issue date. In addition,
participating institutions must issue to the UST common stock purchase warrants,
permitting the UST to purchase common stock with a value equal to 15% of the
UST’s preferred stock investment, and comply with reporting requirements,
compensation restrictions and dividend and stock repurchase limitations imposed
under the EESA and UST regulations. The Company elected not to participate in
the CPP.
On
February 16, 2009, the American Recovery and Reinvestment Act of 2009 (the
“ARRA”) was adopted. Among other things, the ARRA amended various provisions of
the EESA to, among other things, substantially restrict executive compensation
for those entities that participate in the CPP, including those institutions
that participated prior to the adoption of the ARRA, impose more stringent
reporting requirements on such institutions and requires such institutions to
permit their shareholders to have a non-binding, advisory vote on executive
compensation.
On July
30, 2002, the Sarbanes-Oxley Act, or “SOX” was enacted. SOX is not a
banking law, but applies to all public companies, including Sussex
Bancorp. The stated goals of SOX are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws. SOX is the most far reaching U.S. securities legislation
enacted in some time. SOX generally applies to all companies, both
U.S. and non-U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act
of 1934, as amended.
SOX
includes very specific additional disclosure requirements and corporate
government rules and requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of specific issues by the SEC. SOX
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its
committees. SOX addresses, among other matters:
|
·
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audit
committees;
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|
·
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certification
of financial statements by the chief executive officer and the chief
financial officer;
|
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·
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management’s
assessment of a company’s internal controls over financial reporting, and
a company’s auditor’s certification of such
assessment;
|
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·
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the
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer’s securities by directors and senior officers
in the twelve month period following initial publication of any financial
statements that later require
restatement;
|
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·
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a
prohibition on insider trading during pension plan black out
periods;
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·
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disclosure
of off-balance sheet transactions;
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·
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a
prohibition on personal loans to officers and directors, unless subject to
Federal Reserve Regulation O;
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·
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expedited
filing requirements for Form 4 statements of changes of beneficial
ownership of securities required to be filed by officers, directors and
10% shareholders;
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·
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disclosure
of whether or not a company has adopted a code of
ethics;
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·
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“real
time” filing of periodic reports;
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·
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auditor
independence; and
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·
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various
increased criminal penalties for violations of securities
laws.
|
Complying
with the requirements of SOX as implemented by the SEC has and will continue to
increase our compliance costs and could make it more difficult to attract and
retain board members.
On
October 26, 2001, a new anti-terrorism bill, the International Money Laundering
Abatement and Anti-Terrorism Funding Act of 2001, was signed into
law. This law restricts money laundering by terrorists in the United
States and abroad. This act specifies new "know your customer"
requirements that obligate financial institutions to take actions to verify the
identity of the account holders in connection with opening an account at any
U.S. financial institution. Banking regulators will consider
compliance with the act's money laundering provisions in making decisions
regarding approval of acquisitions and mergers. In addition,
sanctions for violations of the act can be imposed in an amount equal to twice
the sum involved in the violating transaction, up to $1 million.
ITEM
1A.
|
RISK FACTORS
|
Risks affecting Our
Business:
The nationwide recession may
adversely affect our business by reducing real estate values in our trade area
and stressing the ability of our customers to repay their
loans. Our trade area, like the rest of the United States, is
currently experiencing economic contraction. As a result, many companies have
experienced reduced revenues and have laid off employees. These factors have
stressed the ability on both commercial and consumer customers to repay their
loans, and have, and may in the future, result in higher levels of non-accrual
loans. In addition, real estate values have declined in our trade
area. Since the majority of our loans are secured by real estate, declines in
the market value of real estate impact the value of the collateral securing our
loans, and could lead to greater losses in the event of defaults on loans
secured by real estate.
Our non-performing assets have
substantially increased over the past two years, and this has, and will
continue, to affect our results of operations. Since year end
2007, our total non-performing assets have increased to $24.3 million, or 5.33%
of our total assets, from $14.0 million, or 3.56% of our total assets. The
increase in non-performing assets reflects difficulties experienced by borrowers
due to declining real estate values and the general slowdown in the economy in
our trade area. The increase in non-performing assets has negatively impacted
our results of operations, through additional provisions for loan losses and
reduced interest income, and will continue to impact our performance until these
assets are resolved. In addition, future increases in our non-performing assets
will further negatively affect our results of operations. We can give you no
assurance that our non-performing assets will not increase further.
Our FDIC deposit insurance premiums
have increased and may continue to increase, substantially increasing our
non-interest expense. During 2008 and 2009, the FDIC has
significantly increased its assessments for deposit insurance due to the
weakness in the economy and the increased number of bank failures. In
2008, we paid $385 thousand in deposit insurance assessments and in 2009 this
increased to $936 thousand. The FDIC increased its assessment in the second
quarter of 2009, which raised insurance premiums for the healthiest banks by 7
basis points, with the new assessments ranging from 12 to 77.5 basis points.
Banks that have opted to remain eligible for the FDIC’s increased insurance
program for non-interest bearing deposit must also pay an assessment of 10 basis
points of the amount of non-interest bearing deposits in excess of
$250,000. The FDIC also imposed a special assessment of the lessor of
5 basis points of total assets minus Tier I capital or 10 basis points of
insured deposits as of June 30, 2009, paid on September 30,
2009. This special assessment totaled $211,411. In
addition on December 31, 2009 a prepaid assessment of $3.1 million was paid to
the FDIC to cover future assessments through December of 2012. These
additional costs will adversely affect our results of
operations.
Our earnings may not grow if we are
unable to successfully attract core deposits and lending opportunities and
exploit opportunities to generate fee-based income. We have
experienced growth, and our future business strategy is to continue to
expand. Historically, the growth of our loans and deposits has been
the principal factor in our increase in net-interest income. In the
event that we are unable to execute our business strategy of continued growth in
loans and deposits, our earnings could be adversely impacted. Our
ability to continue to grow depends, in part, upon our ability to expand our
market share, to successfully attract core deposits and identify loan and
investment opportunities, as well as opportunities to generate fee-based
income. Our ability to manage growth successfully will also depend on
whether we can continue to efficiently fund asset growth and maintain asset
quality and cost controls, as well as on factors beyond our control, such as
economic conditions and interest-rate trends.
Our growth-oriented business strategy
could be adversely affected if we are not able to attract and retain skilled
employees and manage our expenses. We expect to continue to
experience growth in the scope of our operations and, correspondingly, in the
number of our employees and customers. We may not be able to
successfully manage our business as a result of the strain on our management and
operations that may result from this growth. Our ability to manage
this growth will depend upon our ability to continue to attract, hire and retain
skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems, to manage multiple, concurrent customer relationships and to
hire, train and manage our employees.
Market conditions may adversely
affect our fee based insurance business. The revenues of our
fee based insurance business are derived primarily from commissions from the
sale of insurance policies, which commissions are generally calculated as a
percentage of the policy premium. These insurance policy commissions
can fluctuate as insurance carriers from time to time increase or decrease the
premiums on the insurance products we sell.
Risks Related to the Banking
Industry:
Changes in local economic conditions
could adversely affect our loan portfolio. Our success depends
to a great extent upon the general economic conditions of the local markets that
we serve. Unlike larger banks that are more geographically
diversified, we provide banking and financial services primarily to customers in
the three counties in the New Jersey, Pennsylvania and New York markets in which
we have branches, so any decline in the economy of this specific region could
have an adverse impact on us.
Our
loans, the ability of borrowers to repay these loans and the value of collateral
securing these loans, are impacted by economic conditions. Our
financial results, the credit quality of our existing loan portfolio, and the
ability to generate new loans with acceptable yield and credit characteristics
may be adversely affected by changes in prevailing economic conditions,
including declines in real estate values, changes in interest rates, adverse
employment conditions and the monetary and fiscal policies of the federal
government. We cannot assure you that continued negative trends or
developments will not have a significant adverse effect on us.
There is a risk that we may not be
repaid in a timely manner, or at all, for loans we make. The risk of
non-payment (or deferred or delayed payment) of loans is inherent in commercial
banking. Such non-payment, or delayed or deferred payment of loans to
the Company, if they occur, may have a material adverse effect on our earnings
and overall financial condition. Additionally, in compliance with
applicable banking laws and regulations, the Company maintains an allowance for
loan losses created through charges against earnings. As of December
31, 2009, the Company’s allowance for loan losses was $5.5
million. The Company’s marketing focus on small to medium-size
businesses may result in the assumption by the Company of certain lending risks
that are different from or greater than those which would apply to loans made to
larger companies. We seek to minimize our credit risk exposure
through credit controls, which include evaluation of potential borrowers’
available collateral, liquidity and cash flow. However, there can be
no assurance that such procedures will actually reduce loan losses.
Our allowance for loan losses may not
be adequate to cover actual losses. Like all financial
institutions, we maintain an allowance for loan losses to provide for loan
defaults and nonperformance. Our allowance for loan losses may not be
adequate to cover actual losses, and future provisions for loan losses could
materially and adversely affect the results of our operations. Risks
within the loan portfolio are analyzed on a continuous basis by management and,
periodically, by an independent loan review function and by the Audit
Committee. A risk system, consisting of multiple-grading categories,
is utilized as an analytical tool to assess risk and the appropriate level of
loss reserves. Along with the risk system, management further
evaluates risk characteristics of the loan portfolio under current economic
conditions and considers such factors as the financial condition of the
borrowers, past and expected loan loss experience and other factors management
feels deserve recognition in establishing an adequate reserve. This
risk assessment process is performed at least quarterly and as adjustments
become necessary, they are realized in the periods in which they become
known. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates
that may be beyond our control, and
these
losses may exceed current estimates. State and federal regulatory
agencies, as an integral part of their examination process, review our loans and
allowance for loan losses and have in the past required an increase in our
allowance for loan losses. Although we believe that our allowance for
loan losses is adequate to cover probable and reasonably estimated losses, we
cannot assure you that we will not further increase the allowance for loan
losses or that our regulators will not require us to increase this
allowance. Either of these occurrences could adversely affect our
earnings.
We are in competition with many other
financial service providers, including larger commercial banks which have
greater resources than us. The banking industry within our
trade area is highly competitive. The Company’s principal market area
is also served by branch offices of large commercial banks and thrift
institutions. In addition, in 1999 the Gramm-Leach-Bliley Financial
Modernization Act of 1999 was passed into law. The Modernization Act
permits other financial entities, such as insurance companies and securities
firms, to acquire or form financial institutions, thereby further increasing
competition. A number of our competitors have substantially greater
resources than we do to expend upon advertising and marketing, and their
substantially greater capitalization enables them to make much larger
loans. Our success depends upon our ability to serve small business
clients in a more responsive manner than the large and mid-size financial
institutions against whom we compete in our principal market area. In addition
to competition from larger institutions, we also face competition for
individuals and small businesses from recently-formed banks seeking to compete
as “home town” institutions. Most of these new institutions have
focused their marketing efforts on the smaller end of the small business market
we serve.
The laws that regulate our operations
are designed for the protection of depositors and the public, but not our
stockholders. The federal and state laws and regulations
applicable to our operations give regulatory authorities extensive discretion in
connection with their supervisory and enforcement responsibilities and generally
have been promulgated to protect depositors and the deposit insurance funds and
to foster economic growth and not for the purpose of protecting
stockholders. These laws and regulations can materially affect our
future business. Laws and regulations now affecting us may be changed
at any time, and the interpretation of such laws and regulations by bank
regulatory authorities is also subject to change. We can give no
assurance that future changes in laws and regulations or changes in their
interpretation will not adversely affect our business.
We may be subject to higher operating
costs as a result of government regulation. We are subject to
extensive federal and state legislation, regulation and supervision which are
intended primarily to protect depositors and the Federal Deposit Insurance
Company's Deposit Insurance Fund, rather than investors. Legislative
and regulatory changes may increase our costs of doing business; or, otherwise,
adversely affect us and create competitive advantages for non-bank
competitors.
We cannot predict how changes in
technology will impact our business. The financial services
market, including banking services, is increasingly affected by advances in
technology, including developments in:
|
·
|
telecommunications;
|
|
·
|
data
processing;
|
|
·
|
automation;
|
|
·
|
internet-based
banking;
|
|
·
|
tele-banking;
and
|
|
·
|
debit
cards and so-called "smart cards."
|
Our
ability to compete successfully in the future will depend on whether we can
anticipate and respond to technological changes. To develop these and
other new technologies, we will likely have to make additional capital
investments. Although we continually invest in new technology, we
cannot assure you that we will have sufficient resources or access to the
necessary proprietary technology to remain competitive in the
future.
The Company’s information systems may
experience an interruption or breach in security. The Company
relies heavily on communications and information systems to conduct its
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in the Company’s
customer-relationship management, general ledger, deposit, loan and other
systems. While the Company has policies and procedures designed to
prevent or limit the effect of the failure, interruption or security breach of
its information systems, there can be no assurance that any such failures,
interruptions or security breaches will not occur; or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of the Company’s information systems could
damage the Company’s reputation, result in a loss of customer business, subject
the Company to additional regulatory scrutiny or expose the Company to civil
litigation and possible financial liability; any of which could have a material
adverse affect on the Company’s financial condition and results of
operations.
ITEM
1B.
|
UNRESOLVED STAFF COMMENTS
|
None
ITEM
2.
|
PROPERTIES
|
The
Company conducts its business through its principal executive office located at
200 Munsonhurst Road, Route 517, Franklin, New Jersey, its ten banking offices,
and its insurance agency office. The following table sets forth
certain information regarding the Company's properties as of December 31,
2009. All properties are adequately covered by
insurance.
LOCATION |
LEASED
OR OWNED
|
DATE
OF
LEASE
EXPIRATION
|
|
399
Route 23
Franklin,
New Jersey
|
Owned
|
N/A
|
|
7
Church Street
Vernon,
New Jersey
|
Owned
|
N/A
|
|
266
Clove Road
Montague,
New Jersey
|
Leased
|
March,
2012
|
|
96
Route 206
Augusta,
New Jersey
|
Leased
|
July,
2015
|
|
378
Route 23
Wantage,
New Jersey
|
Owned
|
N/A
|
|
455
Route 23
Wantage,
New Jersey
|
Owned
(1)
|
N/A
|
|
15
Trinity Street
Newton,
New Jersey
|
Owned
|
N/A
|
|
165
Route 206
Andover,
New Jersey
|
Owned
|
N/A
|
|
100
Route 206
Augusta,
New Jersey
|
Owned
|
N/A
|
|
33
Main Street
Sparta,
New Jersey
|
Owned
|
N/A
|
|
200
Munsonhurst Road
Franklin,
New Jersey
|
Leased
|
December,
2013
|
|
20-22
Fowler Street
Port
Jervis, New York
|
Leased
|
June,
2016
|
|
65-67
Main Street
Warwick,
New York
|
Leased
|
December,
2011
|
|
(1)
|
The
Company owns the building housing its former Wantage
branch. The land on which the building is located is leased
pursuant to a ground lease which runs until December 31, 2020, and
contains an option for the Company to extend the lease for an additional
25 year term.
|
ITEM
3.
|
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
4.
|
SUBMISSIONS
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted for a vote of the registrant's shareholders during the
fourth quarter of fiscal 2009.
PART II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
The
Company’s Common Stock trades on the NASDAQ Global Market, under the symbol
"SBBX". As of December 31, 2009, the Company had approximately
613 holders of record of its common stock.
The
following table shows the high and low sales price, by quarter, for the common
stock, as well as dividends declared, for the last two fiscal years, as adjusted
for the 6.5% stock dividend paid on November 12, 2008:
2009
|
High Sales Price:
|
Low Sales Price:
|
Dividends Declared:
|
|||
4th
Quarter
|
$5.15
|
$3.24
|
$0.000
|
|||
3rd
Quarter
|
$5.74
|
$3.00
|
$0.000
|
|||
2nd
Quarter
|
$5.35
|
$3.50
|
$0.000
|
|||
1st
Quarter
|
$5.87
|
$1.99
|
$0.030
|
|||
2008
|
High Sales Price:
|
Low Sales Price:
|
Dividends Declared:
|
|||
4th
Quarter
|
$8.75
|
$3.50
|
$0.000
|
|||
3rd
Quarter
|
$9.50
|
$6.93
|
$0.065
|
|||
2nd
Quarter
|
$13.00
|
$8.01
|
$0.065
|
|||
1st
Quarter
|
$12.89
|
$9.74
|
$0.065
|
ITEM
6.
|
SELECTED FINANCIAL DATA
|
The
following selected financial data as of December 31 for each of the five years
should be read in conjunction with the Company's audited consolidated financial
statements and the accompanying notes.
As of and for the Year Ended December
31,
|
||||||||||||||||||||
(Dollars in thousands, except per share
data))
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
SUMMARY
OF INCOME:
|
||||||||||||||||||||
Interest
income
|
$ | 23,055 | $ | 22,653 | $ | 22,808 | $ | 19,998 | $ | 15,547 | ||||||||||
Interest expense
|
8,053 | 10,843 | 11,387 | 8,249 | 4,328 | |||||||||||||||
Net
interest income
|
15,002 | 11,810 | 11,421 | 11,749 | 11,219 | |||||||||||||||
Provision for loan losses
|
3,404 | 1,350 | 1,930 | 733 | 1,138 | |||||||||||||||
Net
interest income after provision for loan losses
|
11,598 | 10,460 | 9,491 | 11,016 | 10,081 | |||||||||||||||
Other
income
|
5,544 | 1,991 | 5,616 | 5,244 | 4,873 | |||||||||||||||
Other expenses
|
14,679 | 14,589 | 13,148 | 12,648 | 11,603 | |||||||||||||||
Income
(loss) before income tax expense (benefit)
|
2,463 | (2,138 | ) | 1,959 | 3,612 | 3,351 | ||||||||||||||
Income tax expense
(benefit)
|
452 | (1,096 | ) | 450 | 1,148 | 952 | ||||||||||||||
Net income (loss)
|
$ | 2,011 | $ | (1,042 | ) | $ | 1,509 | $ | 2,464 | $ | 2,399 | |||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES: (1)
|
||||||||||||||||||||
Basic
|
3,247,723 | 3,291,710 | 3,354,828 | 3,359,529 | 3,368,788 | |||||||||||||||
Diluted
|
3,258,549 | 3,291,710 | 3,385,052 | 3,395,880 | 3,408,933 | |||||||||||||||
PER
SHARE DATA:
|
||||||||||||||||||||
Basic
earnings (loss) per share
|
$ | 0.62 | $ | (0.32 | ) | $ | 0.45 | $ | 0.73 | $ | 0.71 | |||||||||
Diluted
earnings (loss) per share
|
0.62 | (0.32 | ) | 0.45 | 0.73 | 0.70 | ||||||||||||||
Cash
dividends (2)
|
0.03 | 0.20 | 0.26 | 0.26 | 0.19 | |||||||||||||||
Stock
dividends
|
0.0 | % | 6.5 | % | 0.0 | % | 0.0 | % | 5.0 | % | ||||||||||
BALANCE
SHEET:
|
||||||||||||||||||||
Loans,
net
|
$ | 327,463 | $ | 315,067 | $ | 295,506 | $ | 258,936 | $ | 208,720 | ||||||||||
Total
assets
|
454,841 | 440,595 | 393,532 | 356,297 | 313,182 | |||||||||||||||
Total
deposits
|
372,075 | 360,081 | 308,538 | 295,770 | 256,847 | |||||||||||||||
Total
stockholders’ equity
|
34,527 | 31,910 | 34,440 | 34,592 | 32,924 | |||||||||||||||
Average
assets
|
463,616 | 419,725 | 379,155 | 332,912 | 291,368 | |||||||||||||||
Average
stockholders’ equity
|
33,390 | 33,699 | 35,046 | 33,710 | 32,368 | |||||||||||||||
PERFORMANCE
RATIOS:
|
||||||||||||||||||||
Return
on average assets
|
0.43 | % | -0.25 | % | 0.40 | % | 0.74 | % | 0.82 | % | ||||||||||
Return
on average stockholders’ equity
|
6.02 | % | -3.09 | % | 4.31 | % | 7.31 | % | 7.41 | % | ||||||||||
Average
equity/average assets
|
7.20 | % | 8.03 | % | 9.24 | % | 10.13 | % | 11.11 | % | ||||||||||
Net
interest margin
|
3.60 | % | 3.12 | % | 3.31 | % | 3.91 | % | 4.34 | % | ||||||||||
Efficiency
ratio (3)
|
71.44 | % | 105.71 | % | 77.17 | % | 74.43 | % | 72.10 | % | ||||||||||
Other
income to net interest income plus other income
|
26.98 | % | 14.43 | % | 32.96 | % | 30.86 | % | 30.28 | % | ||||||||||
Dividend
payout ratio
|
5 | % | -63 | % | 58 | % | 36 | % | 26 | % | ||||||||||
BANK
CAPITAL RATIOS: (4)
|
||||||||||||||||||||
Tier
I capital to average assets
|
9.07 | % | 8.59 | % | 7.72 | % | 8.54 | % | 9.23 | % | ||||||||||
Tier
I capital to total risk-weighted assets
|
11.91 | % | 11.04 | % | 9.66 | % | 10.46 | % | 12.40 | % | ||||||||||
Total
capital to total risk-weighted assets
|
13.17 | % | 12.29 | % | 10.91 | % | 11.63 | % | 13.55 | % | ||||||||||
ASSET
QUALITY RATIOS:
|
||||||||||||||||||||
Non-performing
loans to total gross loans
|
6.13 | % | 3.44 | % | 4.28 | % | 1.01 | % | 0.65 | % | ||||||||||
Non-performing
assets to total assets
|
5.33 | % | 3.41 | % | 3.35 | % | 0.75 | % | 0.44 | % | ||||||||||
Net
loan charge-offs to average total loans
|
1.14 | % | 0.22 | % | 0.05 | % | 0.00 | % | 0.43 | % | ||||||||||
Allowance
for loan losses to total gross loans at period end
|
1.65 | % | 1.81 | % | 1.71 | % | 1.27 | % | 1.24 | % | ||||||||||
Allowance
for loan losses to non-performing loans (5)
|
26.92 | % | 52.62 | % | 39.96 | % | 125.61 | % | 190.04 | % |
(1)
|
The
weighted average number of shares outstanding was computed based on the
average number of shares outstanding during each period as adjusted for
subsequent stock dividends.
|
(2)
|
Cash
dividends per common share are based on the actual number of common shares
outstanding on the dates of record as adjusted for subsequent stock
dividends.
|
(3)
|
Efficiency
ratio is total other expenses divided by net interest income and total
other income.
|
(4)
|
As
the Company has consolidated assets of less than $500 million, it does not
have a minimum consolidated requirement. The ratios presented
are those of the Bank.
|
(5)
|
Non-performing
loans includes non-accrual loans, loans past due 90 days and still
accruing and restructured loans not on
non-accrual.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
GENERAL
This
discussion is intended to assist in understanding the financial condition and
results of operations of the Company. This discussion should be read
in conjunction with the Consolidated Financial Statements and accompanying Notes
contained in this report.
