UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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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,
2008
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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)
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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:
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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 o No
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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 o No
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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 ý No
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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. o
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.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company ý
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No
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The
aggregate market value of the voting stock held by non-affiliates of the Issuer
as of June 30, 2008 was $20,843,600. The number of shares of the Issuer's Common
Stock, no par value, outstanding as of March 9, 2009 was
3,270,932.
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PART I
ITEM
1. BUSINESS
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. In 2005, the Company formed
a joint venture with National City Mortgage Inc., called SussexMortgage.com LLC
to originate 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.
The joint venture currently operates in New Jersey and four other
states.
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, 2008, the Company employed 113 full-time employees and 19 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
or 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 need 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 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.
In addition, the FDIC implemented a 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. Both increases in deposit insurance will expire on
December 31, 2009, unless extended, and the prior limits, described below, will
go back into effect. The Bank elected not to opt out of this program,
and is paying the required additional assessment.
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
has significantly increased deposit insurance assessment rates, commencing in
the second quarter of 2009. As increased, the adjusted base
assessment rates will range from 12 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. Finally, the FDIC has proposed a special assessment equal to
twenty (20) basis points of insured deposits as of June 30, 2009, to be paid on
September 30, 2009. This proposal has not yet been finalized. The
FDIC in this proposal has also reserved the right to impose one or more
additional special assessments of ten (10) basis points if needed to
recapitalize the Deposit Insurance Fund.
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. On October 14, 2008, the United States Treasury (the “UST”)
announced its Troubled Assets Relief Program (“TARP”) Capital Purchase Program
(“CPP”). Under the CPP, the UST will purchase shares of senior preferred stock
in insured depository institutions or their holding companies, bearing a
dividend rate of 5%. 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. The
Company applied for, and was approved for participation in, the
CPP. In order to participate, the Company was required to amend its
certificate of incorporation to provide for preferred stock. Our
shareholders approved an amendment to the Company’s certificate of incorporation
to authorize preferred stock on February 25, 2009. Subsequent to
shareholder approval, the Company’s Board of Director’s voted not to participate
in the CPP due to a number of factors, including the Company’s strong capital
position, the changed public perception of the CPP, changes to the terms of the
CPP, and reduced opportunities to profitably deploy the additional capital due
to the continued economic slowdown and reduced loan demand.
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 new 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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certification
of financial statements by the chief executive officer and the chief
financial officer;
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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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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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a
prohibition on insider trading during pension plan black out
periods;
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disclosure
of off-balance sheet transactions;
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a
prohibition on personal loans to officers and directors, unless subject to
Federal Reserve Regulation O;
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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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disclosure
of whether or not a company has adopted a code of
ethics;
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“real
time” filing of periodic reports;
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auditor
independence; and
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various
increased criminal penalties for violations of securities
laws.
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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 will 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
2006, our total non-performing assets have increased to $15.0 million, or 3.41%
of our total assets, from $2.7 million, or 0.75% of our total assets. The
increase in non-performing assets reflects difficulties experienced by several
large development projects and the general slowdown in the economy in our trade
area. The increase in non-performing assets has negatively impacted our results
of operations over the past two years, 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
2007, we paid $36 thousand, net of a $127 thousand credit adjustment, in deposit
insurance assessments, and in 2008 this increased to $385 thousand. Premium
assessment rates in 2007 ranged from 5 to 43 basis points. The FDIC has recently
announced an increased assessment, to go into effect for the second quarter of
2009, which will raise insurance premiums for the healthiest banks by 7 basis
points, with the new assessments ranging from 12 to 77.5 basis points. Banks
like the Bank 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. Finally, the FDIC has proposed a special
assessment of 20 basis points of insured deposits as of June 30, 2009, to be
paid September 30, 2009, with the possibility of additional 10 basis point
special assessments if needed to recapitalize the Deposit Insurance Fund. This
proposal is still under review and may be modified. However, had the
special assessment been in effect on our deposits at December 31, 2008 at the
proposed rate, we would have paid approximately $719 thousand. These additional
costs will adversely affect our results of operations.