MANAGEMENT
STRATEGY
The
Company's goal is to serve as a community-oriented financial institution serving
the northwestern New Jersey, northeastern Pennsylvania and Orange County, New
York marketplace. While offering traditional community bank loan and
deposit products and services, the Company obtains significant non-interest
income through its Tri-State Insurance Agency, Inc. ("Tri-State"), insurance
brokerage operations and the sale of non-deposit products. We report
the operations of Tri-State as a separate segment from our commercial banking
operations. See Note 2 to the Consolidated Financial Statements for December 31,
2009 included herein for more financial data regarding our two
segments.
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 those discussed
under Item 1A – “Risk Factors” of this Annual Report on Form 10-K and to the
following: changes to interest rates, the ability to control costs and expenses,
the Company’s ability to integrate new technology into its operations, general
economic conditions, the success of the Company’s efforts to diversify its
revenue base by developing additional sources of non-interest income while
continuing to manage its existing fee based business, the impact of changing
statutory and regulatory requirements on the Company and the risks inherent in
integrating acquisitions into the Company and commencing operations in new
markets. 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.
CRITICAL
ACCOUNTING POLICIES
Our
accounting policies are fundamental to understanding Management's Discussion and
Analysis of Financial Condition and Results of Operations. Our
accounting policies are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements for December 31, 2009 included
herein. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions about future events that affect the amounts reported in our
Consolidated Financial Statements and accompanying Notes. Since
future events and their effect cannot be determined with absolute certainty,
actual results may differ from those estimates. Management makes
adjustments to its assumptions and judgments when facts and circumstances
dictate. The amounts currently estimated by us are subject to change
if different assumptions as to the outcome of future events were
made. We evaluate our estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Management believes the following critical
accounting policies encompass the more significant judgments and estimates used
in preparation of our consolidated financial statements.
Allowance for
Loan Losses. The provision for loan losses charged to operating expense
reflects the amount deemed appropriate by management to provide for known and
inherent losses in the existing loan portfolio. Management's judgment
is based on the evaluation of the past experience of individual loans, the
assessment of current economic conditions, and other relevant
factors. Loan losses are charged directly against the allowance for
loan losses and recoveries on previously charged-off loans are added to the
allowance. Management uses significant estimates to determine the
allowance for loan losses. Consideration is given to a variety of
factors in establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, borrowers'
perceived financial and managerial strengths, the adequacy of underlying
collateral, if collateral dependent, or present value of future cash flows, and
other relevant factors. Since the sufficiency of the allowance for
loan losses is dependent to a great extent on conditions that may be beyond our
control, it is possible that management's estimates of the allowance for loan
losses and actual results could differ in the near term. Although we
believe that we use the best information available to establish the allowance
for loan losses, future additions to the allowance may be necessary if certain
future events occur that cause actual results to differ from the assumptions
used in making the evaluation. For example, a downturn in the local
economy could cause increases in non-performing loans. Additionally,
a decline in real estate values could cause some of our loans to become
inadequately collateralized. In either case, this may require us to
increase our provisions for loan losses, which would negatively
impact
earnings. Additionally, a large loss could deplete the allowance and
require increased provisions to replenish the allowance, which would negatively
impact earnings. Finally, regulatory authorities, as an integral part
of their examination, periodically review the allowance for loan
losses. They may require additions to the allowance for loan losses
based upon their judgments about information available to them at the time of
examination. Future increases to our allowance for loan losses,
whether due to unexpected changes in economic conditions or otherwise, could
adversely affect our future results of operations.
Stock
Compensation Plans. The Company currently
has several stock plans in place for employees and directors
of the Company. The Company accounts for stock-based compensation
under the accounting guidance of FASB ASC 718, Compensation-Stock Compensation,
which requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The stock
compensation accounting guidance requires that compensation cost for all stock
awards be calculated and recognized over predefined vesting
periods.
Income
Taxes. Management considers accounting for income taxes as a
critical accounting policy due to the subjective nature of certain estimates
that are involved in the calculation and evaluation of the timing and
recognition of resulting tax assets and liabilities. Management uses
the asset liability method of accounting for income taxes in which deferred tax
assets and liabilities are established for the temporary differences between the
financial reporting basis and the tax basis of the Company’s assets and
liabilities. Deferred tax expense is the result of changes between
deferred tax assets and liabilities. The principal types of
differences between assets and liabilities for financial statement and tax
return purposes are allowance for loan losses, deferred compensation and
securities available for sale.
Goodwill and
Other Intangible Assets. The Company has recorded
goodwill of $2.8 million at December 31, 2009 primarily related to the
acquisition of Tri-State Insurance Agency in October of 2001. FASB
ASC 350, Intangibles-Goodwill
and Others, requires that goodwill is not amortized to expense, but
rather that it be tested for impairment at least annually. The
Company periodically assesses whether events or changes in circumstances
indicate that the carrying amounts of goodwill require additional impairment
testing. The Company performs its annual impairment test on the
goodwill of Tri-State in the fourth quarter of each calendar year. If
the fair value of the reporting unit exceeds the book value, no write-downs of
goodwill are necessary. If the fair value is less than the book
value, an additional test is necessary to assess the proper carrying value of
goodwill. The Company determined that no impairment write-offs were
necessary during 2009 and 2008.
Business
unit valuation is inherently subjective, with a number of factors based on
assumptions and management judgments. Among these are future growth
rates, discount rates and earnings capitalization rates. Changes in
assumptions and results due to economic conditions, industry factors and
reporting unit performance could result in different assessments of the fair
value and could result in impairment charges in the future.
Investment
Securities Impairment Evaluation. Management evaluates
securities for other-than-temporary impairment on at least a quarterly basis,
and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) if the Company does not
intend to sell the security, and it is more likely than not that the Company
will not have to sell the security before recovery of its cost basis, it will
recognize the credit component of an other-than–temporary impairment of the
security in earnings and the remaining portion in other comprehensive
income. For held to maturity securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the
noncredit portion of a previous other-then-temporary impairment should be
amortized prospectively over the remaining life of the security on the basis of
the timing of future estimated cash flows of the security. The
Company did not have any held for maturity securities in 2009 and
2008. The Company did not recognize an other-than-temporary
impairment charge in 2009 and did record a $3.5 million other-than-temporary
impairment in 2008.
COMPARISION
OF OPERATING RESULTS AT YEAR-END DECEMBER 31, 2009 and 2008
Overview.
Total assets were $454.8 million at year-end 2009 compared to $440.6 million at
year-end 2008, an increase of $14.2 million, or 3.2%. Total loans,
net of the allowance for loan losses, increased $12.4 million, or 3.9%, to
$327.5 million at December 31, 2009 from $315.1 million at December 31,
2008. Total deposits increased by $12.0 million, or 3.3% to $372.1
million at December 31, 2009 from $360.1 million at December 31,
2008. The increase in the Company’s balance sheet was driven by core
deposit growth, which funded the increases in loan receivable
balances.
Results of
Operations. For the year ended
December 31, 2009, the Company returned to profitability, earning net income of
$2.0 million compared to a net loss of $1.0 million for prior
year. Basic and diluted earnings per share were $0.62 for the year
ended December 31, 2009 compared to basic and diluted loss per share of ($0.32)
for the same period last year. For the year ended December 31, 2009
the Company had 3,247,723 average basic shares outstanding, compared to
3,291,710 average basic shares for the year ended December 31, 2008, as adjusted
for the 6.5% stock dividend.
The
Company’s results are primarily attributable to the increase in the net interest
income of $3.2 million and the absence of the $3.5 million other-than-temporary
impairment charge recognized by the Company in 2008 related to certain Fannie
Mae and Freddie Mac securities held by the Company, offset by a $2.0 million
increase to the provision for loan losses. The Company’s net interest
margin increased 48 basis points to 3.60% in 2009 from 3.12% in 2008, while its
net interest spread (i.e., the difference between the average yield on the
Company’s interest earning assets and the average rate on its interest bearing
liabilities) increased 66 basis points to 3.39% in 2009 from 2.73% in
2008. These changes reflect reductions in the yield on the Company’s
earning assets being more than offset by reductions in the cost of the Company’s
liabilities in a declining rate environment.
Comparative Average Balance
and Average Interest Rates
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 for each of the years ended December 31,
2009 and 2008. The average balances of loans include non-accrual
loans, and associated yields include loan fees, which are considered adjustment
to yields.
Twelve Months Ended December
31,
|
||||||||||||||||||||||||
(Dollars in thousands)
|
2009
|
2008
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Earning
Assets:
|
Balance
|
Interest (1)
|
Rate (2)
|
Balance
|
Interest (1)
|
Rate (2)
|
||||||||||||||||||
Securities:
|
||||||||||||||||||||||||
Tax
exempt (3)
|
$ | 28,102 | $ | 1,747 | 6.22 | % | $ | 23,720 | $ | 1,458 | 6.15 | % | ||||||||||||
Taxable
|
59,035 | 2,587 | 4.38 | % | 47,234 | 2,266 | 4.80 | % | ||||||||||||||||
Total
securities
|
87,137 | 4,334 | 4.97 | % | 70,954 | 3,724 | 5.25 | % | ||||||||||||||||
Total
loans receivable (4)
|
326,740 | 19,259 | 5.89 | % | 307,845 | 19,150 | 6.22 | % | ||||||||||||||||
Other
interest-earning assets
|
19,208 | 45 | 0.23 | % | 14,749 | 261 | 1.77 | % | ||||||||||||||||
Total
earning assets
|
433,085 | $ | 23,638 | 5.46 | % | 393,548 | $ | 23,135 | 5.88 | % | ||||||||||||||
Non-interest
earning assets
|
36,355 | 31,359 | ||||||||||||||||||||||
Allowance
for loan losses
|
(5,824 | ) | (5,182 | ) | ||||||||||||||||||||
Total
Assets
|
$ | 463,616 | $ | 419,725 | ||||||||||||||||||||
Sources
of Funds:
|
||||||||||||||||||||||||
Interest
bearing deposits:
|
||||||||||||||||||||||||
NOW
|
$ | 57,928 | $ | 582 | 1.00 | % | $ | 58,878 | $ | 798 | 1.36 | % | ||||||||||||
Money
market
|
14,709 | 177 | 1.21 | % | 23,769 | 527 | 2.22 | % | ||||||||||||||||
Savings
|
169,541 | 2,759 | 1.63 | % | 85,707 | 2,350 | 2.74 | % | ||||||||||||||||
Time
|
101,565 | 2,803 | 2.76 | % | 127,475 | 5,071 | 3.98 | % | ||||||||||||||||
Total
interest bearing deposits
|
343,743 | 6,321 | 1.84 | % | 295,829 | 8,746 | 2.96 | % | ||||||||||||||||
Borrowed
funds
|
33,139 | 1,426 | 4.30 | % | 35,971 | 1,507 | 4.19 | % | ||||||||||||||||
Junior
subordinated debentures
|
12,887 | 306 | 2.38 | % | 12,887 | 590 | 4.57 | % | ||||||||||||||||
Total
interest bearing liabilities
|
389,769 | $ | 8,053 | 2.07 | % | 344,687 | $ | 10,843 | 3.15 | % | ||||||||||||||
Non-interest
bearing liabilities:
|
||||||||||||||||||||||||
Demand
deposits
|
38,154 | 39,303 | ||||||||||||||||||||||
Other
liabilities
|
2,303 | 2,036 | ||||||||||||||||||||||
Total
non-interest bearing liabilities
|
40,457 | 41,339 | ||||||||||||||||||||||
Stockholders'
equity
|
33,390 | 33,699 | ||||||||||||||||||||||
Total
Liabilities and Stockholders' Equity
|
$ | 463,616 | $ | 419,725 | ||||||||||||||||||||
Net
Interest Income and Margin (5)
|
$ | 15,585 | 3.60 | % | $ | 12,292 | 3.12 | % |
(1)
|
Includes
loan fee income
|
(2)
|
Average
rates on securities are calculated on amortized
costs
|
(3)
|
Full
taxable equivalent basis, using a 39% effective tax rate and adjusted for
TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense
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. Net
interest income is the difference between interest and fees on loans and other
interest-earning assets and interest paid on interest-bearing
liabilities. Changes in volume and mix of interest-earning assets and
the interest-bearing liabilities that support those assets, as well as changing
interest rates when differences exist in repricing dates of assets and
liabilities, directly affect net interest income.
Net
interest income, on a fully taxable equivalent basis (a 39% tax rate), increased
$3.3 million, or 26.8%, to $15.6 million for the year ended December 31, 2009
compared to $12.3 million in 2008. Total interest income, on a fully
taxable equivalent basis, increased $500 thousand to $23.6 million in 2009
compared to $23.1 million in 2008. Our total interest income reflects
a net increase in the volume of interest earning assets, offset by a net
decrease in the average rate earned on those assets. Total average
earning assets increased by $39.6 million to $433.1 million from $393.5 million
for the year ended December 31, 2008. The average rate earned on
total earning assets declined 42 basis points to 5.46% in 2009 from 5.88% for
2008.
Interest
expense decreased by $2.7 million to $8.1 million for the year ended December
31, 2009 from $10.8 million for the year ago period as a result of decreases in
market rates of interest. The average balance of interest bearing liabilities
increased $45.1 million, to $389.8 million for the year ended December 31, 2009
from $344.7 million the year earlier. The average rate paid on interest bearing
liabilities decreased 108 basis points to 2.07% for the current year from 3.15%
for the year ended December 31, 2008.
The net
interest margin increased, on a fully taxable equivalent basis, by 48 basis
points to 3.60% in the year ended December 31, 2009 compared to 3.12% for the
same period in 2008.
The
decrease in rate earned on earning assets and the decrease in rate paid on
interest bearing liabilities reflects the declining rate environment, as Federal
Reserve rate cuts implemented to stimulate the economy have resulted in lower
market rates on credit. In addition, higher non-accrual loan balances
in 2009 compared to 2008 negatively impacted the yield earned on earning assets
in 2009.
Interest
Income. Total interest income,
on a fully taxable equivalent basis, increased to $23.6 million for the year
ended December 31, 2009 compared to $23.1 million for the year ended December
31, 2008. Interest income from the securities portfolio increased by
$610 thousand and interest income from the loan portfolio increased by $109
thousand, offset by a decline in interest income of $216 thousand in other
interest-earning assets.
Total
interest income on the loan portfolio increased by $109 thousand to $19.3
million for the current year from $19.2 million in 2008. Although the
average balance in the loan portfolio increased $18.9 million, or 6.1%, for the
year ended December 31, 2009 compared to the year ended December 31, 2008, the
average rate earned on loans decreased 33 basis points to 5.89% for the year
ended December 31, 2009 from 6.22% for the same period in 2008. This
is the result of non-accrual loan balances increasing $7.4 million during the
year ended December 31, 2009 from the prior year end and lower market rates of
interest.
Total
interest income on securities, on a fully taxable equivalent basis, increased
$610 thousand, or 16.4%, from the year ended December 31, 2008 to the same
period in 2009, while the average balance of securities increased $16.2 million
over the same two periods. The average rate decreased 28 basis
points, from 5.25% in 2008 to 4.97% for 2009. The yield on taxable
securities declined 42 basis points to 4.38% in 2009 from 4.80%, a year earlier
as the average balance in taxable securities increased $11.8
million. On a tax equivalent basis the yield on tax exempt securities
increased 7 basis points to 6.22% in 2009 from 6.15% a year earlier, as the
average balance in tax exempt securities increased $4.4 million between the two
years.
Interest
Expense. The
Company’s interest expense for the year ended December 31, 2009 decreased $2.7
million, or 25.7%, to $8.1 million from $10.8 million for the same period in
2008, as the average balance in interest-bearing liabilities increased $45.1
million, or 13.1%, to $389.8 million from $344.7 million between the two
periods. The average rate paid on total interest-bearing liabilities
decreased by 108 basis points from 3.15% for the year ended December 31, 2008 to
2.07% for the same period in 2009. The decrease in interest expense
reflects a decline in current market rates of interest and the Company’s
continued promotion of a highly competitive savings product yielding lower
average rates of interest compared to time deposits.
The
promotion of the savings account product, which began in the first quarter of
2008, has changed the Company’s average balance breakdown between
products. Time deposits, which represented 43 percent of total
interest-bearing deposits in 2008, have been surpassed by average savings
deposits in 2009, which now account for 49 percent of the average
interest-bearing deposit balances. The average balance in savings
accounts increased $83.8 million, or 97.8%, to $169.5 million for the year ended
December 31, 2009 from $85.7 million for the same period in 2008,
as
the
average rate paid on those deposits decreased 111 basis points to 1.63% for the
year ended December 31, 2009 from 2.74% for the year ended December 31, 2008
following declining market rate of interest trends.
The
average balance of time deposits has decreased by $25.9 million, or 20.3%, to
$101.6 million for the year ended December 31, 2009 compared to $127.5 million
the prior year. The average rate paid on time deposits decreased 122
basis points from 3.98% for the period ended December 31, 2008 to 2.76% for the
same period in 2009. The average
balance in money market accounts has decreased $9.1 million, or 38.1%, to $14.7
million for the year ended December 31, 2009 from $23.8 million for the same
period in 2008. The average rate paid on money market deposits
decreased 101 basis points from 2.22% to 1.21% between year end 2008 and year
end 2009.
The
average balance in the Company’s borrowed funds decreased $2.8 million, or 7.9%,
to $33.1 million in the year ended December 31, 2009 as a $3.0 million nine
month repurchase agreement bearing an interest rate of 2.21% matured in December
of 2008. At December 31, 2009, the Company’s borrowed funds consisted
of six convertible notes and one amortizing advance from the Federal Home Loan
Bank. The interest expense on borrowed funds decreased $81 thousand
to $1.4 million for the year ended December 31, 2009 from $1.5 million for the
same period in 2008, while the average rate paid on borrowed funds increased 11
basis points to 4.30% for the year 2009 from 4.19% in 2008.
The
Company’s average balance in junior subordinated debentures remained unchanged
at $12.9 million for the year ended December 31, 2009 and 2008. The
interest rate paid on the debentures, which is tied to the three month LIBOR,
resets quarterly and averaged 2.38% for the year ended December 31, 2009, a
decline of 219 basis points from the average rate paid in 2008 of
4.57%.
The
following table reflects the impact on net interest income of changes in the
volume of earning assets and interest bearing liabilities and changes in rates
earned and paid by the Company on such assets and
liabilities. For purposes of this table, nonaccrual loans have
been included in the average loan balance. Changes due to both volume
and rate have been allocated in proportion to the relationship of the dollar
amount change in each.
December
31, 2009 v. 2008
|
||||||||||||
Increase
(decrease)
|
||||||||||||
Due to changes in:
|
||||||||||||
(Dollars in thousands)
|
Volume
|
Rate
|
Total
|
|||||||||
Securities:
|
||||||||||||
Tax
exempt
|
$ | 272 | $ | 17 | $ | 289 | ||||||
Taxable
|
491 | (170 | ) | 321 | ||||||||
Total
securities (1)
|
763 | (153 | ) | 610 | ||||||||
Total
loans receivable (2)
|
1,142 | (1,033 | ) | 109 | ||||||||
Other interest-earning
assets
|
61 | (277 | ) | (216 | ) | |||||||
Total net change in income on interest-earning
assets
|
1,966 | (1,463 | ) | 503 | ||||||||
Interest
bearing deposits:
|
||||||||||||
NOW
|
(13 | ) | (203 | ) | (216 | ) | ||||||
Money
Market
|
(159 | ) | (191 | ) | (350 | ) | ||||||
Savings
|
1,639 | (1,230 | ) | 409 | ||||||||
Time
|
(905 | ) | (1,363 | ) | (2,268 | ) | ||||||
Interest
bearing deposits
|
562 | (2,987 | ) | (2,425 | ) | |||||||
Borrowed
funds
|
(121 | ) | 40 | (81 | ) | |||||||
Junior subordinated
debentures
|
- | (284 | ) | (284 | ) | |||||||
Total net change in expense
on interest-bearing liabilities
|
441 | (3,231 | ) | (2,790 | ) | |||||||
Change in net interest
income
|
$ | 1,525 | $ | 1,768 | $ | 3,293 |
|
(1)
|
Fully
taxable equivalent basis, using 39% effective tax rate and adjusted for
TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense
disallowance.
|
|
(2)
|
Includes
loan fee income
|
Provision for
Loan Losses. The provision for loan
losses in 2009 was $3.4 million compared to a provision of $1.4 million in 2008,
an increase of $2.0 million. The increase in the provision is
primarily attributable to an increase in non-performing loans, which is due to
adverse economic conditions and declining real estate collateral values in the
Company’s trade area. As a result of these conditions, the Company’s
non-performing loan balance increased to $20.4 million at December 31, 2009 from
$11.0 million at December 31, 2008. The Company believes these loans
are adequately provided for in its loan loss provision or are sufficiently
collateralized at December 31, 2009. 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 activity in the allowance
during
the periods. Management reviews the adequacy of its allowance on an
ongoing basis and will provide additional provisions, as management may deem
necessary.
Non-Interest
Income. The
Company’s non-interest income increased by $3.5 million to $5.5 million for the
year ended December 31, 2009 from $2.0 million for the same period in
2008. The increase is primarily attributable to the absence of
impairment charges in 2009, while the Company incurred an other-than-temporary
impairment charge on equity securities of $3.5 million in connection with
certain Fannie Mae and Freddie Mac perpetual preferred stock in
2008. The Company’s non-interest income is primarily generated
through insurance commissions earned through the operation of Tri-State and
service charges on deposit accounts. The Company incurred
decreases in both of these areas as service charges on deposit account income
decreased $67 thousand, or 4.4%, to $1.5 million in 2009 and insurance
commissions decreased $223 thousand, or 8.9%, to $2.3 million for the year ended
December 31, 2009 from $2.5 million for the same period in
2008. Holding gains on trading securities also declined by $194
thousand to $5 thousand for the year ended December 31, 2009 from $199 thousand
one year earlier. Offsetting these decreases, gains on the sale of
premises and equipment increased $206 thousand, to $203 thousand for the year
ended December 31, 2009 compared to a loss of $3 thousand for the year ended
December 31, 2008 and gains on the sale of foreclosed real estate increased $248
thousand between the same two periods. Non-interest income from
SussexMortgage.com for the year ended December 31, 2009 was $102 thousand as
compared to $111 thousand a year earlier and is included in other non-interest
income.
Non-Interest
Expense. Total non-interest
expense increased $90 thousand, or 0.6%, from $14.6 million in 2008 to $14.7
million in 2009. The Company has made several cost reductions to
minimize the effects of the current economic climate by reducing its
controllable expenses. Efficiencies were gained by decreases in
salaries and employee benefits, inclusive of a $328 thousand accrual for a
former executive’s severance, of $194 thousand, or 2.6%. Furniture, fixtures and
data processing expenses have decreased $195 thousand, or 13.2%, in 2009 over
2008 as the expiration of depreciable asset lives have been greater than
replacement purchases. Advertising and promotion expenses decreased
$290 thousand, or 61.8%, in 2009 compared to the same period in 2008 as the
Company has reduced its agency-based marketing program. Professional fees
increased $147 thousand to $768 thousand for the year ended December 31, 2009.
This increase is substantially related to the Company’s non-performing assets.
Asset quality deterioration also contributed to an increase of $19 thousand in
expense for the write-down of foreclosed real estate and $92 thousand in
expenses related to the foreclosed properties. The write-downs are
due to the decline in fair value of these foreclosed properties, and the
additional expense is related to the ongoing cost to maintain those foreclosed
properties held by the Bank. During 2009, our expense for FDIC
deposit insurance premiums increased by $551 thousand, due to a one time special
assessment of $211 thousand and higher assessments rates applicable to all
insured institutions in 2009.
Income
Taxes. The
Company’s provision for income taxes was $452 thousand for the year ended
December 31, 2009, while the Company recognized a tax benefit of $1.1 million
for the year ended December 31, 2008. The tax benefit in 2008 was
attributable to the loss of Fannie Mae and Freddie Mac perpetual preferred stock
being recognized as an ordinary loss, rather than a capital loss.
COMPARISION
OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2009 AND 2008
At
December 31, 2009, the Company had total assets of $454.8 million compared to
total assets of $440.6 million at December 31, 2008, an increase of $14.2
million, or 3.2%. Net loans increased $12.4 million, or 3.9%, to $327.5 million
at December 31, 2009 from $315.1 million at December 31, 2008. Total
deposits increased to $372.1 million at December 31, 2009 from $360.1 million at
December 31, 2008.
Cash and Cash
Equivalents. The Company's cash and
cash equivalents increased by $2.2 million or 10.4%, at December 31, 2009 to
$23.1 million from $20.9 million at December 31, 2008. This increase
reflects the Company's increase in federal funds sold of $1.0 million to $14.3
million at December 31, 2009 from $13.3 million at year-end 2008. In addition,
cash and due from banks increased $1.2 million to $8.8 million at December 31,
2009 from $7.6 million one year earlier.
Trading
Securities and Securities Portfolio. The Company's
securities portfolio is designed to provide interest income, including
tax-exempt income, and also provide a source of liquidity, diversify the earning
assets portfolio, allow for management of interest rate risk, and provide
collateral for public fund deposits and borrowings. Securities are
classified as either trading securities or available for sale
securities. The portfolio is composed primarily of obligations of
U.S. Government agencies and government sponsored entities, including
collateralized mortgage obligations issued by such agencies and entities, and
tax-exempt municipal bonds.
The
Company periodically conducts reviews to evaluate whether unrealized losses on
its investment securities portfolio are deemed temporarily impaired or whether
an other-than-temporary impairment has occurred. Various inputs to
economic models are used to determine if an unrealized loss is
other-than-temporary. All of the Company’s debt and equity securities
have been evaluated as of December 31, 2009 and the Company does not consider
any security impaired. The Company evaluated the prospects of the
issuers in relation to the severity and the duration of the unrealized
losses. The Company’s securities in unrealized loss positions are
mostly driven by wider credit spreads and changes in interest
rates. Based on that evaluation the Company does not intend to sell
any security in an unrealized loss position, and it is more likely than not that
the Company will not have to sell any of its securities before recovery of its
cost basis.
All
securities are classified as trading securities or available for sale securities
and are stated at fair value. Trading securities are recorded at fair
value with changes in fair value included in earnings. Unrealized
gains and losses on securities available for sale are excluded from results of
operations, and are reported as a separate component of stockholders' equity net
of taxes. Securities classified as available for sale include
securities that may be sold in response to changes in interest rates, changes in
prepayment risk, the need to increase regulatory capital or other similar
requirements. The Company has no securities classified as held to
maturity. Management determines the appropriate classification of
securities at the time of purchase.
The
following table shows the carrying value of the Company's available for sale
security portfolio as of December 31, 2009, 2008 and 2007. Securities
available for sale are stated at their fair value.
December 31,
|
||||||||||||
(Dollars in thousands)
|
2009
|
2008
|
2007
|
|||||||||
U.S.
Government agencies
|
$ | 15,002 | $ | 7,963 | $ | 6,740 | ||||||
State
and political subdivisions
|
25,877 | 23,859 | 23,384 | |||||||||
Mortgage-backed
securities
|
28,082 | 28,701 | 16,321 | |||||||||
Corporate
debt securities
|
1,007 | - | - | |||||||||
Equity securities
|
1,347 | 1,749 | 1,952 | |||||||||
Total available for sale
|
$ | 71,315 | $ | 62,272 | $ | 48,397 |
Trading
securities, at fair value, consist of the following at December 31, 2009, 2008
and 2007.
(Dollars in thousands)
|
2009
|
2008
|
2007
|
|||||||||
U.S.
Government agencies
|
$ | - | $ | 5,744 | $ | 4,242 | ||||||
Mortgage-backed securities
|
2,955 | 7,546 | 10,017 | |||||||||
Total trading securities
|
$ | 2,955 | $ | 13,290 | $ | 14,259 |
The
Company's securities, available for sale, increased by $9.0 million, or 14.5%,
to $71.3 million at December 31, 2009 from $62.3 million at December 31,
2008. The Company purchased $45.1 million in new securities during
2009, $17.5 million in securities were sold and $19.7 million in securities
matured, were called and were repaid. There was a $1.1 million net
increase in unrealized gains in the available for sale portfolio; a $134
thousand realized gain on the sale of available for sale securities and $127
thousand in net amortization expense recorded during 2009.
As of
December 31, 2009 trading securities balances decreased $10.3 million to $3.0
million from $13.3 million at December 31, 2008, due to $2.5 million in paydowns
and amortization expense, $7.8 million in sales or called securities and a
realized gain of $5 thousand. There were no purchases of trading
securities during 2009. The securities portfolio contained no
high-risk securities or derivatives as of December 31, 2009.
The
contractual maturity distribution and weighted average yield of the Company's
securities, available for sale, at December 31, 2009 are summarized in the
following table. Securities available for sale are carried at
amortized cost in the table for purposes of calculating the weighted average
yield received on such securities. Weighted average yield is
calculated by dividing income within each maturity range by the outstanding
amount of the related investment and has not been tax-effected on the tax-exempt
obligations.
December
31, 2009
|
Due
under 1 Year
|
Due
1-5 Years
|
Due
5-10 Years
|
Due
over 10 Years
|
||||||||||||||||||||||||||||
(Dollars in thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
||||||||||||||||||||||||
Available
for sale:
|
||||||||||||||||||||||||||||||||
U.S.
Government agencies
|
$ | 1,500 | 1.45 | % | $ | 5,774 | 2.89 | % | $ | - | - | $ | 7,664 | 2.74 | % | |||||||||||||||||
State
and political subdivisions
|
3,427 | 1.24 | % | - | - | - | - | 22,560 | 4.34 | % | ||||||||||||||||||||||
Mortgage-backed
securities
|
- | - | 32 | 5.27 | % | 1,505 | 4.53 | % | 25,801 | 5.48 | % | |||||||||||||||||||||
Corporate
debt securities
|
1,005 | 3.72 | % | - | - | - | - | - | - | |||||||||||||||||||||||
Equity securities
|
- | - | - | - | - | - | 1,806 | 2.78 | % | |||||||||||||||||||||||
Total available for sale
|
$ | 5,932 | 1.71 | % | $ | 5,806 | 2.90 | % | $ | 1,505 | 4.53 | % | $ | 57,831 | 4.59 | % |
The
Company holds $2.0 million in Federal Home Loan Bank of New York stock at
December 31, 2009 that it does not consider an investment
security. Ownership of this restricted stock is required for
membership in the Federal Home Loan Bank of New York.
Loans. The loan portfolio
comprises the largest component of the Company's earning
assets. Total loans receivable, net of unearned income, at December
31, 2009 increased $12.1 million, or 3.8% to $333.0 million from $320.9 million
at year-end 2008. During the year ended December 31, 2009, new
originations have exceeded payoffs both through scheduled maturities and
prepayments. Increases in balances in 2009 occurred in loans secured by
non-residential real estate (an increase of $18.2 million, or 11.1%), and loans
secured by residential 1- 4 family real estate (an increase of $9.1 million, or
10.8%). These increases were partially offset by declines in
construction and land development loans (a decrease of $10.9 million, or 28.3%),
and commercial and industrial loans (a decrease of $5.3 million, or
23.9%). The Company continued to process mortgage originations
in-house and through its joint venture with the PNC Mortgage, Inc.
The
following table summarizes the composition of the Company's loan portfolio by
type as of December 31, 2005 through 2009:
December 31,
|
||||||||||||||||||||
(Dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Commercial
and industrial loans
|
$ | 17,016 | $ | 22,346 | $ | 20,702 | $ | 18.298 | $ | 16,667 | ||||||||||
Non-residential
real estate loans
|
183,262 | 165,019 | 154,559 | 139,428 | 110,391 | |||||||||||||||
One
to four family residential property loans
|
93,558 | 84,412 | 70,597 | 60,960 | 47,409 | |||||||||||||||
Construction
and land development loans
|
27,555 | 38,413 | 41,954 | 30,094 | 23,154 | |||||||||||||||
Consumer
loans
|
978 | 1,248 | 1,483 | 1,620 | 1,550 | |||||||||||||||
Other loans
|
10,770 | 9,572 | 11,470 | 12,055 | 12,318 | |||||||||||||||
Total gross loans
|
$ | 333,139 | $ | 321,010 | $ | 300,765 | $ | 262,455 | $ | 211,489 |
The
increase in loans was funded during 2009 by an increase in the Company's
deposits. The end of year loan to deposit ratios for 2009 and 2008 were 88.0%
and 87.5%, respectively.
The
maturity ranges of the loan portfolio and the amounts of loans with
predetermined interest rates and floating rates in each maturity range, as of
December 31, 2009 are presented in the following table.
December 31, 2009
|
||||||||||||
Due
Under
|
Due
1-5
|
Due
Over
|
||||||||||
(Dollars in thousands)
|
One Year
|
Years
|
Five Years
|
|||||||||
Real
estate:
|
||||||||||||
Commercial
mortgage
|
$ | 15,158 | $ | 16,958 | $ | 151,147 | ||||||
Construction
and land development
|
25,965 | 50 | 1,540 | |||||||||
Residential mortgage
|
1,539 | 6,603 | 85,416 | |||||||||
Total
real estate
|
42,662 | 23,611 | 238,102 | |||||||||
Commercial
and industrial
|
3,791 | 8,051 | 5,173 | |||||||||
Consumer and other
|
225 | 1,262 | 10,261 | |||||||||
Total loans
|
$ | 46,679 | $ | 32,924 | $ | 253,536 | ||||||
Interest
rates:
|
||||||||||||
Predetermined
|
38,326 | 23,897 | 97,543 | |||||||||
Floating
|
8,353 | 9,027 | 155,993 | |||||||||
Total loans
|
$ | 46,679 | $ | 32,924 | $ | 253,536 |
Loan and Asset
Quality. Non-performing assets
consist of non-accrual loans, loans over ninety days delinquent and still
accruing interest, renegotiated loans not on non-accrual, foreclosed real estate
and impaired securities. Total non-performing assets increased by
$9.3 million, or 61.7%, to $24.3 million at year end 2009 from $15.0 million at
year end 2008. The Company's non-accrual loan balance increased $7.4
million to $17.1 million at December 31, 2009 from $9.7 million at December 31,
2008. There were $1.4 million in loans past due over 90 days and
still accruing interest, $1.9 million in renegotiated loans not on non-accrual,
$3.8 million in foreclosed real estate and no impaired securities at December
31, 2009.
The
largest increase in non-performing assets was an $8.2 million increase in
non-accrual real estate loans. As residential non-accrual real estate loans
decreased $439 thousand from $897 thousand at December 31, 2008, non-residential
non-accrual real estate loans increased $8.7 million to $12.1 million at
year-end 2009. This increase is reflective of the overall decline in
the economy and commercial real estate market. As a result of this
increase in non-performing loans, the ratio of non-performing loans to total
loans increased to 6.13% at December 31, 2009 from 3.44% one year
earlier.
The
Company seeks to actively manage its non-performing assets. In
addition to active monitoring and collecting on delinquent loans, management has
a loan review process for customers with aggregate relationships of $500,000 or
more if the credit(s) are unsecured or secured, in whole or substantial part, by
collateral other than real estate and $1,000,000 or more if the credit(s) are
secured in whole or substantial part by real estate.
Management
continues to monitor the Company's asset quality and believes that the
non-accrual loans are adequately collateralized and anticipated material losses
have been adequately reserved for in the allowance for loan losses.
The
following table provides information regarding risk elements in the loan and
securities portfolio as of December 31, 2005 through 2009.
December 31,
|
||||||||||||||||||||
(Dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Non-accrual
loans:
|
||||||||||||||||||||
Commercial
|
$ | 240 | $ | 336 | $ | 449 | $ | - | $ | - | ||||||||||
Consumer
|
1 | 11 | 11 | - | - | |||||||||||||||
Construction
|
4,307 | 5,042 | 10,210 | 465 | - | |||||||||||||||
Mortgage
|
12,590 | 4,356 | 1,631 | 942 | 816 | |||||||||||||||
Total
nonaccrual loans
|
17,138 | 9,745 | 12,301 | 1,407 | 816 | |||||||||||||||
Loans
past due 90 days and still accruing
|
1,392 | - | 69 | 746 | 535 | |||||||||||||||
Restructured loans
|
1,885 | 1,302 | 494 | 506 | 25 | |||||||||||||||
Total
non-performing loans
|
20,415 | 11,047 | 12,864 | 2,659 | 1,376 | |||||||||||||||
Impaired
securities
|
- | 93 | - | - | - | |||||||||||||||
Foreclosed real estate
|
3,843 | 3,864 | - | - | - | |||||||||||||||
Total non-performing assets
|
$ | 24,258 | $ | 15,004 | $ | 12,864 | $ | 2,659 | $ | 1,376 | ||||||||||
Non-performing loans to total
loans
|
6.13 | % | 3.44 | % | 4.28 | % | 1.01 | % | 0.65 | % | ||||||||||
Non-performing assets to total
assets
|
5.33 | % | 3.41 | % | 3.27 | % | 0.75 | % | 0.44 | % | ||||||||||
Interest income received on nonaccrual
loans
|
$ | 488 | $ | 61 | $ | 50 | $ | 10 | $ | 42 | ||||||||||
Interest income that would have been recorded
under the original terms of the loans
|
$ | 1,153 | $ | 858 | $ | 653 | $ | 127 | $ | 48 |
Allowance for
Loan Losses. The allowance consists
of general and allocated components. The allocated component relates
to loans that are classified as impaired. For those loans that are
classified as impaired, an allowance is established when the discounted cash
flows, collateral value or observable market price of the impaired loan is lower
than the carrying value of that loan. The general component covers
non-classified loans and is based on historical charge-off experience and
expected losses derived from the Company’s internal risk rating
process. Other adjustments may be made to the allowance for pools of
loans after an assessment of internal or external influences on credit quality
that are not fully reflected in the historical loss or risk rating
data.
Management
regularly assesses the appropriateness and adequacy of the loan loss reserve in
relation to credit exposure associated with individual borrowers, overall trends
in the loan portfolio and other relevant factors, and believes the reserve is
reasonable and adequate for each of the periods presented.
At
December 31, 2009, the allowance for loan losses was $5.5 million, a decrease of
$317 thousand, or 5.5%, from $5.8 million at December 31, 2008. The
provision for loan losses was $3.4 million and there were $3.9 million
in
charge-offs
and $152 thousand in recoveries during 2009. The allowance for loan
losses as a percentage of total loans was 1.65% at December 31, 2009 compared to
1.81% on December 31, 2008.
The
decrease in the allowance was due to two significant charge-offs taken in 2009
totaling $2.6 million. One charge-off was related to the decline in
the real estate value on a one to four family construction project and the
second, on a commercial real estate investment project. Offsetting
these charge-offs was a $2.0 million increase in the provision for loan losses,
mostly due to increased balances in non-performing loans coupled by declines in
appraisal values and an increase in historical loss trends. The
Company continually evaluates loans for impairment in conjunction with an active
appraisal review process to determine collateral values in a timely
manner.
The table
below presents information regarding the Company's provision and allowance for
loan losses for each of the periods presented.
Year Ended December 31,
|
||||||||||||||||||||
(Dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Balance
at beginning of year
|
$ | 5,813 | $ | 5,140 | $ | 3,340 | $ | 2,615 | $ | 2,274 | ||||||||||
Provision
charged to operating expenses
|
3,404 | 1,350 | 1,930 | 733 | 1,138 | |||||||||||||||
Recoveries
of loans previously charged-off:
|
||||||||||||||||||||
Commercial
|
4 | - | 2 | - | 198 | |||||||||||||||
Consumer
|
17 | 30 | 46 | 86 | 11 | |||||||||||||||
Real Estate
|
131 | 9 | 6 | - | 1 | |||||||||||||||
Total recoveries
|
152 | 39 | 54 | 86 | 210 | |||||||||||||||
Loans
charged-off:
|
||||||||||||||||||||
Commercial
|
1,344 | 34 | 70 | - | 398 | |||||||||||||||
Consumer
|
66 | 110 | 102 | 94 | 80 | |||||||||||||||
Real Estate
|
2,463 | 572 | 12 | - | 529 | |||||||||||||||
Total charge-offs
|
3,873 | 716 | 184 | 94 | 1,007 | |||||||||||||||
Net charge-offs
|
3,721 | 677 | 130 | 8 | 797 | |||||||||||||||
Balance at end of year
|
$ | 5,496 | $ | 5,813 | $ | 5,140 | $ | 3,340 | $ | 2,615 | ||||||||||
Net
charge-offs to average loans outstanding
|
1.14 | % | 0.22 | % | 0.05 | % | 0.00 | % | 0.43 | % | ||||||||||
Allowance for loan losses to year-end
loans
|
1.65 | % | 1.81 | % | 1.71 | % | 1.27 | % | 1.24 | % |
The table
below presents details concerning the allocation of the allowance for loan
losses to the various categories for each of the periods
presented. The allocation is made for analytical purposes and it is
not necessarily indicative of the categories in which future credit losses may
occur. The total allowance is available to absorb losses from any
category of loans.