Due to the current state of the yield
curve, our net-interest margin and net-interest spread have
declined. Continued declines in our net-interest margin and
net-interest spread will negatively impact our results of
operations. During 2008, the yield
curve; i.e., the difference between short and long-term rates of interest, has
been flat or inverted. This has impacted our results of operations,
since most of our funding (our deposits) are short-term, while our assets (our
loans) are longer term obligations. If the yield curve remains flat,
or short-term rates continue to rise relative to longer term rates, our
net-interest income and results of operations will be negatively
impacted.
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 significant 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, 2008, the Company’s allowance for loan losses was $5.8
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
banks, 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 a great deal upon our judgment that large and mid-size financial
institutions do not adequately serve small businesses in our principal market
area and upon our ability to compete favorably for such customers. 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,
2008. 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
|
Owned
|
N/A
|
|
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
(2)
|
June
30,
2009
|
|
65-67
Main Street
Warwick,
New York
|
Leased
|
December,
2009
|
|
|
(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.
|
|
|
(2)
|
The
Company assumed the lease on the Port Jervis, New York branch on March 24,
2006.
|
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,
except as described below, 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 2008.
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, 2008, the Company had approximately
622 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:
|
2008
|
High Sales
Price:
|
Low Sales
Price:
|
Dividends
Declared:
|
|||
|
4th
Quarter
|
$8.75
|
$3.50
|
$
-
|
|||
|
3rd
Quarter
|
$9.50
|
$6.93
|
$0.065
|
|||
|
2nd
Quarter
|
$13.00
|
$8.01
|
$0.065
|
|||
|
1st
Quarter
|
$12.89
|
$9.74
|
$0.065
|
|||
|
2007
|
High Sales
Price:
|
Low Sales
Price:
|
Dividends
Declared:
|
|||
|
4th
Quarter
|
$12.67
|
$10.19
|
$0.065
|
|||
|
3rd
Quarter
|
$14.08
|
$9.39
|
$0.065
|
|||
|
2nd
Quarter
|
$14.74
|
$13.23
|
$0.065
|
|||
|
1st
Quarter
|
$15.15
|
$13.41
|
$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))
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
SUMMARY
OF INCOME:
|
||||||||||||||||||||
|
Interest
income
|
$ | 22,653 | $ | 22,808 | $ | 19,998 | $ | 15,547 | $ | 11,791 | ||||||||||
|
Interest
expense
|
10,843 | 11,387 | 8,249 | 4,328 | 2,814 | |||||||||||||||
|
Net
interest income
|
11,810 | 11,421 | 11,749 | 11,219 | 8,977 | |||||||||||||||
|
Provision
for loan losses
|
1,350 | 1,930 | 733 | 1,138 | 558 | |||||||||||||||
|
Net
interest income after provision for loan losses
|
10,460 | 9,491 | 11,016 | 10,081 | 8,419 | |||||||||||||||
|
Other
income
|
1,991 | 5,616 | 5,244 | 4,873 | 4,542 | |||||||||||||||
|
Other
expenses
|
14,589 | 13,148 | 12,648 | 11,603 | 10,789 | |||||||||||||||
|
Income
(loss) before income taxes
|
(2,138 | ) | 1,959 | 3,612 | 3,351 | 2,172 | ||||||||||||||