Allowance for Loans Losses at December
31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
%
of
|
%
of
|
%
of
|
||||||||||||||||||||||
(Dollars in thousands)
|
Amount
|
Gross Loans
|
Amount
|
Gross Loans
|
Amount
|
Gross Loans
|
||||||||||||||||||
Commercial
|
$ | 380 | 5.11 | % | $ | 526 | 6.96 | % | $ | 438 | 6.88 | % | ||||||||||||
Consumer
and other loans
|
94 | 3.53 | % | 55 | 3.37 | % | 72 | 4.31 | % | |||||||||||||||
Real
estate, construction and development:
|
||||||||||||||||||||||||
Commercial
|
4,695 | 63.28 | % | 4,519 | 63.37 | % | 4,367 | 65.34 | % | |||||||||||||||
Residential
|
327 | 28.08 | % | 713 | 26.30 | % | 263 | 23.47 | % | |||||||||||||||
Total
|
$ | 5,496 | 100.00 | % | $ | 5,813 | 100.00 | % | $ | 5,140 | 100.00 | % |
Allowance for Loans Losses at December
31,
|
||||||||||||||||
2006
|
2005
|
|||||||||||||||
%
of
|
%
of
|
|||||||||||||||
(Dollars in thousands)
|
Amount
|
Gross Loans
|
Amount
|
Gross Loans
|
||||||||||||
Commercial
|
$ | 405 | 6.97 | % | $ | 477 | 7.88 | % | ||||||||
Consumer
and other loans
|
66 | 5.21 | % | 42 | 6.55 | % | ||||||||||
Real
estate, construction and development:
|
||||||||||||||||
Commercial
|
2,674 | 64.59 | % | 1,939 | 63.15 | % | ||||||||||
Residential
|
195 | 23.23 | % | 157 | 22.42 | % | ||||||||||
Total
|
$ | 3,340 | 100.00 | % | $ | 2,615 | 100.00 | % |
Premises and
Equipment; Other Assets. Premises and equipment
decreased by $1.4 million, or 17.1%, from $8.5 million at December 31, 2008 to
$7.1 million at December 31, 2009. This decrease is largely due to
the sale of a bank owned property for $1.1 million, with a net gain on the sale
of $203 thousand and depreciation expenses of $755 thousand for the year ended
December 31, 2009.
Other
assets increased from $9.7 million at December 31, 2008 to $12.2 million at
December 31, 2009, an increase of $2.6 million, or 26.5%. This
increase was primarily due to the prepayment of three years of FDIC assessments
totaling $2.9 million.
Deposits. Total deposits increased
$12.0 million, or 3.3%, from $360.1 million at December 31, 2008 to $372.1
million at December 31, 2009. Non-interest bearing deposits decreased
$629 thousand, or 1.8%, to $34.2 million at December 31, 2009 from $34.8 million
at December 31, 2008; interest-bearing deposits increased $12.6 million, or
3.9%, to $337.9 million at December 31, 2009 from $325.3 million at December 31,
2008. The increase in interest bearing deposits was attributable to
the Company’s offering of a highly competitive savings product. Although this
product has increased the rate paid on savings accounts, management believes it
is a more cost effective source of deposits than time deposits, and provides
greater opportunities to establish stronger customer relationships and cross
marketing opportunities. Management continues to monitor the shift in deposits
through its Asset/Liability Committee.
Total
average deposits increased $46.8 million from $335.1 million for the year ended
December 31, 2008 to $381.9 million for the year ended December 31, 2009, a
14.0% increase. Average time deposits decreased $25.9 million, or
20.3% to $101.6 million for 2009, from $127.5 million for
2008. Average money market accounts decreased to $14.7 million for
2009, a decrease of $9.1 million, or 38.1%, from $23.8 million for
2008. The change in the deposit portfolio reflects the offering of a
competitive savings product. The average savings account balances increased
$83.8 million, or 97.8% from $85.7 million for 2008 to $169.5 million for
2009. The Company’s average non-interest bearing demand deposits
decreased $1.1 million, or 2.9%, during 2009.
The
average balances and weighted average rates paid on deposits for 2009, 2008 and
2007 are presented below.
Year Ended December 31,
|
||||||||||||||||||||||||
2009
Average
|
2008
Average
|
2007
Average
|
||||||||||||||||||||||
(Dollars in thousands)
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
||||||||||||||||||
Demand,
non-interest bearing
|
$ | 38,154 | $ | 39,303 | $ | 37,663 | ||||||||||||||||||
Now
accounts
|
57,928 | 1.00 | % | 58,878 | 1.36 | % | 60,377 | 2.12 | % | |||||||||||||||
Money
market accounts
|
14,709 | 1.21 | % | 23,769 | 2.22 | % | 37,317 | 3.69 | % | |||||||||||||||
Savings
|
169,541 | 1.63 | % | 85,707 | 2.74 | % | 38,142 | 0.91 | % | |||||||||||||||
Time
|
101,565 | 2.76 | % | 127,475 | 3.98 | % | 138,633 | 4.85 | % | |||||||||||||||
Total deposits
|
$ | 381,897 | $ | 335,132 | $ | 312,132 |
The
remaining maturity for certificates of deposit accounts of $100,000 or more as
of December 31, 2009 is presented in the following table.
(Dollars in thousands)
|
2009
|
|||
3
months or less
|
$ | 6,377 | ||
3
to 6 months
|
12,918 | |||
6
to 12 months
|
12,067 | |||
Over 12 months
|
6,890 | |||
Total
|
$ | 38,252 |
Borrowings. Borrowings consist of
long-term advances from the Federal Home Loan Bank. These advances
are secured under terms of a blanket collateral agreement by a pledge of
qualifying investment securities and certain mortgage loans. At
December 31, 2009 and 2008 the Company had $33.1 million in notes outstanding at
a weighted average interest rate of 4.25%.
The
Company had no short-term borrowings outstanding at December 31,
2009. The following table summarizes short-term borrowing and
weighted average interest rates paid during the past three years.
Year Ended December 31,
|
||||||||||||
(Dollars in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Average
daily amount of short-term borrowings outstanding during the
period
|
$ | 22 | $ | 185 | $ | 28 | ||||||
Weighted
average interest rate on average daily short-term
borrowings
|
0.38 | % | 2.87 | % | 5.67 | % | ||||||
Maximum
short-term borrowings outstanding at any month-end
|
- | $ | 1,175 | $ | 2,650 | |||||||
Short-term
borrowings outstanding at period end
|
- | - | - | |||||||||
Weighted average interest rate on short-term
borrowings at period end
|
- | - | - |
Junior
Subordinated Debentures. On June 28, 2007, the
Company raised $12.5 million in capital through the issuance of junior
subordinated debentures to a non-consolidated statutory trust
subsidiary. The subsidiary in turn issued $12.5 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 plus
144 basis points and adjusts quarterly. The rate at December 31, 2009
was 1.69%. The capital securities are redeemable by Sussex Bancorp
during the first five years at a redemption price of 103.5% of par for the first
year and thereafter on a sliding scale down to 100% of par on or after September
15, 2012 in whole or in part or earlier if the regulatory capital or tax
treatment of the securities is substantially changed. These trust
preferred securities must be redeemed upon final maturity on September 15,
2037. The proceeds of these trust preferred securities which
have been contributed to the Bank are included in the Bank’s capital ratio
calculations and treated as Tier I Capital.
In
accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51” (codified within ASC 810),
our wholly-owned subsidiaries, Sussex Capital Trust I and Sussex Capital Trust
II, are not included in our consolidated financial statements. For
regulatory reporting purposes, the Federal Reserve allows trust preferred
securities to continue to qualify as Tier I Capital subject to specified
limitations.
Equity. Stockholders'
equity inclusive of accumulated other comprehensive income, net of income taxes,
was $34.5 million at December 31, 2009, an increase of $2.6 million from the
$31.9 million at year-end 2008. Stockholders' equity increased due to
$2.0 million in net income recorded in 2009, a $52 thousand increase from
compensation expense for restricted stock grants and an unrealized gain on
securities available for sale, net of income tax, of $683
thousand. These increases were offset by a $30 thousand decrease in
common stock due to the purchase and retirement of treasury shares and cash
dividends paid of $99 thousand.
LIQUIDITY
AND CAPITAL RESOURCES
It is
management's intent to fund future loan demand with deposits and maturities and
pay downs on investments. In addition, the Company is a member of the
Federal Home Loan Bank of New York and at December 31, 2009 had the ability to
borrow up to $65.3 million against selected mortgages as collateral for
borrowings. The Company also has available an overnight line of
credit and a one-month overnight repricing line of credit, each in the amount of
$47.9 million at the Federal Home Loan Bank and an overnight line of credit in
the amount of $4.0 million at the Atlantic Central Bankers Bank.
The
Company has borrowings that consist of advances from the Federal Home Loan Bank
("FHLB"). The Company's long-term borrowings total $33.1 million at
December 31, 2009 and are secured under terms of a blanket collateral agreement
by a pledge of certain mortgage loans. The borrowings consist of six
long-term notes that mature between December 21, 2010 and December 26, 2017,
each with convertible options which allow the FHLB to change the note to then
current market rates, and one $3.1 million amortizing advance that matures on
November 3, 2010. The interest rates on these borrowings range from
3.66% to 5.14%.
At
December 31, 2009, the amount of liquid assets remained at a level management
deemed adequate to ensure that contractual liabilities, depositors' withdrawal
requirements, and other operational customer credit needs could be
satisfied. At December 31, 2009, liquid investments totaled $23.1
million, and all mature within 30 days.
At
December 31, 2009, the Company had $3.0 million in trading securities and $71.3
million in securities available for sale. Of the available for sale
securities, $30.1 million had $929 thousand of unrealized losses and therefore
are not available for liquidity purposes because management’s intent is to hold
them until market recovery.
The
Bank's regulators have classified and defined bank capital as consisting of Tier
I Capital, which includes tangible stockholders' equity for common stock and
certain preferred stock and other hybrid instruments, and Tier II Capital, which
includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for Tier I
capital.
The
Bank's regulators have implemented risk based guidelines which require banks to
maintain certain minimum capital as a percent of such assets and certain
off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). Banks are required to maintain Tier I capital
as a percent of risk-adjusted assets of 4.0% and Tier II capital as of
risk-adjusted assets of 8.0% at a minimum. At December 31, 2009, the
Bank's Tier I and Tier II capital ratios were 11.91% and 13.17%, respectively.
The Company also maintained $830 thousand in cash and cash equivalents which
could be contributed to the Bank as capital.
In
addition to the risk-based guidelines discussed above, the Bank's regulators
require that banks which meet the regulators' highest performance and
operational standards maintain a minimum leverage ratio (Tier I capital as a
percent of tangible assets) of 4.0%. For those banks with higher
levels of risk or that are experiencing or anticipating growth, the minimum will
be proportionately increased. Minimum leverage ratios for each bank
and bank holding company are established and updated through the ongoing
regulatory examination process. As of December 31, 2009, the Bank had
a leverage ratio of 9.07%.
Off-Balance Sheet
Arrangements. The Company's financial
statements do not reflect off-balance sheet arrangements that are made in the
normal course of business. These off-balance sheet arrangements
consist of unfunded loans and letters of credit made under the same standards as
on-balance sheet instruments. These unused commitments, at December
31, 2009 totaled $33.0 million. This consisted of $580 thousand in
commitments to grant commercial and residential loans, $2.4 million in
commercial and residential construction lines of credit, $6.8 million in
commercial lines of credit, $13.8 million in home equity lines of credit, and
the remainder in other unused commitments. These instruments have
fixed maturity dates, and because many of them will expire without being drawn
upon, they do not generally present any significant liquidity risk to the
Company. Management believes that any amounts actually drawn upon can
be funded in the normal course of operations.
INTEREST
RATE RISK
An
interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Interest rate sensitivity is the
volatility of a Company's earnings from a movement in market interest
rates. Interest rate "gap" analysis is a common, though imperfect,
measure of interest rate risk. We do not employ gap analysis as a
rate risk management tool, but rather we rely upon earnings at risk analysis to
forecast the impact on our net interest income of instantaneous 100 and 200
basis point increases in market rates. In assessing the impact on
earnings, the rate shock analysis assumes that no change occurs in our funding
sources or types of assets in response to the rate change.
Our Board
of Directors has established limits for interest rate risk based on the
percentage change in interest income we would incur in differing interest rate
scenarios. At December 31, 2009 the percentage of change in interest
income in the event of a 100 or 200 basis point change in interest rates was
within the policy limits.
Our
financial modeling simulates our cash flows, interest income and interest
expense from earning assets and interest bearing liabilities for a twelve month
period in each of the different interest rate environments, using actual
individual deposit, loan and investment maturities and rates in the model
calculations. Assumptions regarding the likelihood of prepayments on
residential mortgage loans and investments are made based on historical
relationships between interest rates and prepayments. Commercial
loans with prepayment penalties are assumed to pay on schedule to
maturity. In actual practice, commercial borrowers may request and be
granted interest rate reductions during the life of a commercial loan due to
competition from financial institutions and declining interest
rates.
The
following table sets forth our interest rate risk profile at December 31, 2009
and 2008. The interest rate sensitivity of our assets and liabilities
and the impact on net interest income illustrated in the following table would
vary substantially if different assumptions were used or if actual experience
differs from that indicated by the assumptions.
|
2009
|
2008
|
||||||||||||||||||||||
Change
in
|
Percent
|
Gap
as a
|
Change
in
|
Percent
|
Gap
as a
|
|||||||||||||||||||
Net
Interest
|
Change
in Net
|
%
of
|
Net
Interest
|
Change
in Net
|
%
of
|
|||||||||||||||||||
(Dollars in thousands)
|
Income
|
Interest Income
|
Total Assets
|
Income
|
Interest Income
|
Total Assets
|
||||||||||||||||||
Down
200 basis points
|
$ | (1,070 | ) | -0.24 | % | 11.82 | % | $ | (412 | ) | -0.09 | % | 4.71 | % | ||||||||||
Down
100 basis points
|
(227 | ) | -0.05 | % | 5.03 | % | 76 | 0.02 | % | -1.74 | % | |||||||||||||
Up
100 basis points
|
(233 | ) | -0.05 | % | -5.14 | % | (497 | ) | -0.11 | % | -11.37 | % | ||||||||||||
Up 200 basis points
|
(837 | ) | -0.19 | % | -9.25 | % | (1,376 | ) | -0.32 | % | -15.75 | % |
IMPACT
OF INFLATION AND CHANGING PRICES
Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, the level
of interest rates has a more significant impact on a financial institution's
performance than general levels of inflation. Interest rates do not
necessarily move in the same direction or change with the same magnitude as the
price of goods and services, which are affected by
inflation. Accordingly, the liquidity, interest rate sensitivity and
maturity characteristics of the Company's assets and liabilities are more
indicative of its ability to maintain acceptable performance
levels. Management of the Company monitors and seeks to mitigate the
impact of interest rate changes by attempting to match the maturities of assets
and liabilities, thus seeking to minimize the potential effect of
inflation.
ITEM
7A.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
Not
Applicable
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
TABLE
OF CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
ON
CONSOLIDATED FINANCIAL STATEMENTS
|
30
|
CONSOLIDATED
BALANCE SHEETS
|
|
AS
OF DECEMBER 31, 2009 AND 2008
|
31
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
32
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
33
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
34
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
35
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM-ON
CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders Sussex Bancorp
Franklin,
New Jersey
We have
audited the accompanying consolidated balance sheets of Sussex Bancorp and its
subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years then ended. Sussex Bancorp and its subsidiary’s management are responsible
for these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sussex Bancorp and its
subsidiary as of December 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Allentown,
Pennsylvania
March 22,
2010
SUSSEX BANCORP
CONSOLIDATED
BALANCE SHEETS
December 31,
|
||||||||
(Dollars
In Thousands)
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 8,779 | $ | 7,602 | ||||
Federal
funds sold
|
14,300 | 13,310 | ||||||
Cash
and cash equivalents
|
23,079 | 20,912 | ||||||
Interest
bearing time deposits with other banks
|
100 | 100 | ||||||
Trading
securities
|
2,955 | 13,290 | ||||||
Securities
available for sale
|
71,315 | 62,272 | ||||||
Federal
Home Loan Bank Stock, at cost
|
2,045 | 1,975 | ||||||
Loans
receivable, net of unearned income
|
332,959 | 320,880 | ||||||
Less: allowance
for loan losses
|
5,496 | 5,813 | ||||||
Net
loans receivable
|
327,463 | 315,067 | ||||||
Foreclosed
real estate, net of allowance for losses of $893 for 2009
|
3,843 | 3,864 | ||||||
and
$437 in 2008
|
||||||||
Premises
and equipment, net
|
7,065 | 8,526 | ||||||
Accrued
interest receivable
|
1,943 | 2,115 | ||||||
Goodwill
|
2,820 | 2,820 | ||||||
Other
assets
|
12,213 | 9,654 | ||||||
Total
Assets
|
$ | 454,841 | $ | 440,595 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Liabilities:
|
||||||||
Deposits:
|
||||||||
Non-interest
bearing
|
$ | 34,155 | $ | 34,784 | ||||
Interest
bearing
|
337,920 | 325,297 | ||||||
Total
Deposits
|
372,075 | 360,081 | ||||||
Borrowings
|
33,090 | 33,146 | ||||||
Accrued
interest payable and other liabilities
|
2,262 | 2,571 | ||||||
Junior
subordinated debentures
|
12,887 | 12,887 | ||||||
Total
Liabilities
|
420,314 | 408,685 | ||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock, no par value, 1,000,000 shares authorized; none
issued
|
- | - | ||||||
Common
stock, no par value, 5,000,000 shares authorized;
|
||||||||
issued
shares 3,259,786 in 2009 and 3,261,362 in 2008;
|
||||||||
outstanding
shares 3,245,811 in 2009 and 3,248,417 in 2008
|
27,805 | 27,783 | ||||||
Retained
earnings
|
6,577 | 4,665 | ||||||
Accumulated
other comprehensive income (loss)
|
145 | (538 | ) | |||||
Total
Stockholders' Equity
|
34,527 | 31,910 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 454,841 | $ | 440,595 |
See Notes
to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year Ended December 31,
|
||||||||
(Dollars In Thousands Except Per Share
Data)
|
2009
|
2008
|
||||||
INTEREST
INCOME
|
||||||||
Loans
receivable, including fees
|
$ | 19,259 | $ | 19,150 | ||||
Securities:
|
||||||||
Taxable
|
2,587 | 2,266 | ||||||
Tax-exempt
|
1,164 | 976 | ||||||
Federal
funds sold
|
30 | 259 | ||||||
Interest
bearing deposits
|
15 | 2 | ||||||
Total
Interest Income
|
23,055 | 22,653 | ||||||
INTEREST
EXPENSE
|
||||||||
Deposits
|
6,321 | 8,746 | ||||||
Borrowings
|
1,426 | 1,507 | ||||||
Junior
subordinated debentures
|
306 | 590 | ||||||
Total
Interest Expense
|
8,053 | 10,843 | ||||||
Net
Interest Income
|
15,002 | 11,810 | ||||||
PROVISION
FOR LOAN LOSSES
|
3,404 | 1,350 | ||||||
Net
Interest Income after Provision for Loan Losses
|
11,598 | 10,460 | ||||||
OTHER
INCOME
|
||||||||
Service
fees on deposit accounts
|
1,467 | 1,534 | ||||||
ATM
fees
|
480 | 464 | ||||||
Insurance
commissions and fees
|
2,284 | 2,507 | ||||||
Investment
brokerage fees
|
137 | 151 | ||||||
Holding
gains on trading securities
|
5 | 199 | ||||||
Gain
on sale of securities, available for sale
|
134 | 150 | ||||||
Gain
(loss) on sale of premises and equipment
|
203 | (3 | ) | |||||
Gain
(loss) on sale of foreclosed real estate
|
190 | (58 | ) | |||||
Impairment
write-downs on equity securities
|
- | (3,526 | ) | |||||
Other
|
644 | 573 | ||||||
Total
Other Income
|
5,544 | 1,991 | ||||||
OTHER
EXPENSES
|
||||||||
Salaries
and employee benefits
|
7,351 | 7,545 | ||||||
Occupancy,
net
|
1,302 | 1,299 | ||||||
Furniture,
equipment and data processing
|
1,286 | 1,481 | ||||||
Stationary
and supplies
|
178 | 192 | ||||||
Professional
fees
|
768 | 621 | ||||||
Advertising
and promotion
|
179 | 469 | ||||||
Insurance
|
194 | 171 | ||||||
FDIC
Assessment
|
936 | 385 | ||||||
Postage
and freight
|
139 | 155 | ||||||
Amortization
of intangible assets
|
18 | 49 | ||||||
Write-down
on foreclosed real estate
|
456 | 437 | ||||||
Expenses
related to foreclosed real estate
|
347 | 255 | ||||||
Other
|
1,525 | 1,530 | ||||||
Total
Other Expenses
|
14,679 | 14,589 | ||||||
Income
(Loss) before Income Taxes
|
2,463 | (2,138 | ) | |||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
452 | (1,096 | ) | |||||
Net
Income (Loss)
|
$ | 2,011 | $ | (1,042 | ) | |||
EARNINGS
(LOSS) PER SHARE
|
||||||||
Basic
|
$ | 0.62 | $ | (0.32 | ) | |||
Diluted
|
$ | 0.62 | $ | (0.32 | ) |
See Notes
to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Years
Ended December 31, 2009 and 2008
Accumulated
|
||||||||||||||||||||||||
Number
of
|
Other
|
Total
|
||||||||||||||||||||||
Shares
|
Common
|
Retained
|
Comprehensive
|
Treasury
|
Stockholders'
|
|||||||||||||||||||
(Dollars in Thousands, Except Per Share
Data)
|
Outstanding
|
Stock
|
Earnings
|
Income (loss)
|
Stock
|
Equity
|
||||||||||||||||||
Balance
December 31, 2007
|
3,093,699 | $ | 26,651 | $ | 7,774 | $ | 15 | $ | - | $ | 34,440 | |||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss
|
- | - | (1,042 | ) | - | - | (1,042 | ) | ||||||||||||||||
Change
in unrealized losses on securities
|
||||||||||||||||||||||||
for
available for sale, net of tax
|
- | - | - | (553 | ) | - | (553 | ) | ||||||||||||||||
Total
Comprehensive Loss
|
(1,595 | ) | ||||||||||||||||||||||
Treasury
shares purchased
|
(54,765 | ) | - | - | - | (390 | ) | (390 | ) | |||||||||||||||
Treasury
shares retired
|
- | (390 | ) | - | - | 390 | - | |||||||||||||||||
Exercise
of stock options
|
3,606 | 34 | - | - | - | 34 | ||||||||||||||||||
Income
tax benefit of stock options exercised
|
- | 1 | - | - | - | 1 | ||||||||||||||||||
Restricted
stock vested during the period (a)
|
4,025 | - | - | - | - | - | ||||||||||||||||||
Compensation
expense related to stock option
|
||||||||||||||||||||||||
and
restricted stock grants
|
- | 76 | - | - | - | 76 | ||||||||||||||||||
Dividends
on common stock ($0.20 per share)
|
- | - | (654 | ) | - | - | (654 | ) | ||||||||||||||||
6.5%
stock dividend
|
201,852 | 1,411 | (1,413 | ) | - | - | (2 | ) | ||||||||||||||||
Balance
December 31, 2008
|
3,248,417 | 27,783 | 4,665 | (538 | ) | - | 31,910 | |||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
- | - | 2,011 | - | - | 2,011 | ||||||||||||||||||
Change
in unrealized gains on securities
|
||||||||||||||||||||||||
for
available for sale, net of tax
|
- | - | - | 683 | - | 683 | ||||||||||||||||||
Total
Comprehensive Income
|
2,694 | |||||||||||||||||||||||
Treasury
shares purchased
|
(7,500 | ) | - | - | - | (30 | ) | (30 | ) | |||||||||||||||
Treasury
shares retired
|
- | (30 | ) | - | - | 30 | - | |||||||||||||||||
Restricted
stock vested during the period (a)
|
4,894 | - | - | - | - | - | ||||||||||||||||||
Compensation
expense related to stock option
|
||||||||||||||||||||||||
and
restricted stock grants
|
- | 52 | - | - | - | 52 | ||||||||||||||||||
Dividends
on common stock ($0.03 per share)
|
- | - | (99 | ) | - | - | (99 | ) | ||||||||||||||||
Balance
December 31, 2009
|
3,245,811 | $ | 27,805 | $ | 6,577 | $ | 145 | $ | - | $ | 34,527 |
(a)
Balance of unvested shares of restricted stock: 13,975 in 2009 and 12,945 in
2008
See Notes
to Consolidated Financial Statements
SUSSEX BANCORP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year Ended December 31,
|
||||||||
(Dollars in Thousands)
|
2009
|
2008
|
||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income (loss)
|
$ | 2,011 | $ | (1,042 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Provision
for loan losses
|
3,404 | 1,350 | ||||||
Provision
for depreciation and amortization
|
773 | 1,002 | ||||||
Net
change in trading securities
|
10,335 | 969 | ||||||
Impairment
charge on preferred securities
|
- | 3,526 | ||||||
Net
amortization of securities premiums and discounts
|
127 | 12 | ||||||
Net
realized gain on sale of securities
|
(134 | ) | (150 | ) | ||||
Net
(gain) loss on sale of premises and equipment
|
(203 | ) | 3 | |||||
Net
realized (gain) loss on sale of foreclosed real estate
|
(190 | ) | 58 | |||||
Provision
for foreclosed real estate
|
456 | 437 | ||||||
Deferred
income taxes
|
976 | (1,844 | ) | |||||
Earnings
on investment in life insurance
|
(156 | ) | (105 | ) | ||||
Compensation
expense for stock options and stock awards
|
52 | 76 | ||||||
(Increase)
decrease in assets:
|
||||||||
Accrued
interest receivable
|
172 | (80 | ) | |||||
Other
assets
|
(3,852 | ) | 111 | |||||
Increase
(decrease) in accrued interest payable and other
liabilities
|
(309 | ) | 105 | |||||
Net
Cash Provided by Operating Activities
|
13,462 | 4,428 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Securities
available for sale:
|
||||||||
Purchases
|
(45,067 | ) | (36,692 | ) | ||||
Proceeds
from sale of securities
|
17,456 | 9,679 | ||||||
Maturities,
calls and principal repayments
|
19,713 | 8,828 | ||||||
Net
increase in loans
|
(17,575 | ) | (26,008 | ) | ||||
Proceeds
from the sale of foreclosed real estate
|
1,552 | 738 | ||||||
Proceeds
from the sale of bank premises and equipment
|
1,094 | - | ||||||
Purchases
of bank premises and equipment
|
(207 | ) | (370 | ) | ||||
(Increase)
decrease in FHLB stock
|
(70 | ) | 57 | |||||
Net
Cash Used in Investing Activities
|
(23,104 | ) | (43,768 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Net
increase in deposits
|
11,994 | 51,543 | ||||||
Proceeds
from borrowings
|
- | 3,000 | ||||||
Repayments
of borrowings
|
(56 | ) | (5,054 | ) | ||||
Proceeds
from the exercise of stock options
|
- | 34 | ||||||
Purchase
of treasury stock
|
(30 | ) | (390 | ) | ||||
Dividends
paid, net of reinvestments
|
(99 | ) | (656 | ) | ||||
Net
Cash Provided by Financing Activities
|
11,809 | 48,477 | ||||||
Net
Increase in Cash and Cash Equivalents
|
2,167 | 9,137 | ||||||
Cash
and Cash Equivalents - Beginning
|
20,912 | 11,775 | ||||||
Cash
and Cash Equivalents - Ending
|
$ | 23,079 | $ | 20,912 | ||||
Supplementary
Cash Flows Information
|
||||||||
Interest
paid
|
$ | 8,433 | $ | 10,997 | ||||
Income
taxes paid
|
$ | 575 | $ | 450 | ||||
Supplementary
Schedule of Noncash Investing and Financing Activities Supplementary Cash
Flows Information
|
||||||||
Foreclosed
real estate acquired in settlement of loans
|
$ | 1,775 | $ | 5,097 |
See Notes
to Consolidated Financial Statements
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 –
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of Sussex Bancorp (the
“Company”) and its wholly-owned subsidiary, Sussex Bank (the
“Bank”). The Bank’s wholly-owned subsidiaries are SCB Investment
Company, SCBNY Company, Inc. and Tri-State Insurance Agency, Inc. All
intercompany transactions and balances have been eliminated in
consolidation.
Organization
and Nature of Operations
Sussex
Bancorp’s business is conducted principally through the Bank. Sussex
Bank is a New Jersey state chartered bank and provides full banking
services. The Bank generates commercial, mortgage and consumer loans
and receives deposits from customers at its eight branches located in Sussex
County, New Jersey and two branches in Orange County, New York. As a
state bank, the Bank is subject to regulation of the New Jersey Department of
Banking and Insurance and the Federal Deposit Insurance
Corporation. Sussex Bancorp is subject to regulation by the Federal
Reserve Board. SCB Investment Company and SCBNY Company, Inc. hold
portions of the Bank’s investment portfolio. Tri-State Insurance
Agency, Inc. provides insurance agency services mostly through the sale of
property and casualty insurance policies. The Company is also a party
to a joint venture with PNC Mortgage, Inc., called SussexMortgage.com LLC, which
originates one to four family mortgage loans for funding by third party
investors for sale into the secondary market. Servicing is released
to the third party investors.
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the other-than-temporary impairment, allowance for loan losses,
valuation of goodwill and intangible assets, the valuation of deferred tax
assets and the fair value of financial instruments.
Significant
Group Concentrations of Credit Risk
Most of
the Company’s activities are with customers located within Sussex County, New
Jersey and adjacent counties in the states of Pennsylvania, New Jersey and New
York. Notes 3 and 4 discuss the types of securities that the Company
invests in. The types of lending that the Company engages are
included in Note 5. Although the Company has a diversified loan
portfolio, its debtors’ ability to honor their contracts is influenced by the
region’s economy. The Company does not have any significant
concentrations in any one industry or customer.
Cash
and Cash Equivalents
For
purposes of the consolidated statements of cash flows, cash and cash equivalents
include cash and cash equivalents, balances due from banks, interest bearing
deposits with banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Trading
Securities
The
Company engages in trading activities for its own account. Securities
that are held principally for resale in the near term are recorded in the
trading securities account at fair value with changes in fair value recorded in
earnings. Interest and dividends are included in interest
income.
Securities
Securities
classified as available for sale, including equity securities with readily
determinable fair values, are those securities that the Company intends to hold
for an indefinite period of time but not necessarily to
maturity. Securities available for sale are recorded at fair value,
with unrealized gains and losses excluded from earnings and reported in other
comprehensive income. Purchase premiums and discounts are recognized
in interest income using the interest method over the terms of the
securities. Gains and losses on the sale of securities are recorded
on the settlement date and are determined using the specific identification
method.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FASB
recently issued accounting guidance related to the recognition and presentation
of other-than-temporary impairment (“Pending Content” of FASB ASC 320-10). See
the “Recent Accounting Pronouncement” section for additional
information.
For
equity securities, when the Company has decided to sell an impaired available
for sale security and the entity does not expect the fair value of the security
to fully recover before the expected time of sale, the security is deemed other
than temporarily impaired in the period in which the decision to sell is
made. The Company recognizes an impairment loss when the impairment
is deemed other-than-temporary even if a decision to sell has not been
made.
Federal
Home Loan Bank Stock
Federal
law requires a member institution of the Federal Home Loan Bank system to hold
stock of its district FHLB according to a predetermined
formula. Based on redemption provisions of the FHLB, the stock has no
quoted market value and is carried at cost. The Federal Home Loan
Bank stock was carried at $2,045,000 and $1,975,000 for the years ended December
31, 2009 and 2008, respectively.
Loans
Receivable
Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the yield (interest
income) of the related loans. The Bank is generally amortizing these
amounts over the contractual life of the loan.
The
accrual of interest is discontinued when the contractual payment of principal or
interest has become 90 days past due or management has serious doubts about
further collectability of principal or interest, even though the loan is
currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Interest received on
nonaccrual loans generally is either applied against principal or reported as
interest income, according to management’s judgment as to the collectability of
principal. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectability of the
total contractual principal and interest is no longer in doubt.
Allowance
for Loan Losses
The
allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
Management’s
periodic evaluation of the adequacy of the allowance is based on known and
inherent risks in the portfolio, adverse situations that may affect the
borrower’s ability to repay, the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
The
allowance consists of specific and general components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired,
an allowance is established when the discounted cash flows, collateral value or
observable market price of the impaired loan is lower than the carrying value
for that loan. The general component covers non-classified loans and
is based on historical loss experience adjusted for qualitative
factors.
A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Foreclosed
Assets
Foreclosed
assets are comprised of property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure. Foreclosed assets initially are
recorded at fair value, less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at the lower
of carrying amount or fair value less costs to sell. Revenues and expenses from
operations and changes in the valuation allowance are included in expenses
related to foreclosed real estate.
Premises
and Equipment
Land is
carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the
straight-line method over the following estimated useful lives of the related
assets:
Years
|
||||
Buildings
and building improvements
|
20 - 40 | |||
Leasehold
improvements
|
5 - 10 | |||
Furniture,
fixtures and equipment
|
5 - 10 | |||
Computer
equipment and software
|
3 - 5 |
Depreciation
expense for the years ended December 31, 2009 and 2008 was $755 thousand and
$956 thousand, respectively.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the purchase price over the fair market value of net
assets acquired. At December 31, 2009 and 2008, the Company has
recorded goodwill totaling $2.8 million, primarily as a result of the
acquisition of an insurance agency in 2001. In accordance with
current accounting standards, goodwill is not amortized, but evaluated at least
annually for impairment. Any impairment of goodwill results in a
charge to income. The Company periodically accesses whether events
and changes in circumstances indicate that the carrying amounts of goodwill and
intangible assets may be impaired. The estimated fair value of the
reporting segment exceeded its book value; therefore, no write-down of goodwill
was required. The goodwill related to the insurance agency is not
deductible for tax purposes.
The
Company also has amortizable intangible assets resulting from the acquisition of
insurance agencies, which include the value of executive employment contracts
and the acquired book of businesses, which were being amortized on a
straight-line basis over 3 to 7 years. The total net amortizable
intangible assets were fully amortized during the year ended December 31, 2008
with total accumulated amortization of $523 thousand.
The
Company has an amortizable core deposit intangible asset related to the premium
paid on the acquisition of deposits. The core deposit intangible was
created on March 24, 2006 in the acquisition of the Port Jervis branch and is
being amortized on a seven year accelerated schedule. This intangible
was $30 thousand and $48 thousand, net of accumulated amortization of $90
thousand and $72 thousand as of December 31, 2009 and 2008,
respectively.
Other
intangible assets are included in other assets on the balance sheets for
December 31, 2009 and 2008. Amortization expense on intangible assets
was $18 thousand and $49 thousand for the years ended December 31, 2009, and
2008, respectively. Amortization expense is estimated to be $14
thousand for the year ending
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2010, $10 thousand for the year ending December 31, 2011, $5 thousand for
the year ending December 31, 2012 and $1 thousand for the year ending December
31, 2013.
Advertising
Costs
The
Company follows the policy of charging the costs of advertising to expense as
incurred.
Income
Taxes
The
Company accounts for Income Taxes in accordance with income tax accounting
guidance (FASB ASC 740, Income
Taxes). The Company adopted the most recent accounting
guidance related to accounting for uncertainty in income taxes, which sets out a
consistent framework to determine the appropriate level of tax reserves to
maintain for uncertain tax positions.
The
income tax guidance results in two components of income tax expense: current and
deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax
law to the taxable income or excess of deductions over revenues. The
Company determines deferred income taxes using the liability (or balance sheet)
method. Under this method, the net deferred tax asset or liability is
based on the tax effects of the differences between the book and tax bases of
assets and liabilities, and enacted changes in tax rates and laws are recognized
in the period in which they occur. Management does not believe it has
any uncertain tax positions.
Deferred
income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more
likely than not, based on the technical merits, that the tax position will be
realized or sustained upon examination. The term more likely than not
means a likelihood of more than 50 percent; the terms examined and upon
examination also include resolution of the related appeals or litigation
processes, if any. A tax position that meets the more likely than not
recognition threshold is initially and subsequently measured as the largest
amount of tax benefit that has a greater than 50 percent likelihood of being
realized upon settlement with a taxing authority that has full knowledge of all
relevant information. The determination of whether or not a tax
position has met the more likely than not recognition threshold considers the
facts, circumstances, and information available at the reporting date and is
subject to management’s judgment. Deferred tax assets are reduced by
a valuation allowance if, based on the weight of evidence available, it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.
The
Company’s policy is to account for interest as a component of interest expense
and penalties as a component of other expense. Sussex Bancorp and its
subsidiaries file a consolidated federal income tax return. The Company’s
federal and state income tax returns for the years ended December 31, 2008, 2007
and 2006 remain subject to examination by respective tax
authorities.
Off-Balance
Sheet Financial Instruments
In the
ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit. Such financial instruments are recorded in the balance sheet
when they are funded.
Stock
Compensation Plans
The
Company currently has several stock plans in place for employees and directors
of the Company. Stock compensation accounting guidance (FASB ASC 718,
Compensation-Stock
Compensation) requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The stock
compensation accounting guidance requires that compensation cost for all stock
awards be calculated and recognized over a defined vesting
period. For awards with graded-vesting, compensation cost is
recognized on a straight-line basis over the requisite vesting period for the
entire award. A Black-Sholes model is used to estimate the fair value
of stock options, while the market price of the Company’s common stock at the
date of grant is used for restricted stock awards. Stock-based
compensation expense related to stock plans for the year ended December 31, 2009
and 2008 was $52 thousand and $76 thousand, respectively.
Earnings
per Share
Basic
earnings per share represents net income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
adjustment
to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate to outstanding stock
options and non-vested restricted stock grants. Potential common
shares related to stock options are determined using the treasury stock
method.
Segment
Reporting
The
Company acts as an independent community financial services provider and offers
traditional banking and related financial services to individual, business and
government customers. Through its branch and automated teller machine
networks, the Bank offers a full array of commercial and retail financial
services, including taking of time, savings and demand deposits; the making of
commercial, consumer and mortgage loans; and the providing of other financial
services. The Bank also performs fiduciary services through its Trust
Department. Management does not separately allocate expenses,
including the cost of funding loan demand, between the commercial, retail, trust
and mortgage banking operations of the Bank. As such, discrete
financial information is not available and segment reporting would not be
meaningful. The Company’s insurance agency is managed separately from
the traditional banking and related financial services that the Company
offers. The insurance operations provides primarily property and
casualty coverage. See Note 2 for segment reporting of insurance
operations.
Insurance
Agency Operations
Tri-State
Insurance Agency, Inc. is a retail insurance broker operating in the State of
New Jersey. The insurance agency’s primary source of revenue is
commission income, which is earned by placing insurance coverage for its
customers with various insurance underwriters. The insurance agency
places basic property and casualty, life and health coverage with about fifteen
different insurance carriers. There are two main billing processes,
direct billing (currently accounts for approximately 90% of revenues) and agency
billing.
Under the
direct billing arrangement, the insurance carrier bills and collects from the
customer directly and remits the brokers’ commission to the broker on a monthly
basis. For direct bill policies, Tri-State records commissions as
revenue when the data necessary to reasonably determine such amounts is
obtained. On a monthly basis, Tri-State receives notification from
each insurance carrier of total premiums written and collected during the month,
and the broker’s net commission due for their share of business produced by
them.
Under the
agency billing arrangement, the broker bills and collects from the customer
directly, retains their commission, and remits the net premium amount to the
insurance carrier. Virtually all agency-billed policies are billed
and collected on an installment basis (the number of payments varies by
policy). Tri-State records revenues for the first installment as of
the policy effective date. Revenues from subsequent installments are
recorded at the installment due date. Tri-State records its
commission as a percentage of each installment due.
Trust
Operations
Trust
income is recorded on a cash basis, which approximates the accrual
basis. Securities and other property held by the Company in a
fiduciary or agency capacity for customers of the trust department are not
assets of the Company and, accordingly, are not included in the accompanying
consolidated financial statements.
Subsequent
Events
The
Company has evaluated events and transactions occurring subsequent to the
balance sheet date of December 31, 2009 for items that should potentially be
recognized or disclosed in these financial statements. The evaluation
was conducted through the date these financial statements were
issued.
FASB
Accounting Standards Codification
The
Financial Accounting Standards Board (FASB) issued FASB Accounting Standards
Codification (ASC) effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The ASC is an
aggregation of previously issued authoritative U.S. generally accepted
accounting principles (GAAP) in one comprehensive set of guidance organized by
subject area. In accordance with the ASC, references to previously
issued accounting standards have been replaced by ASC
references. Subsequent revisions to GAAP will be incorporated into
the ASC through Accounting Standards Updates (ASU).
New
Accounting Standards
In
October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets. This Update
amends the Codification for the issuance of FASB Statement No. 166, Accounting
for Transfers of Financial Assets-an amendment of FASB Statement No.
140. The amendments in this Update
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
improve
financial reporting by eliminating the exceptions for qualifying special-purpose
entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In addition, the
amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for
transferred financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This Update is effective at the
start of a reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. The Company does
not expect FASB ASU 2009-16 to have a material impact on its financial
statements.
In
October 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) -
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. This Update amends the Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update
also require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. This Update is effective at the start of a
reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. The Company does
not expect FASB ASU 2009-17 to have a material impact on its financial
statements.