|
Income
taxes
|
(1,096 | ) | 450 | 1,148 | 952 | 581 | ||||||||||||||
|
Net
income (loss)
|
$ | (1,042 | ) | $ | 1,509 | $ | 2,464 | $ | 2,399 | $ | 1,591 | |||||||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES: (1)
|
||||||||||||||||||||
|
Basic
|
3,291,710 | 3,354,828 | 3,359,529 | 3,368,788 | 2,093,518 | |||||||||||||||
|
Diluted
|
3,291,710 | 3,385,052 | 3,395,880 | 3,408,933 | 2,179,594 | |||||||||||||||
|
PER
SHARE DATA:
|
||||||||||||||||||||
|
Basic
earnings (loss) per share
|
$ | (0.32 | ) | $ | 0.45 | $ | 0.73 | $ | 0.71 | $ | 0.76 | |||||||||
|
Diluted
earnings (loss) per share
|
(0.32 | ) | 0.45 | 0.73 | 0.70 | 0.73 | ||||||||||||||
|
Cash
dividends (2)
|
0.20 | 0.26 | 0.26 | 0.19 | 0.25 | |||||||||||||||
|
Stock
dividends
|
6.5 | % | 0.0 | % | 0.0 | % | 5.0 | % | 0.0 | % | ||||||||||
|
BALANCE
SHEET:
|
||||||||||||||||||||
|
Loans,
net
|
$ | 315,067 | $ | 295,506 | $ | 258,936 | $ | 208,720 | $ | 154,642 | ||||||||||
|
Total
assets
|
440,595 | 393,532 | 356,297 | 313,182 | 278,275 | |||||||||||||||
|
Total
deposits
|
360,081 | 308,538 | 295,770 | 256,847 | 229,827 | |||||||||||||||
|
Total
stockholders’ equity
|
31,910 | 34,440 | 34,592 | 32,924 | 31,652 | |||||||||||||||
|
Average
assets
|
419,725 | 379,155 | 332,912 | 291,368 | 251,338 | |||||||||||||||
|
Average
stockholders’ equity
|
33,699 | 35,046 | 33,710 | 32,368 | 16,067 | |||||||||||||||
|
PERFORMANCE
RATIOS:
|
||||||||||||||||||||
|
Return
on average assets
|
-0.25 | % | 0.40 | % | 0.74 | % | 0.82 | % | 0.63 | % | ||||||||||
|
Return
on average stockholders’ equity
|
-3.09 | % | 4.31 | % | 7.31 | % | 7.41 | % | 9.90 | % | ||||||||||
|
Average
equity/average assets
|
8.03 | % | 9.24 | % | 10.13 | % | 11.11 | % | 6.39 | % | ||||||||||
|
Net
interest margin
|
3.12 | % | 3.31 | % | 3.91 | % | 4.34 | % | 4.10 | % | ||||||||||
|
Efficiency
ratio (3)
|
1.06 | % | 0.77 | % | 0.74 | % | 0.72 | % | 0.80 | % | ||||||||||
|
Other
income to net interest income plus other income
|
14.43 | % | 32.96 | % | 30.86 | % | 30.28 | % | 33.60 | % | ||||||||||
|
Dividend
payout ratio
|
-63 | % | 58 | % | 36 | % | 26 | % | 33 | % | ||||||||||
|
BANK
CAPITAL RATIOS: (4)
|
||||||||||||||||||||
|
Tier
I capital to average assets
|
8.59 | % | 7.72 | % | 8.54 | % | 9.23 | % | 9.96 | % | ||||||||||
|
Tier
I capital to total risk-weighted assets
|
11.04 | % | 9.66 | % | 10.46 | % | 12.40 | % | 14.61 | % | ||||||||||
|
Total
capital to total risk-weighted assets
|
12.29 | % | 10.91 | % | 11.63 | % | 13.55 | % | 15.86 | % | ||||||||||
|
ASSET
QUALITY RATIOS:
|
||||||||||||||||||||
|
Non-performing
loans to total gross loans
|
3.44 | % | 4.28 | % | 1.01 | % | 0.65 | % | 0.85 | % | ||||||||||
|
Non-performing
assets to total assets
|
3.41 | % | 3.35 | % | 0.75 | % | 0.44 | % | 0.48 | % | ||||||||||
|
Net
loan charge-offs to average total loans
|
0.22 | % | 0.05 | % | 0.00 | % | 0.43 | % | 0.01 | % | ||||||||||
|
Allowance
for loan losses to total gross loans at period end
|
1.81 | % | 1.71 | % | 1.27 | % | 1.24 | % | 1.45 | % | ||||||||||
|
Allowance
for loan losses to non-performing loans (5)
|
52.62 | % | 39.96 | % | 125.61 | % | 190.04 | % | 169.96 | % | ||||||||||
|
(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 renegotiated
loans.