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) - Accounting for
Distributions to Shareholders with Components of Stock and
Cash. The amendments in this Update clarify that the stock
portion of a distribution to shareholders that allows them to elect to receive
cash or stock with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the aggregate is considered a share
issuance that is reflected in earnings per share prospectively and is not a
stock dividend. This Update codifies the consensus reached in EITF
Issue No. 09-E, “Accounting for Stock Dividends, Including Distributions to
Shareholders with Components of Stock and Cash.” This Update is
effective for interim and annual periods ending on or after December 15, 2009,
and should be applied on a retrospective basis. The Company has
evaluated the new pronouncement and does not expect that it will have a material
impact on its consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) - Accounting and Reporting for
Decreases in Ownership of a Subsidiary - A Scope
Clarification. This Update clarifies that the scope of the
decrease in ownership provisions of Subtopic 810-10 and related guidance applies
to: a subsidiary or group of assets that is a business or nonprofit
activity; a subsidiary that is a business or nonprofit activity that is
transferred to an equity method investee or joint venture; and an exchange of a
group of assets that constitutes a business or nonprofit activity for a
noncontrolling interest in an entity (including an equity method investee or
joint venture). This Update also clarifies that the decrease in
ownership guidance in Subtopic 810-10 does not apply to: (a) sales of in
substance real estate; and (b) conveyances of oil and gas mineral rights, even
if these transfers involve businesses. The amendments in this Update
expand the disclosure requirements about deconsolidation of a subsidiary or
derecognition of a group of assets to include: the valuation techniques used to
measure the fair value of any retained investment; the nature of any continuing
involvement with the subsidiary or entity acquiring the group of assets;
and Whether
the transaction that resulted in the deconsolidation or derecognition was with a
related party or whether the former subsidiary or entity acquiring the assets
will become a related party after the transaction. This Update is
effective beginning in the period that an entity adopts FASB Statement No. 160,
Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB 51 (now included
in Subtopic 810-10). If an entity has previously adopted Statement
160, the amendments are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments
in this Update should be applied retrospectively to the first period that an
entity adopts Statement 160. The Company does not expect FASB ASU
2010-02 to have a material impact on its financial statements.
The FASB
has issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
objective
is to improve these disclosures and, thus, increase the transparency in
financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic
820-10 to now require: a reporting entity to disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers; and in the reconciliation for fair
value measurements using significant unobservable inputs, a reporting entity
should present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of
the following existing disclosures: for purposes of reporting fair value
measurement for each class of assets and liabilities, a reporting entity needs
to use judgment in determining the appropriate classes of assets and
liabilities; and a reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. ASU 2010-06 is effective
for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. Early adoption is
permitted. The Company does not expect FASB ASU 2010-06 to have a
material impact on its financial statements.
In
November 2008, the SEC released a proposed roadmap regarding the potential use
by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (IFRS). IFRS is a
comprehensive series of accounting standards published by the International
Accounting Standards Board (“IASB”). Under the proposed roadmap, the
Company may be required to prepare financial statements in accordance with IFRS
as early as 2014. The SEC will make a determination in 2011 regarding
the mandatory adoption of IFRS. The Company is currently assessing
the impact that this potential change would have on its consolidated financial
statements, and it will continue to monitor the development of the potential
implementation of IFRS.
NOTE
2 –
|
SEGMENT
REPORTING
|
Segment
information for 2009 and 2008 is as follows:
Banking
and
|
Insurance
|
|||||||||||
(Dollars in thousands)
|
Financial Services
|
Services
|
Total
|
|||||||||
Year
Ended December 31, 2009:
|
||||||||||||
Net
interest income from external sources
|
$ | 15,002 | $ | - | $ | 15,002 | ||||||
Other
income from external sources
|
3,260 | 2,284 | 5,544 | |||||||||
Depreciation
and amortization
|
762 | 11 | 773 | |||||||||
Income
before income taxes
|
2,357 | 106 | 2,463 | |||||||||
Income
tax expense (1)
|
410 | 42 | 452 | |||||||||
Total
assets
|
451,834 | 3,007 | 454,841 | |||||||||
Year
Ended December 31, 2008:
|
||||||||||||
Net
interest income from external sources
|
$ | 11,810 | $ | - | $ | 11,810 | ||||||
Other
income from external sources
|
(516 | ) | 2,507 | 1,991 | ||||||||
Depreciation
and amortization
|
965 | 37 | 1,002 | |||||||||
Loss
before income taxes
|
(2,132 | ) | (6 | ) | (2,138 | ) | ||||||
Income
tax benefit (1)
|
(1,094 | ) | (2 | ) | (1,096 | ) | ||||||
Total
assets
|
437,499 | 3,096 | 440,595 |
(1)
|
Calculated
at statutory tax rate of 40%
|
NOTE
3 –
|
FAIR
VALUE OF ASSETS AND
LIABILITIES
|
The
Company adopted FASB ASC 820, Fair Value Measurement and
Disclosures, in two steps; effective January 1, 2008, for all financial
instruments and non-financial instruments accounted for at fair value on a
recurring basis and effective January 1, 2009, for all non-financial instruments
accounted for at fair value on a non-recurring basis. This guidance
establishes a new framework for measuring fair value and expands related
disclosures.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sale transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective year ends, and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year end.
Under
FASB ASC 820, there is a hierarchical disclosure framework associated with the
level of pricing observability utilized in measuring assets and liabilities at
fair value. The three broad levels defined by the FASB ASC 820
hierarchy are as follows:
Level I -
Quoted prices are available in active markets for identical assets or
liabilities as of the reported date.
Level II
- Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reported date. The nature of
these asset and liabilities include items for which quoted prices are available
but traded less frequently, and items that are fair valued using other financial
instruments, the parameters of which can be directly observed.
Level III
- Assets and liabilities that have little to no pricing observability as of
reported date. These items do not have two-way markets and are
measured using management’s best estimate of fair value, where the inputs into
the determination of fair value require significant management judgment or
estimation.
The
following table summarizes the fair value of the Company’s financial assets
measured on a recurring basis by the above FASB ASC 820 pricing observability
levels as of December 31, 2009 and 2008:
Quoted Prices in
|
Significant
|
|||||||||||||||
Active
Markets
|
Other
|
Significant
|
||||||||||||||
Fair
|
for
Identical
|
Observable
|
Unobservable
|
|||||||||||||
Value
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
(Dollars in thousands)
|
Measurements
|
(Level I)
|
(Level II)
|
(Level III)
|
||||||||||||
December
31, 2009:
|
||||||||||||||||
Trading
securities
|
$ | 2,955 | $ | - | $ | 2,955 | $ | - | ||||||||
Available
for sale securities
|
71,315 | - | 71,315 | - | ||||||||||||
December
31, 2008:
|
||||||||||||||||
Trading
securities
|
$ | 13,290 | $ | - | $ | 13,290 | $ | - | ||||||||
Available
for sale securities
|
62,272 | - | 62,272 | - |
Trading
securities, at fair value, consist of the following as of December 31, 2009 and
2008:
(Dollars in thousands)
|
2009
|
2008
|
||||||
U.S.
Government agencies
|
$ | - | $ | 5,744 | ||||
Mortgage-backed
securities
|
2,955 | 7,546 | ||||||
$ | 2,955 | $ | 13,290 |
The
Company’s trading securities and available for sale securities portfolios
contain investments which are all rated within the Company’s investment policy
guidelines and upon review of the entire portfolio all securities are marketable
and have observable pricing inputs. There was a holding gain on trading
securities recorded on the income statement of $5 thousand for the year ended
December 31, 2009 and $199 thousand for the same period in
2008.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
and 2008 are as follows:
Quoted Prices in
|
Significant
|
|||||||||||||||
Active
Markets
|
Other
|
Significant
|
||||||||||||||
Fair
|
for
Identical
|
Observable
|
Unobservable
|
|||||||||||||
Value
|
Assets
|
Inputs
|
Inputs
|
|||||||||||||
(Dollars in thousands)
|
Measurements
|
(Level I)
|
(Level II)
|
(Level III)
|
||||||||||||
December
31, 2009:
|
||||||||||||||||
Impaired
loans
|
$ | 4,452 | $ | - | $ | - | $ | 4,452 | ||||||||
Foreclosed
real estate
|
2,385 | - | - | 2,385 | ||||||||||||
December
31, 2008:
|
||||||||||||||||
Impaired
loans
|
$ | 2,039 | $ | - | $ | - | $ | 2,039 | ||||||||
Foreclosed
real estate
|
3,360 | - | - | 3,360 |
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and
assumptions were used to estimate the fair value of the Company’s financial
instruments at December 31, 2009 and 2008:
Cash and Cash
Equivalents (Carried at Cost): The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those assets’ fair
value.
Deposits (Carried
at Cost): Fair value for fixed-rate time certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The Company
generally purchases amounts below the insured limit, limiting the amount of
credit risk on these time deposits.
Securities:
The fair value of securities, available for sale (carried at fair value)
is determined by obtaining quoted market prices on nationally recognized
securities exchanges (Level I), or matrix pricing (Level 2), which is a
mathematical technique used widely in the industry to value debt securities
without relying exclusively on quoted market prices for the specific securities
but rather by relying on the securities’ relationship to other benchmark quoted
prices. For certain securities which are not traded in active markets
or are subject to transfer restrictions, valuations are adjusted to reflect
illiquidity and/or non-transferability, and such adjustments are generally based
on available market evidence (Level 3). In the absence of such
evidence, management’s best estimate is used. Management’s best
estimate consists of both internal and external support on certain Level 3
investments. Internal cash flow models using a present value formula
that includes assumptions market participants would use along with indicative
exit pricing obtained from broker/dealers (where available) were used to support
fair values of certain Level 3 investments.
Loans Receivable
(Carried at Cost): The fair values of loans are estimated using
discounted cash flow analyses, using the market rates at the balance sheet date
that reflect the credit and interest rate-risk inherent in the
loans. Projected future cash flows are calculated based upon
contractual maturity or call dates, projected repayments and prepayments of
principal. Generally, for variable rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.
Impaired Loans
(Generally Carried at Fair Value): Impaired loans are those that are
accounted for under FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan (Codified within FASB ASC 310) (“FASB ASC 310”), in
which the Company has measured impairment generally based on the fair value of
the loan’s collateral. Fair value is generally
determined based upon independent third-party appraisals of the properties, or
discounted cash flows based upon the expected proceeds. These assets
are included in Level 3 fair values, based upon the lowest level of input that
is significant to the fair value measurements. The fair value
consists of the loan balances of $6.1 million and $4.1 million, net of valuation
allowance of $1.7 million and $2.1 million. Additional provisions for
loan losses of $1.5 million and $1.0 million for 2009 and 2008, respectively,
were recorded during these periods.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Home Loan
Bank Stock (Carried at Cost): The carrying amount of
restricted investment in bank stock approximates fair value and considers the
limited marketability of such securities.
Deposit
Liabilities (Carried at Cost): The fair values disclosed for demand,
savings and club accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered in the
market on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Borrowings
(Carried at Cost): Fair values of FHLB advances are estimated using
discounted cash flow analysis, based on quoted prices for new FHLB advances with
similar credit risk characteristics, terms and remaining
maturity. These prices obtained from this active market represent a
market value that is deemed to represent the transfer price if the liability
were assumed by a third party.
Junior
Subordinated Debentures (Carried at Cost): Fair values of junior
subordinated debt are estimated using discounted cash flow analysis, based on
market rates currently offered on such debt with similar credit risk
characteristics, terms and remaining maturity.
Accrued Interest
Receivable and Accrued Interest Payable (Carried at Cost): The carrying
amounts of accrued interest receivable and payable approximate its fair
value.
Off-Balance Sheet
Instruments (Disclosed at Cost): Fair values for the Company’s
off-balance sheet financial instruments (lending commitments and letters of
credit) are based on fees currently charged in the market to enter into similar
agreements, taking into account, the remaining terms of the agreements and the
counterparties’ credit standing.
The
estimated fair values of the Company’s financial instruments at December 31,
2009 and 2008 were as follows:
2009
|
2008
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
(Dollars in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 23,079 | $ | 23,079 | $ | 20,912 | $ | 20,912 | ||||||||
Time
deposits with other banks
|
100 | 100 | 100 | 100 | ||||||||||||
Trading
securities
|
2,955 | 2,955 | 13,290 | 13,290 | ||||||||||||
Securities
available for sale
|
71,315 | 71,315 | 62,272 | 62,272 | ||||||||||||
Federal
Home Loan Bank stock
|
2,045 | 2,045 | 1,975 | 1,975 | ||||||||||||
Loans
receivable, net of allowance
|
327,463 | 330,441 | 315,067 | 324,787 | ||||||||||||
Accrued
interest receivable
|
1,943 | 1,943 | 2,115 | 2,115 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
372,075 | 372,868 | 360,081 | 360,900 | ||||||||||||
Borrowings
|
33,090 | 34,963 | 33,146 | 37,373 | ||||||||||||
Junior
subordinated debentures
|
12,887 | 9,090 | 12,887 | 12,888 | ||||||||||||
Accrued
interest payable
|
361 | 361 | 741 | 741 | ||||||||||||
Off-balance
financial instruments:
|
||||||||||||||||
Commitments
to extend credit
|
- | - | - | - | ||||||||||||
Outstanding
letters of credit
|
- | - | - | - |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 –
|
SECURITIES
|
The
amortized cost and approximate fair value of securities available for sale as of
December 31, 2009 and 2008 are summarized as follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
(Dollars in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
December
31, 2009
|
||||||||||||||||
U.S.
Government agencies
|
$ | 14,938 | $ | 85 | $ | (21 | ) | $ | 15,002 | |||||||
State
and political subdivisions
|
25,987 | 221 | (331 | ) | 25,877 | |||||||||||
Mortgage-backed
securities
|
27,338 | 862 | (118 | ) | 28,082 | |||||||||||
Corporate
debt securities
|
1,005 | 2 | - | 1,007 | ||||||||||||
Equity
securities
|
1,806 | - | (459 | ) | 1,347 | |||||||||||
$ | 71,074 | $ | 1,170 | $ | (929 | ) | $ | 71,315 | ||||||||
December
31, 2008
|
||||||||||||||||
U.S.
Government agencies
|
$ | 7,751 | $ | 212 | $ | - | $ | 7,963 | ||||||||
State
and political subdivisions
|
25,027 | 39 | (1,207 | ) | 23,859 | |||||||||||
Mortgage-backed
securities
|
28,310 | 529 | (138 | ) | 28,701 | |||||||||||
Equity
securities
|
2,081 | 1 | (333 | ) | 1,749 | |||||||||||
$ | 63,169 | $ | 781 | $ | (1,678 | ) | $ | 62,272 |
Securities
with a carrying value of approximately $10.8 million and $24.7 million at
December 31, 2009 and 2008, respectively, were pledged to secure public deposits
and for other purposes required or permitted by applicable laws and
regulations.
The
amortized cost and fair value of securities available for sale at December 31,
2009 are shown below by contractual maturity. Actual maturities may
differ from contractual maturities as issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
|
Amortized Cost
|
Fair Value
|
||||||
Due
in one year or less
|
$ | 5,932 | $ | 5,925 | ||||
Due
after one year through five years
|
5,774 | 5,838 | ||||||
Due
after five years through ten years
|
- | - | ||||||
Due
after ten years
|
30,224 | 30,123 | ||||||
Total
bonds and obligations
|
41,930 | 41,886 | ||||||
Mortgage-backed
securities
|
27,338 | 28,082 | ||||||
Equity
securities
|
1,806 | 1,347 | ||||||
Total
available for sale securities
|
$ | 71,074 | $ | 71,315 |
Gross
gains on sales of securities available for sale were $181 thousand and $157
thousand and gross losses were $47 thousand and $7 thousand for the years ended
December 31, 2009 and 2008, respectively.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Temporarily
Impaired Securities
The
following table shows our investments’ gross unrealized losses and fair value
with unrealized losses that are not deemed to be other than temporarily
impaired, aggregated by investment category and length of time that individual
available for sale securities have been in a continuous unrealized loss
position, at December 31, 2009 and 2008.
Less Than Twelve Months
|
Twelve Months or More
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
(Dollars in thousands)
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
||||||||||||||||||
December
31, 2009
|
||||||||||||||||||||||||
U.S.
Government agencies
|
$ | 8,585 | $ | (21 | ) | $ | - | $ | - | $ | 8,585 | $ | (21 | ) | ||||||||||
State
and political subdivisions
|
13,208 | (82 | ) | 2,467 | (249 | ) | 15,675 | (331 | ) | |||||||||||||||
Mortgage-backed
securities
|
4,513 | (118 | ) | - | - | 4,513 | (118 | ) | ||||||||||||||||
Equity
securities
|
124 | (66 | ) | 1,187 | (393 | ) | 1,311 | (459 | ) | |||||||||||||||
Total
Temporarily Impaired Securities
|
$ | 26,430 | $ | (287 | ) | $ | 3,654 | $ | (642 | ) | $ | 30,084 | $ | (929 | ) | |||||||||
December
31, 2008
|
||||||||||||||||||||||||
State
and political subdivisions
|
$ | 18,067 | $ | (954 | ) | $ | 1,038 | $ | (253 | ) | $ | 19,105 | $ | (1,207 | ) | |||||||||
Mortgage-backed
securities
|
9,243 | (137 | ) | 166 | (1 | ) | 9,409 | (138 | ) | |||||||||||||||
Equity
securities
|
199 | (203 | ) | 950 | (130 | ) | 1,149 | (333 | ) | |||||||||||||||
Total
Temporarily Impaired Securities
|
$ | 27,509 | $ | (1,294 | ) | $ | 2,154 | $ | (384 | ) | $ | 29,663 | $ | (1,678 | ) |
U.S. Government and federal agency
obligations. The
unrealized losses on the four investments in U.S. government obligations and
direct obligations of U.S. government agencies were caused by interest rate
increases. The contractual terms of those investments do not permit
the issuer to settle the securities at a price less than amortized cost bases of
the investments. Because the Company does not intend to sell
investments and it is not more than likely that the Corporation will be required
to sell those investments before recovery of their amortized cost basis, which
may be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.
State and political subdivisions.
The unrealized losses on the twenty six investments in state and
political subdivisions were caused primarily by market
illiquidity. Credit risk premiums have increased dramatically during
the recent financial crisis. Spreads have begun to normalize but are
still holding at elevated levels as the recovery in the economy begins to
unfold. The wider spreads experienced during the past year have
significantly impacted the value of all municipal securities.
Mortgage-backed securities.
The unrealized losses on the Company’s six investment in mortgage-backed
securities were caused by interest rate increases. The Company
purchased those investments at a discount relative to their face amount, and the
contractual cash flows of those investments are guaranteed by an agency of the
U.S. Government. Accordingly, it is expected that the securities
would not be settled at a price less than the amortized cost basis of the
Company’s investments. Because the decline in market value is
attributable to changes in interest rates and not credit quality, and because
the Company does not intend to sell the investments and it is not more likely
than not that the Company will be required to sell the investments before
recovery of their amortized cost basis, which may be maturity, the Company does
not consider those investments to be other-than-temporarily impaired at December
31, 2009.
Equity securities. The
Company’s investments in four marketable equity securities consist primarily of
investments in common stock of entities in the financial services
industry. The remaining fair value and unrealized losses are
distributed in other entities. All of the Company’s holdings of common stock in
the financial services industry are in an unrealized position as of December 31,
2009. The severity of the impairment is driven by higher projected
collateral losses, wider credit spreads and changes in interest rates within the
financial services industry. The Company’s evaluated the prospects of
the issuer in relation to the severity and duration of the
impairment. Tier 1 capital averaged under 10% and total risk based
capital averaged over 15% in aggregate at 12/31/09. The financial
institutions have Tier 1 capital in excess of 9% as of
12/31/09. Non-performing assets of the financial institutions
averaged 5.00% with reserves averaging 1.92% at 12/31/09. Based on that
evaluation and the Company’s ability and
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
intent to
hold those investments for a reasonable period of time sufficient for a
forecasted recovery of fair value, the Company does not consider those
investments to be other-than-temporarily impaired at December 31,
2009.
Other-Than-Temporary
Impairment
Upon
acquisition of a security, the Company decides whether it is within the scope of
the accounting guidance for beneficial interests or will be evaluated for
impairment under accounting guidance for investments in debt and equity
securities.
The
accounting guidance for beneficial interest in securitized financial assets
provides incremental impairment guidance for a subset of the debt securities
within the scope of the guidance for investments in debt and equity
securities. For securities where the security is a beneficial
interest in securitized financial assets, the Company uses the beneficial
interests in securitized financial asset impairment model. For
securities where the security is not a beneficial interest in securitized
financial assets, the Company uses debt and equity securities impairment
model.
We
routinely conduct periodic reviews to indentify and evaluate each investment
security to determine whether an other-than temporary impairment has
occurred. Economic models are used to determine whether an other-than
temporary impairment has occurred on these securities. While all
securities are considered, the securities primarily impacted by other-than
temporary impairment testing are private-label mortgage-backed
securities. For each private-label mortgage-backed security in the
investment portfolio (including but not limited to those whose fair value is
less than their amortized cost basis), an extensive, regular review is conducted
to determine if an other-than-temporary impairment has
occurred. Various inputs to the economic models are used to determine
if an unrealized loss is other-than-temporary. The most significant
inputs are default date, severity and prepay speed. Other inputs may
include the actual collateral attributes, which include geographic
concentrations, credit ratings, and other performance indicators of the
underlying asset.
During
the third quarter of 2008 the Company held Fannie Mae and Freddie Mac perpetual
preferred stock with a cost basis of approximately $3.8
million. These securities were subject to an other-than-temporary
impairment (“OTTI”) charge due to the Federal Housing Finance Agency placing
both Fannie Mae and Freddie Mac under conservatorship on September 7,
2008. Although this action did not eliminate the equity in Fannie Mae
and Freddie Mac represented by the perpetual preferred stock, it negatively
impacted the value of the perpetual preferred stock. The fair
value of these securities at December 31, 2008 was $93 thousand and the OTTI
charge taken in the quarter ended September 30, 2008 was $3.5
million. The Company sold its remaining Fannie Mae and Freddie Mac
equity securities in 2009. The Company had considered these high-risk
securities at December 31, 2008 and held no high risk securities or derivatives
as of December 31, 2009. Other declines in fair value are
attributable to changes in spread and market conditions and not credit quality,
and because the Company did not intend to sell any of these securities, and it
was more likely than not that the Company will not have to sell any of these
securities before recovery of their cost basis, no securities at December 31,
2009 were deemed to be other than temporarily impaired.
NOTE
5 –
|
LOANS
|
The
composition of net loans receivable at December 31, 2009 and 2008 is as
follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Loans
secured by one to four family residential properties
|
$ | 93,558 | $ | 84,412 | ||||
Loans
secured by nonresidential properties
|
183,262 | 165,019 | ||||||
Loans
for construction and land development
|
27,555 | 38,413 | ||||||
Loans
secured by farmland
|
6,280 | 8,561 | ||||||
Commercial
and industrial loans
|
17,016 | 22,346 | ||||||
Consumer
|
978 | 1,248 | ||||||
Other
loans
|
4,490 | 1,011 | ||||||
333,139 | 321,010 | |||||||
Unearned
net loan origination (fees) costs
|
(180 | ) | (130 | ) | ||||
Allowance
for loan losses
|
(5,496 | ) | (5,813 | ) | ||||
Net
Loans Receivable
|
$ | 327,463 | $ | 315,067 |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage
loans serviced for others are not included in the accompanying balance
sheets. The total amount of loans serviced for the benefit of others
was approximately $1.6 million and $2.0 million at December 31, 2009 and 2008,
respectively.
NOTE
6 –
|
ALLOWANCE
FOR LOAN LOSSES
|
The
following table presents changes in the allowance for loan losses for the years
ended December 31, 2009 and 2008:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Balance,
at beginning of year
|
$ | 5,813 | $ | 5,140 | ||||
Provision
for loan losses
|
3,404 | 1,350 | ||||||
Loans
charged off
|
(3,873 | ) | (716 | ) | ||||
Recoveries
|
152 | 39 | ||||||
Balance,
at end of year
|
$ | 5,496 | $ | 5,813 |
Loans on
which the accrual of interest has been discontinued amounted to approximately
$17.1 million and $9.7 million at December 31, 2009 and 2008,
respectively. Loan balances past due 90 days or more and still
accruing interest, but which management expects will eventually be paid in full,
amounted to $1.4 million at December 31, 2009 and $0 thousand at December 31,
2008.
A loan is
considered impaired, in accordance with the impairment accounting guidance (FASB
ASC 310-10-35-16), when based on current information and events, it is probable
that the Corporation will be unable to collect all amounts due from the borrower
in accordance with the contractual terms of the loan. Impaired loans
include loans modified in troubled debt restructurings where concessions have
been granted to borrowers experiencing financial difficulties. These
concessions could include a reduction in the interest rate on the loan, payment
extensions, forgiveness of principal, forbearance or other actions intended to
maximize collection.
The total
recorded investment in impaired loans was $24.8 million and $11.3 million at
December 31, 2009 and 2008, respectively. Impaired loans not
requiring an allowance for loan losses were $18.7 million and $7.2 million at
December 31, 2009 and 2008, respectively. Impaired loans requiring an
allowance for loan losses were $6.1 million and $4.1 million at December 31,
2009 and 2008, respectively. At December 31, 2009 and 2008, the
related allowance for loan losses associated with those loans was $1.7 million
and $2.1 million respectively. For the years ended December 31, 2009
and 2008, the average recorded investment in impaired loans was $18.7 million
and $13.1 million, respectively. Interest income recognized on such
loans during the time each was impaired was $488 thousand and $61 thousand,
respectively. The Company recognizes income on impaired loans under
the cash basis when the collateral on the loan is sufficient to cover the
outstanding obligation to the Company. If these factors do not exist,
the Company will record all payments as a reduction of principal on such
loans.
NOTE
7 –
|
FORECLOSED
ASSETS
|
Foreclosed
assets are presented net of an allowance for losses. An analysis of
the allowance for losses on foreclosed assets for the year ended December 31,
2009 and 2008 is as follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Balance,
at beginning of year
|
$ | 437 | $ | - | ||||
Provision
for losses
|
456 | 437 | ||||||
Balance,
at end of year
|
$ | 893 | $ | 437 |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Expenses
applicable to foreclosed assets for the year ended December 31, 2009 and 2008
include the following:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Net
loss (gain) on sales of real estate
|
$ | (190 | ) | $ | 58 | |||
Provision
for losses
|
456 | 437 | ||||||
Operating
expenses, net of rental income
|
347 | 255 | ||||||
$ | 613 | $ | 750 |
NOTE
8 –
|
PREMISES
AND EQUIPMENT
|
The
components of premises and equipment at December 31, 2009 and 2008 are as
follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Land
and land improvements
|
$ | 1,959 | $ | 2,111 | ||||
Building
and building improvements
|
5,876 | 6,726 | ||||||
Leasehold
improvements
|
396 | 310 | ||||||
Furniture,
fixtures and equipment
|
6,184 | 6,122 | ||||||
Assets
in progress
|
137 | 118 | ||||||
14,552 | 15,387 | |||||||
Accumulated
depreciation
|
(7,487 | ) | (6,861 | ) | ||||
Premises
and equipment, net
|
$ | 7,065 | $ | 8,526 |
During
the years ended December 31, 2009 and 2008, depreciation expense totaled $755
thousand and $959 thousand, respectively. As of December 31, 2009,
the Company had outstanding commitments of approximately $39 thousand for
computer software upgrades.
NOTE
9 –
|
DEPOSITS
|
The
components of deposits at December 31, 2009 and 2008 are as
follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Demand,
non-interest bearing
|
$ | 34,155 | $ | 34,784 | ||||
Savings,
club and interest-bearing demand
|
236,204 | 207,080 | ||||||
Time,
other
|
63,464 | 76,239 | ||||||
Time,
$100 and more
|
38,252 | 41,978 | ||||||
Total
deposits
|
$ | 372,075 | $ | 360,081 |
At
December 31, 2009, the scheduled maturities of time deposits are as follows (in
thousands):
2010
|
$ | 80,005 | ||
2011
|
13,100 | |||
2012
|
2,026 | |||
2013
|
6,043 | |||
2014
|
489 | |||
Thereafter
|
53 | |||
$ | 101,716 |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 –
|
BORROWINGS
|
At
December 31, 2009, the Bank has a line of credit commitment from the Federal
Home Loan Bank of New York for overnight advances of up to $95.7 million and a
$4.0 million line of credit at Atlantic Central Bankers Bank. There
were no borrowings under these lines of credit at December 31,
2009.
At
December 31, 2009 and 2008, under separate arrangements, the Bank had the
following borrowings from the Federal Home Loan Bank (in
thousands):
Initial
|
Interest
|
Balance
at December 31,
|
|||||||||||||
Maturity Date
|
Conversion Date
|
Rate
|
2009
|
2008
|
|||||||||||
November
3, 2010
|
N/A | 5.00 | % | $ | 3,090 | $ | 3,146 | ||||||||
December
21, 2010
|
December 21, 2003
|
5.14 | % | 4,000 | 4,000 | ||||||||||
December
7, 2016
|
December
7, 2008
|
4.00 | % | 5,000 | 5,000 | ||||||||||
June
21, 2017
|
June
21, 2008
|
4.60 | % | 6,000 | 6,000 | ||||||||||
December
7, 2017
|
December
7, 2017
|
3.97 | % | 5,000 | 5,000 | ||||||||||
December
26, 2017
|
December 26, 2009
|
3.66 | % | 5,000 | 5,000 | ||||||||||
December
26, 2017
|
December 26, 2010
|
3.79 | % | 5,000 | 5,000 | ||||||||||
$ | 33,090 | $ | 33,146 |
Maturities
of long-term debt in years subsequent to December 31, 2009 are as follows (in
thousands):
2010
|
$ | 7,090 | ||
2011
|
- | |||
2012
|
- | |||
2013
|
- | |||
2014
|
- | |||
Thereafter
|
26,000 | |||
$ | 33,090 |
The above
convertible notes contain an option which allows the Federal Home Loan Bank
(FHLB), at quarterly intervals commencing after each initial conversion date, to
convert the fixed convertible advance into replacement funding for the same or
lesser principal amount based on any advance then offered by the FHLB at their
current market rates. The Bank has the option to repay these
advances, if converted, without penalty.
At
December 31, 2009, the above borrowings are secured by a pledge of qualifying
residential and commercial mortgage loans, having an aggregate unpaid principal
balance of approximately $99.7 million of which the Bank has borrowing capacity
of at least 65% of such balance.
NOTE
11 –
|
JUNIOR
SUBORDINATED DEBENTURES AND MANDATORY REDEEMABLE CAPITAL
DEBENTURES
|
On June
28, 2007, Sussex Capital Trust II, a Delaware statutory business trust and a
non-consolidated wholly-owned subsidiary of the Company, issued $12.5 million of
variable rate capital trust pass-through securities to investors. The
variable interest rate reprices quarterly at the three month LIBOR plus 1.44%
and was 1.69% at December 31, 2009. Sussex Capital Trust II purchased
$12.9 million of variable rate junior subordinated deferrable interest
debentures from Sussex Bancorp. The debentures are the sole asset of
the Trust. The terms of the junior subordinated debentures are the
same as the terms of the capital securities. Sussex Bancorp has also
fully and unconditionally guaranteed the obligations of the Trust under the
capital securities. The capital securities are redeemable by Sussex
Bancorp during the first five years at a redemption price of 103.5% of par for
the first year and thereafter on a sliding scale down to 100% of par on or after
September 15, 2012, in whole or in part or earlier if the deduction of related
interest for federal income taxes is prohibited, classification as Tier I
Capital is no longer allowed, or certain other contingencies
arise. The capital securities must be redeemed upon final maturity of
the subordinated debentures on September 15, 2037.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 –
|
LEASE
COMMITMENTS AND TOTAL RENTAL
EXPENSE
|
The
Company has operating lease agreements expiring in various years through
2020. The Company has the option to extend the lease agreements for
additional lease terms. The Company is responsible to pay all real
estate taxes, insurance, utilities and maintenance and repairs on its leased
facilities.
Future
minimum lease payments by year are as follows (in thousands):
2010
|
$ | 430 | ||
2011
|
403 | |||
2012
|
349 | |||
2013
|
199 | |||
2014
|
186 | |||
Thereafter
|
178 | |||
$ | 1,745 |
Rent
expense was $494 thousand and $493 thousand for the years ended December 31,
2009 and 2008, respectively.
NOTE
13 –
|
EMPLOYEE
BENEFIT PLANS
|
The
Company has a 401(k) Plan and Trust for its employees. Non-highly
compensated employees may contribute up to the statutory limit of 75% of their
salary to the Plan. Highly compensated employees are restricted to a
contribution up to 7% of their salary. The Company provides a 50%
match of the employee's contribution up to 6% of the employee's annual
salary. The Company has suspended the employer match as of April 1,
2009. The amount charged to expense related to this Plan for the
years ended December 31, 2009 and 2008 was $46 thousand and $117 thousand,
respectively.
The
Company also maintains nonqualified Supplemental Salary Continuation Plans
covering the Company’s Chairman and a former executive officer of the Company
whose service was terminated in 2009. Under the provisions of the
Plans, the Company has executed agreements providing the officers a retirement
benefit. For the years ended December 31, 2009 and 2008,
$235 thousand and $164 thousand, respectively was charged to expense in
connection with the Plans. The increase in 2009 reflects the
acceleration of the liability accrual for the Plan benefiting the terminated
executive. At December 31, 2009 and 2008, the Bank had an investment in life
insurance of $3.4 million and $3.2 million, respectively, which are included in
other assets. Earnings on the investment in life insurance, included
in other income, were $156 thousand and $106 thousand for the years ended
December 31, 2009 and 2008, respectively. Payments from the Plan for
one executive started in May of 2008 and the other executive will start in April
of 2010.
In March
of 2005 the Board of Directors approved an Executive Incentive and Deferred
Compensation Plan. The purpose of the Plan is to motivate and reward
for achieving bank financial and strategic goals as well as to provide specified
benefits to a select group of management or highly compensated employees who
contribute materially to the continued growth, development and future business
success of the Company. No incentive compensation was recorded under
the Plan for the years ended December 31, 2009 and 2008. Participants
may elect to receive their award or defer such compensation in a deferral
account which will earn interest at the average interest rate earned by the
Company in its investment portfolio, compounded monthly. As of the
years ended December 31, 2009 and 2008, the carrying value of deferred
compensation was $51 thousand and $49 thousand, respectively.
In July
2006, the Board of Directors adopted a form of Director Deferred Compensation
Agreement for both the Bank and the Company (the “DCA”). Under the
terms of the DCA, a director may elect to defer all or a portion of his retainer
and fees for the coming year. Under the DCA, only the payment of the
compensation earned is deferred, and there is no deferral of the expense in the
Company’s financial statements related to the participant’s deferred
compensation, which will be charged to the Company’s income statement as an
expense in the period in which the participant earned the
compensation. The deferred amounts are credited with earnings at a
rate equal to the average interest rate earned by the Company on its investment
portfolio or at a rate that tracks the performance of the Company’s common
stock. The participant’s benefit will be distributed to the
participant or his beneficiary upon a change in control of the Company, the
termination of the DCA, the occurrence of an unforeseeable emergency,
the
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
termination
of service or the participant’s death or disability. Upon
distribution, a participant’s benefit will be paid in monthly installments over
a period of ten (10) years. As of the years ended December 31, 2009
and 2008, $120 thousand and $85 thousand, respectively, have been
deferred.
The
Company has an Employee Stock Ownership Plan for the benefit of all employees
who meet the eligibility requirements set forth in the Plan. The
amount of employer contributions to the Plan is at the discretion of the Board
of Directors. The contributions charged to expense for the years
ended December 31, 2009 and 2008 were $0 thousand and $40 thousand,
respectively. At December 31, 2009 and 2008, 53,531 and 54,631
shares, respectively, of the Company's common stock were held in the
Plan. In the event a terminated Plan participant desires to sell his
or her shares of the Company’s stock, or for certain employees who elect to
diversify their account balances, the Company may be required to purchase the
shares from the participant at their fair market value.
NOTE
14 –
|
COMPREHENSIVE
INCOME
|
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The
components of other comprehensive income (loss) and related tax effects for the
years ended December 31, 2009 and 2008 are as follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Unrealized
gains (losses) on available for sale securities
|
$ | 1,272 | $ | (4,297 | ) | |||
Less:
reclassification adjustments for realized gains (losses) and
impairment
|
||||||||
write-downs
included in net income (loss)
|
134 | (3,375 | ) | |||||
Net
unrealized gains (losses)
|
1,138 | (922 | ) | |||||
Tax
effect
|
(455 | ) | 369 | |||||
Net
of tax amount
|
$ | 683 | $ | (553 | ) |
NOTE
15–
|
EARNINGS
PER SHARE
|
The
following table sets forth the computations of basic and diluted earnings per
share, adjusted for the 6.5% stock dividend in 2008:
Income
|
Shares
|
Per
Share
|
||||||||||
(In Thousands, Except per Share
Amounts)
|
(Numerator)
|
(Denominator)
|
Amount
|
|||||||||
Year
Ended December 31, 2009:
|
||||||||||||
Basic
earnings per share:
|
||||||||||||
Net
income applicable to common stockholders
|
$ | 2,011 | 3,248 | $ | 0.62 | |||||||
Effect
of dilutive securities:
|
||||||||||||
Stock
options and nonvested stock awards
|
- | 11 | ||||||||||
Diluted
earnings per share:
|
||||||||||||
Net
income applicable to common stockholders
|
||||||||||||
and
assumed conversions
|
$ | 2,011 | 3,259 | $ | 0.62 | |||||||
Year
Ended December 31, 2008:
|
||||||||||||
Basic
earnings per share:
|
||||||||||||
Net
loss applicable to common stockholders
|
$ | (1,042 | ) | 3,292 | $ | (0.32 | ) | |||||
Effect
of dilutive securities:
|
||||||||||||
Stock
options and nonvested stock awards
|
- | - | ||||||||||
Diluted
earnings per share:
|
||||||||||||
Net
loss applicable to common stockholders
|
||||||||||||
and
assumed conversions
|
$ | (1,042 | ) | 3,292 | $ | (0.32 | ) |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For 2008,
the Company had 12,981 shares not included in the above calculation due to their
anti-dilutive effect on earnings per share.
NOTE
16 –
|
STOCK
OPTION PLANS
|
On
October 15, 2008 the Board of Directors approved a 6.5% stock dividend to
stockholders of record as of October 29, 2008. The following data
have been adjusted to give retroactive effect to stock dividends declared
subsequent to option authorizations, grants and exercises.
During
2001, the stockholders approved the 2001 Stock Option Plan established to
provide equity incentives to selected persons. Options may be granted
to employees, officers and directors of the Company or
subsidiary. Options granted under the Plan may be either incentive
stock options or non-qualified stock options as designated at the time of
grant. The shares granted under the Plan to directors are
non-qualified stock options. As of December 31, 2009 there were
55,409 shares available for future grants under this Plan.
During
2005, the stockholders approved the 2004 Equity Incentive Plan to provide equity
incentives to selected persons. Awards may be granted to employees,
officers, directors, consultants and advisors of the Company or
subsidiary. Awards granted under the Plan may be either stock options
or restricted stock and are designated at the time of grant. Options
granted under the Plan to directors, consultants and advisors are non-qualified
stock options. Options granted to officers and other employees may be
incentive stock options, which are subject to limitations under Section 422 of
the Internal Revenue Code, or non-qualified stock options. Restricted stock
awards may be made to any plan participant. As of December 31, 2009,
there were 186,953 shares available for future grants under the
Plan.
Restricted
stock activity for the years ended December 31, 2009 and 2008 are as
follows:
Number of Shares
|
||||||||
2009
|
2008
|
|||||||
Accumulated
shares granted
|
24,819 | 18,895 | ||||||
Vested
during the year
|
4,894 | 4,025 |
Remaining
unvested restricted stock grants are expected to vest as follows:
Number of Shares
|
||||
2010
|
4,544 | |||
2011
|
3,194 | |||
2012
|
2,669 | |||
2013
|
2,094 | |||
2014
|
1,474 | |||
13,975 |
Options
granted under the 2001 stock option plan and the 2004 equity incentive plan to
officers and other employees and which are incentive stock options, are subject
to limitations under Section 422 of the Internal Revenue Code. The
option price under each such grant shall not be less than the fair market value
on the date of the grant. No option will be granted for a term in
excess of 10 years. The Company may establish a vesting schedule that
must be satisfied before the options may be exercised.
During
1995, the stockholders approved a stock option plan for nonemployee directors
(the Directors’ Plan). This plan expired in 2005, and therefore there
are no authorized shares left to be granted. As of December 31, 2009,
6,230 options were outstanding and will expire from October 2010 to October
2014.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock
option transactions under all plans are summarized as follows:
Weighted
|
Weighted
|
|||||||||||||||
Number
of
|
Average
Exercise
|
Average
|
Aggregate
|
|||||||||||||
Shares
|
Price per Share
|
Contractual Term
|
Intrinsic Value
|
|||||||||||||
Outstanding,
December 31, 2007
|
231,975 | $ | 12.31 | |||||||||||||
Options
exercised
|
(3,840 | ) | 8.80 | |||||||||||||
Options
expired
|
(1,233 | ) | 8.65 | |||||||||||||
Options
forfeited
|
(9,531 | ) | 11.69 | |||||||||||||
Outstanding,
December 31, 2008
|
217,371 | $ | 12.34 | |||||||||||||
Options
expired
|
(1,234 | ) | 9.50 | |||||||||||||
Options
forfeited
|
(28,775 | ) | 11.93 | |||||||||||||
Outstanding,
December 31, 2009
|
187,362 | $ | 12.43 | 6.10 | $ | - | ||||||||||
Exercisable,
December 31, 2009
|
187,362 | $ | 12.43 | 6.10 | $ | - |
The
following table summarizes information about stock options outstanding at
December 31, 2009 as adjusted for stock dividends:
Exercise
|
Number
|
Remaining
|
Number
|
|||||||||||
Price
|
Outstanding
|
Contractual Life
|
Exercisable
|
|||||||||||
6.88 | 1,234 | 0.8 | 1,234 | |||||||||||
8.86 | 19,483 | 3.1 | 19,483 | |||||||||||
8.90 | 5,788 | 2.1 | 5,788 | |||||||||||
8.99 | 17,024 | 3.8 | 17,024 | |||||||||||
9.33 | 5,875 | 2.8 | 5,875 | |||||||||||
12.25 | 40,068 | 13.5 | 40,068 | |||||||||||
12.63 | 7,826 | 5.8 | 7,826 | |||||||||||
13.39 | 27,050 | 5.1 | 27,050 | |||||||||||
14.67 | 56,306 | 4.1 | 56,306 | |||||||||||
16.45 | 6,708 | 4.8 | 6,708 | |||||||||||
187,362 | 187,362 |
There
were no stock options exercised during 2009.