|
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,
2008 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 our 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, 2008 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-Based
Compensation. The Company currently
has several stock option plans in place for employees and directors
of the Company. The Company accounts for stock options under the
fair value
recognition provisions of the Financial Accounting Standards Board (FASB)
Statement No. 123(R), "Share-Based
Payment," using the modified-prospective transition method. Under this transition
method, compensation cost recognized in 2008 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006 based on the grant date fair value calculated in accordance with the
provisions of FASB Statement No. 123, and (b) compensation cost for all
share-based payments granted subsequent to December 31, 2005, based on a grant
date fair value estimate in accordance with the provisions of FASB Statement No.
123(R). The Company had 47,679 unvested stock options at December 31, 2005;
therefore, the adoption of FASB Statement No. 123(R) relates to these unvested
stock options and any stock options granted after January 1, 2006.
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 to sale.
Goodwill and
Other Intangible Assets. The Company has recorded
goodwill of $2.3 million at December 31, 2008 related to the acquisition of
Tri-State Insurance Agency on October 1, 2001 and $486 thousand from the
acquisition of the Port Jervis, New York branch office on March 24,
2006. SFAS No. 142, “Goodwill and Other Intangible Assets.” 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 2008 and 2007.
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) 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) the intent and ability
of the Company to retain its investments in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
COMPARISION
OF OPERATING RESULTS AT YEAR-END DECEMBER 31, 2008 and 2007
Overview.
Total assets were $440.6 million at year-end 2008 compared to $393.5 million at
year-end 2007, an increase of $47.1 million, or 12.0%. Total loans,
net of the allowance for loan losses, increased $19.6 million, or 6.6%, to
$315.1 million at December 31, 2008 from $295.5 million at December 31,
2007. Total deposits increased by $51.5 million, or 16.7% to $360.1
million at December 31, 2008 from $308.5 million at December 31,
2007.
Results of
Operations. For the year ended
December 31, 2008, the Company reflected a net loss of $1.0 million compared to
net income of $1.5 million for prior year. Basic and diluted loss per
share were ($0.32) for the year ended December 31, 2008 compared to basic and
diluted earnings per share of $0.45 for the same period last
year.
For the
year ended December 31, 2008 the Company had 3,291,710 average basic shares
outstanding, compared to 3,354,828 average basic shares for the year ended
December 31, 2007, as adjusted for the 6.5% stock dividend.
The
Company’s results are primarily attributable to the effect of a $3.5 million
other than temporary impairment charge recognized by the Company in the third
quarter in connection with certain Fannie Mae and Freddie Mac perpetual
preferred stock held by the Company. During 2008, the Company’s net
interest income increased by $569 thousand, its provision for loan losses
declined by $580 thousand and its other expenses increased by $1.4 million,
reflecting increased salary and compensation expense, FDIC premium expense,
write downs on foreclosed real estate and other foreclosed real estate expense.
The Company’s net interest margin declined to 3.12% in 2008 from 3.31% in 2007,
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) declined 5 basis points to 2.73% in 2008 from 2.78% in
2007.