Information
regarding the Company's restricted stock grants activity for the year ended
December 31, 2009 is as follows:
Weighted
Average
|
||||||||
Number
of
|
Grant
Date
|
|||||||
Shares
|
Fair Value
|
|||||||
Restricted
stock, beginning of year
|
12,945 | $ | 12.68 | |||||
Granted
|
9,570 | 4.75 | ||||||
Forfeited
|
(3,646 | ) | 7.96 | |||||
Vested
|
(4,894 | ) | 12.73 | |||||
Restricted
stock, end of year
|
13,975 | $ | 8.34 |
Total
stock-based compensation related to restricted stock awards was $52 thousand for
the year ended December 31, 2009. As of December 31, 2009 there was
$79 thousand of unrecognized compensation cost related to non vested restricted
stock awards which is expected to be recognized over a weighted average period
of 3.08 years.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
17 – INCOME
TAXES
The
Company and its subsidiary are subject to U.S. federal and state income
tax. The Company is no longer subject to examination by U.S. Federal
taxing authorities for years before 2003 and for all state income taxes through
2003.
The
components of income tax expense (benefit) for the years ended December 31, 2009
and 2008 are as follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Current:
|
||||||||
Federal
|
$ | (344 | ) | $ | 412 | |||
State
|
(180 | ) | 336 | |||||
(524 | ) | 748 | ||||||
Deferred:
|
||||||||
Federal
|
723 | (1,442 | ) | |||||
State
|
253 | (402 | ) | |||||
976 | (1,844 | ) | ||||||
$ | 452 | $ | (1,096 | ) |
The
reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense (benefit) included in the statements of income for the years
ended December 31, 2009 and 2008 is as follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||||||||||
Federal
income tax (benefit) at statutory rate
|
$ | 837 | 34 | % | $ | (727 | ) | (34 | %) | |||||||
Tax
exempt interest
|
(410 | ) | (17 | ) | (329 | ) | (15 | ) | ||||||||
State
income tax (benefit), net of federal income tax effect
|
49 | 2 | (43 | ) | (2 | ) | ||||||||||
Other
|
(24 | ) | (1 | ) | 3 | - | ||||||||||
$ | 452 | 18 | % | $ | (1,096 | ) | (51 | %) |
The
income tax provision includes $54 thousand and $60 thousand in 2009 and 2008,
respectively, of income tax expense related to net gains on sales of
securities.
The
components of the net deferred tax asset at December 31, 2009 and 2008 are as
follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Deferred
tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 2,195 | $ | 2,322 | ||||
Deferred
compensation
|
602 | 402 | ||||||
Other-than-temporary
impairment
|
- | 1,408 | ||||||
Unrealized
losses on securities available for sale
|
- | 359 | ||||||
Foreclosed
real estate
|
356 | - | ||||||
Intangible
assets
|
52 | 58 | ||||||
Other
|
105 | 90 | ||||||
Total
Deferred Tax Assets
|
3,235 | 4,639 | ||||||
Deferred
tax liabilities:
|
||||||||
Premises
and equipment
|
(181 | ) | (177 | ) | ||||
Prepaid
expenses
|
(178 | ) | (176 | ) | ||||
Unrealized
gain on securities, available for sale
|
(96 | ) | - | |||||
Total
Deferred Tax Liabilities
|
(455 | ) | (353 | ) | ||||
Net
Deferred Tax Asset
|
$ | 2,855 | $ | 4,286 |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
18 –
|
TRANSACTIONS
WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS
|
The
Company has had, and may be expected to have in the future, banking transactions
in the ordinary course of business with its executive officers, directors,
principal stockholders, their immediate families and affiliated companies
(commonly referred to as related parties), on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
The
related party loan activity for the year ended December 31, 2009 is summarized
as follows:
(Dollars in thousands)
|
2009
|
|||
Balance,
beginning
|
$ | 2,681 | ||
Disbursements
|
644 | |||
Repayments
|
(209 | ) | ||
Balance,
ending
|
$ | 3,116 |
Certain
related parties of the Company provided legal and appraisal services to the
Company. Such services rendered totaled $22 thousand and $30 thousand
during 2009 and 2008, respectively. The Company paid rent to related
parties for an office location in the amount of $171 thousand in 2009 and $166
thousand in 2008.
NOTE
19 –
|
FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET
RISK
|
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the Company's financial
instrument commitments at December 31, 2009 and 2008 is as
follows:
(Dollars in thousands)
|
2009
|
2008
|
||||||
Commitments
to grant loans
|
$ | 580 | $ | 2,275 | ||||
Unfunded
commitments under lines of credit
|
30,268 | 44,005 | ||||||
Outstanding
standby letters of credit
|
2,157 | 2,580 |
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or
commercial real estate, accounts receivable, inventory and
equipment.
Outstanding
letters of credit 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. These standby letters of
credit expire within twelve months, although many have automatic renewal
provisions. 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
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2009 and 2008 for guarantees
under standby letters of credit issued is not material.
NOTE
20 –
|
REGULATORY
MATTERS
|
The
Company is required to maintain cash reserve balances either in vault cash or
with the Federal Reserve Bank. The total of those reserve balances
was approximately $1.2 million at December 31, 2009.
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet the minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank’s assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank’s
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk-weightings and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31,
2009, that the Bank meets all capital adequacy requirements to which they are
subject.
As of
December 31, 2009, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Bank’s category.
The
Bank’s actual capital amounts and ratios at December 31, 2009 and 2008 are
presented below:
To
be Well
|
||||||||||||
For
Capital Adequacy
|
Capitalized
under Prompt
|
|||||||||||
Actual
|
Purposes
|
Corrective Action Provisions
|
||||||||||
(Dollars in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
As
of December 31, 2009
|
||||||||||||
Total
capital (to risk-weighted assets)
|
$ | 45,019 | 13.17 | % |
$>27,351
|
>8.00%
|
$>34,189
|
>10.00%
|
||||
Tier
I capital (to risk-weighted assets)
|
40,730 | 11.91 |
>13,676
|
>4.00
|
>20,513
|
>6.00
|
||||||
Tier
I capital (to average assets)
|
40,730 | 9.07 |
>17,956
|
>4.00
|
>22,444
|
>5.00
|
||||||
As
of December 31, 2008
|
||||||||||||
Total
capital (to risk-weighted assets)
|
$ | 41,524 | 12.29 | % |
$>27,023
|
>8.00%
|
$>33,778
|
>10.00%
|
||||
Tier
I capital (to risk-weighted assets)
|
37,278 | 11.04 |
>13,511
|
>4.00
|
>20,267
|
>6.00
|
||||||
Tier
I capital (to average assets)
|
37,278 | 8.59 |
>17,361
|
>4.00
|
>21,702
|
>5.00
|
The Bank
is subject to certain restrictions on the amount of dividends that it may
declare due to regulatory considerations. The State of New Jersey
banking laws specify that no dividend shall be paid by the Bank on its capital
stock unless, following the payment of such dividend, the capital stock of the
Bank will be unimpaired and the Bank will have a surplus of not less than 50% of
its capital stock or, if not, the payment of such dividend will not reduce the
surplus of the Bank.
At
December 31, 2009, the Bank’s funds available for payment of dividends were
$36.1 million. Accordingly, $7.5 million of the Company’s equity in
the net assets of the Bank was restricted as of December 31, 2009.
In
addition, dividends paid by the Bank to the Company would be prohibited if the
effect thereof would cause the Bank’s capital to be reduced below applicable
minimum capital requirements.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
21 –
|
PARENT
COMPANY ONLY FINANCIAL
|
Condensed
financial information pertaining only to the parent company, Sussex Bancorp, is
as follows:
BALANCE
SHEETS
|
||||||||
December 31,
|
||||||||
(Dollars in thousands)
|
2009
|
2008
|
||||||
Assets:
|
||||||||
Cash
|
$ | 830 | $ | 1,012 | ||||
Investment
in subsidiary
|
44,385 | 40,192 | ||||||
Securities,
available for sale
|
582 | 1,140 | ||||||
Loans
|
1,004 | 1,038 | ||||||
Accrued
interest and other assets
|
688 | 1,477 | ||||||
Total
Assets
|
$ | 47,489 | $ | 44,859 | ||||
Liabilities
and Stockholders' Equity:
|
||||||||
Other
liabilities
|
$ | 75 | $ | 62 | ||||
Junior
subordinated debentures
|
12,887 | 12,887 | ||||||
Stockholders'
Equity
|
34,527 | 31,910 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 47,489 | $ | 44,859 |
STATEMENTS
OF INCOME
|
||||||||
Year Ended December 31,
|
||||||||
(Dollars in thousands)
|
2009
|
2008
|
||||||
Dividends
from banking subsidiary
|
$ | 99 | $ | 656 | ||||
Interest
and fees on loans
|
64 | 68 | ||||||
Interest
on investments
|
26 | 32 | ||||||
Interest
expense on debentures
|
(306 | ) | (590 | ) | ||||
Other
expenses
|
(152 | ) | (131 | ) | ||||
Income
(loss) before Income Tax Benefit and Equity in
|
||||||||
Undistributed
Net Income of Banking Subsidiary
|
(269 | ) | 35 | |||||
Income
tax benefit
|
125 | 211 | ||||||
Income
(loss) before Equity in Undistributed Net
|
||||||||
Income
of Banking Subsidiary
|
(144 | ) | 246 | |||||
Equity
in undistributed net income (loss) of banking subsidiary
|
1,768 | (1,675 | ) | |||||
Equity
in undistributed net income of nonbanking subsidiary
|
387 | 387 | ||||||
Net
Income (Loss)
|
$ | 2,011 | $ | (1,042 | ) |
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS
OF CASH FLOWS
|
||||||||
Year Ended December 31,
|
||||||||
(Dollars in thousands)
|
2009
|
2008
|
||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
Income (Loss)
|
$ | 2,011 | $ | (1,042 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Net
change in other assets and liabilities
|
1,009 | (208 | ) | |||||
Equity
in undistributed net income (loss) of banking subsidiary
|
(2,154 | ) | 1,288 | |||||
Net
Cash Provided by Operating Activities
|
866 | 38 | ||||||
Cash
Flows Used In Investing Activities:
|
||||||||
Securities
available for sale:
|
||||||||
Maturities,
calls and principal repayments
|
171 | 139 | ||||||
Net
(increase) decrease in loans
|
34 | 30 | ||||||
Capital
contribution to banking subsidiary
|
(1,124 | ) | (8,000 | ) | ||||
Net
Cash Used In Investing Activities
|
(919 | ) | (7,831 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||
Cash
dividends paid, net of reinvestments
|
(99 | ) | (656 | ) | ||||
Purchase
of treasury stock
|
(30 | ) | (390 | ) | ||||
Proceeds
from exercise of stock options
|
0 | 34 | ||||||
Net
Cash Used In Financing Activities
|
(129 | ) | (1,012 | ) | ||||
Net
Decrease in Cash and Cash Equivalents
|
(182 | ) | (8,805 | ) | ||||
Cash
and Cash Equivalents - Beginning of Year
|
1,012 | 9,817 | ||||||
Cash
and Cash Equivalents - End of Year
|
$ | 830 | $ | 1,012 |
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not
applicable
ITEM
9A(T).
|
CONTROLS
AND
PROCEDURES
|
(a) Evaluation
of disclosure controls and procedures
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, 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) Report
on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13A-15 (f) and 15d-15 (f) of
the Securities and Exchange Act of 1934. The Company’s internal control system
was designed to provide reasonable assurance to the Company’s management and
Board of Directors as to the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements, errors or fraud. Also, projections of any evaluations of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on this
assessment, management concluded that as of December 31, 2009, the Company’s
internal control over financial reporting is operating as designed and is
effective based on the COSO criteria.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
The
forgoing shall not deemed to be “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section. In addition, this information shall not
be deemed to be incorporated by reference into any of the Registrant’s filings
with the Securities and Exchange Commission, except as shall be expressly set
forth by specific reference in any such filing.
By: /s/ Anthony Labozzetta
|
By: /s/ Candace A.
Leatham
|
President
and Chief Executive Officer
|
Executive
Vice President and Chief Financial
Officer
|
(c) Changes
in Internal Control over Financial Reporting
Not
applicable
ITEM
9B.
|
OTHER
INFORMATION
|
Not
applicable
PART III
ITEM
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information
required by this item is included in the Definitive Proxy Statement for the
Company's 2010 Annual Meeting under the captions "ELECTION OF DIRECTORS",
“INFORMATION ABOUT THE BOARD OF DIRECTORS AND MANAGEMENT” and "COMPLIANCE WITH
SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is
incorporated herein by reference. It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 30, 2010.
The
Company’s Code of Conduct governing its Chief Executive Officer and senior
financial officers, as well as its Board of Directors, officers and employees,
has been adopted as required by the SOX, SEC regulations and the NASDAQ listing
standards. It governs such matters as conflicts of interest, use of
corporate opportunity, confidentiality, compliance with law and the like. The
Code of Conduct is available on the Company’s website,
www.sussexbank.com.
The
following table sets forth certain information about each executive officer of
the Company who is not also a director.
Name and Position
|
Age
|
Principal Occupation for the Past Five
Years
|
Officer Since
|
Term Expires
|
Tammy
Case
|
51
|
Executive
Vice President, Loan Administration
|
2004
|
N/A
|
Candace
A. Leatham
|
55
|
Executive
Vice President and Chief Financial Officer
|
1984
|
N/A
|
George
Lista
|
50
|
Chief
Executive Officer, Tri-State Insurance Agency
|
2001
|
N/A
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Information
concerning executive compensation is incorporated by reference from the
Registrant’s Definitive Proxy Statement for the Company's 2010 Annual Meeting
under the caption "EXECUTIVE COMPENSATION". It is expected that such
Proxy Statement will be filed with the Securities and Exchange Commission no
later than April 30, 2010.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information
concerning security ownership of certain beneficial owners and management is
included in the Definitive Proxy Statement for the Company's 2010 Annual Meeting
under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT", which is incorporated herein by reference. It is
expected that such Proxy statement will be filed with the Securities and
Exchange Commission no later than April 30, 2010.
The
following table sets forth information with respect to the Company's equity
compensation plans as of the end of the most recently completed fiscal
year.
Equity
Compensation Plan Information
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||
(a)
|
(b)
|
(c)
|
||||
Equity
compensation plans approved by security holders
|
187,362
|
$12.43
|
242,362
|
|||
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
|||
Total
|
187,362
|
$12.43
|
242,362
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Information
concerning certain relationships and related transactions is included in the
Definitive Proxy Statement for the Company's 2010 Annual Meeting under the
caption "INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS", which is
incorporated herein by reference. It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 30, 2010.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
Information
concerning the fees and services of the Registrant’s independent principal
accountant is included in the Definitive Proxy Statement for the Company’s 2010
Annual Meeting under the caption “PRINCIPAL ACCOUNTANT FEES AND SERVICES” which
is incorporated herein by reference. It is expected that such proxy
statement will be filed with the Securities and Exchange Commission no later
than April 30, 2010.
PART IV
ITEM
15.
|
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
|
Exhibit
Number
|
Description of
Exhibits
|
|
3.1
|
Certificate
of Incorporation of Sussex Bancorp
(a)
|
|
3.2
|
Amended
and Restated Bylaws of Sussex Bancorp
(b)
|
|
4.1
|
Specimen
Common Stock Certificate (c)
|
|
10.1
|
1995
Incentive Stock Option Plan (d)
|
|
10.2
|
2001
Stock Option Plan (e)
|
|
10.3
|
Amendment,
dated January 7, 2004, to Employment Agreement dated September 15, 1999
with Donald L. Kovach (f)
|
|
10.4
|
Employment
Agreement with Tammy Case dated February 20, 2008
(g)
|
|
10.5
|
Employment
Agreement with George Lista dated September 28, 2004
(h)
|
|
10.6
|
Amendment,
dated January 7, 2004, to Salary Continuation Agreement dated March 15,
2002 with Donald L. Kovach (i)
|
|
10.7
|
Amendment,
dated October 17, 2007, to Salary Continuation Agreement dated March 15,
2002 with Donald L. Kovach (j)
|
|
10.8
|
2004
Equity Incentive Plan (k)
|
|
10.9
|
Amended
and Restated Director Deferred Compensation Agreement
(l)
|
|
10.10
|
Employment
Agreement dated January 20, 2010 with Anthony Labozzetta
(m)
|
|
10.11
|
Amended
and Restated Executive Incentive and Deferred Compensation Plan
(n)
|
|
Subsidiaries
of Sussex Bancorp
|
|
Consent
of ParenteBeard LLC
|
|
Rule
13a-14(a) Certification of Anthony
Labozzetta
|
|
Rule
13a-14(a) Certification of Candace A.
Leatham
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
(a)
|
Incorporated
herein by reference to Exhibit A of the Company's Definitive Proxy
Statement on Schedule 14-A filed March 31, 1997, Exhibit 99.4 of the
Company's form 8-B filed December 13, 1996 and Exhibit A to the Company’s
Definitive Proxy Statement on Schedule 14A filed on January 28,
2009.
|
(b)
|
Incorporated
herein by reference to Exhibit 3(ii) to Current Report on Form 8-K filed
October 22, 2008.
|
(c)
|
Incorporated
herein by reference to Exhibit 4.1 of the Company’s Registration Statement
filed on Form SB-2 on October 6,
2004.
|
(d)
|
Incorporated
herein by reference to Exhibit 99.6 of the Company’s Form 8-B filed
December 13, 1996.
|
(e)
|
Incorporated
herein by reference to Exhibit B of the Company’s Definitive Proxy
Statement on Form 14-A filed March 19,
2001.
|
(f)
|
Incorporated
herein by reference to Exhibit 10.1 of the Company’s Form 10-KSB for the
year ended December 31, 2003.
|
(g)
|
Incorporated
herein by reference to Exhibit 10.A and 10.B of the Company’s Form 8-K
filed February 26, 2008.
|
(h)
|
Incorporated
herein by reference to Exhibit 10.A and 10.B respectively of the Company’s
Form 8-K filed September 7, 2006.
|
(i)
|
Incorporated
herein by reference to Exhibit 10 of the Company’s Form 10-QSB for the
period ended June 30, 2003.
|
(j)
|
Incorporated
herein by reference to Exhibit 10.2 and 10.3 of the Company’s Form 10-Q
for the quarter ended September 30,
2007.
|
(k)
|
Incorporated
herein by reference to Exhibit C of the Company’s definitive Proxy
Statement for the 2005 Annual Meeting of Shareholders, filed on March 15,
2005.
|
(l)
|
Incorporated
herein by reference to Exhibit 10 of the Company’s Form 8-K filed December
19, 2008.
|
(m)
|
Incorporated
herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed
January 26, 2010.
|
(n)
|
Incorporated
herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed
January 26, 2010.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
|
|
/s/ Anthony Labozzetta
|
|
ANTHONY
LABOZZETTA
|
|
President
and
|
|
Chief
Executive Officer
|
|
Dated:
March 22, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Name
|
Title
|
Date
|
|
/s/ Anthony Labozzetta
|
President
and Chief Executive Officer
|
March
22, 2010
|
|
Anthony
Labozzetta
|
|||
/s/ Candace A. Leatham
|
Executive
Vice President (Principal
|
March
22, 2010
|
|
Candace
A. Leatham
|
Financial
and Accounting Officer)
|
||
/s/ Anthony S. Abbate
|
Director
|
March
22, 2010
|
|
Anthony
S. Abbate
|
|||
/s/ Irvin Ackerson
|
Director
|
March
22, 2010
|
|
Irvin
Ackerson
|
|||
/s/ Patrick Brady
|
Director
|
March
22, 2010
|
|
Patrick
Brady
|
|||
/s/ Richard Branca
|
Director
|
March
22, 2010
|
|
Richard
Branca
|
|||
/s/ Katherine H. Caristia
|
Director
|
March
22, 2010
|
|
Katherine
H. Caristia
|
|||
/s/ Mark J. Hontz
|
Director
|
March
22, 2010
|
|
Mark
J. Hontz
|
|||
/s/ Donald L. Kovach
|
Director
|
March
22, 2010
|
|
Donald
L. Kovach
|
|||
/s/ Edward J. Leppert
|
Director
|
March
22, 2010
|
|
Edward
J. Leppert
|
|||
/s/ Timothy Marvil
|
Director
|
March
22, 2010
|
|
Timothy
Marvil
|
|||
/s/ Richard W. Scott
|
Director
|
March
22, 2010
|
|
Richard
W. Scott
|
|||
/s/ Terry H Thompson
|
Director
|
March
22, 2010
|
|
Terry
H Thompson
|
62