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,
2008 and 2007. 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)
|
2008
|
2007
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
|
Earning
Assets:
|
Balance
|
Interest
(1)
|
Rate
(2)
|
Balance
|
Interest
(1)
|
Rate
(2)
|
||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||
|
Tax
exempt (3)
|
$ | 23,720 | $ | 1,458 | 6.15 | % | $ | 24,033 | $ | 1,317 | 5.48 | % | ||||||||||||
|
Taxable
|
47,234 | 2,266 | 4.80 | % | 35,214 | 1,696 | 4.82 | % | ||||||||||||||||
|
Total
securities
|
70,954 | 3,724 | 5.25 | % | 59,247 | 3,013 | 5.09 | % | ||||||||||||||||
|
Total
loans receivable (4)
|
307,845 | 19,150 | 6.22 | % | 283,346 | 19,524 | 6.89 | % | ||||||||||||||||
|
Other
interest-earning assets
|
14,749 | 261 | 1.77 | % | 11,603 | 574 | 4.95 | % | ||||||||||||||||
|
Total
earning assets
|
393,548 | $ | 23,135 | 5.88 | % | 354,196 | $ | 23,111 | 6.52 | % | ||||||||||||||
|
Non-interest
earning assets
|
31,359 | 28,738 | ||||||||||||||||||||||
|
Allowance
for loan losses
|
(5,182 | ) | (3,778 | ) | ||||||||||||||||||||
|
Total
Assets
|
$ | 419,725 | $ | 379,156 | ||||||||||||||||||||
|
Sources
of Funds:
|
||||||||||||||||||||||||
|
Interest
bearing deposits:
|
||||||||||||||||||||||||
|
NOW
|
$ | 58,878 | $ | 798 | 1.36 | % | $ | 60,377 | $ | 1,282 | 2.12 | % | ||||||||||||
|
Money
market
|
23,769 | 527 | 2.22 | % | 37,317 | 1,378 | 3.69 | % | ||||||||||||||||
|
Savings
|
85,707 | 2,350 | 2.74 | % | 38,142 | 348 | 0.91 | % | ||||||||||||||||
|
Time
|
127,475 | 5,071 | 3.98 | % | 138,633 | 6,726 | 4.85 | % | ||||||||||||||||
|
Total
interest bearing deposits
|
295,829 | 8,746 | 2.96 | % | 274,469 | 9,734 | 3.55 | % | ||||||||||||||||
|
Borrowed
funds
|
35,971 | 1,507 | 4.19 | % | 20,397 | 966 | 4.74 | % | ||||||||||||||||
|
Junior
subordinated debentures
|
12,887 | 590 | 4.57 | % | 9,271 | 687 | 7.41 | % | ||||||||||||||||
|
Total
interest bearing liabilities
|
344,687 | $ | 10,843 | 3.15 | % | 304,137 | $ | 11,387 | 3.74 | % | ||||||||||||||
|
Non-interest
bearing liabilities:
|
||||||||||||||||||||||||
|
Demand
deposits
|
39,303 | 37,663 | ||||||||||||||||||||||
|
Other
liabilities
|
2,036 | 2,309 | ||||||||||||||||||||||
|
Total
non-interest bearing liabilities
|
41,339 | 39,972 | ||||||||||||||||||||||
|
Stockholders'
equity
|
33,699 | 35,047 | ||||||||||||||||||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 419,725 | $ | 379,156 | ||||||||||||||||||||
|
Net
Interest Income and Margin (5)
|
$ | 12,292 | 3.12 | % | $ | 11,724 | 3.31 | % | ||||||||||||||||
|
(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
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
$569 thousand, or 4.9%, to $12.3 million for the year ended December 31, 2008
compared to $11.7 million in 2007. Total interest income, on a fully
taxable equivalent basis, remained consistent in 2008 compared to 2007 at $23.1
million. 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
$39.4 million to $393.5 million from $354.2 million for the year ended December
31, 2007. The average rate earned on total earning assets declined 64
basis points to 5.88% in 2008 from 6.52% for 2007.
Interest
expense decreased by $544 thousand to $10.8 million for the year ended December
31, 2008 from $11.4 million for the year ago period as a result of decreases in
market rates of interest. The average balance of interest bearing liabilities
increased $40.6 million, to $344.7 million for the year ended December 31, 2008
from $304.1 million the year earlier. The average rate paid on interest bearing
liabilities decreased by 59 basis points to 3.15% for the current year from
3.74% for the year ended December 31, 2007.
The net
interest margin decreased, on a fully taxable equivalent basis, by 19 basis
points to 3.12% in the year ended December 31, 2008 compared to 3.31% for the
same period in 2007.
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 products. The greater decline in yield earned on assets
than in rate paid on deposits reflects the current highly competitive market for
credit worthy borrowers and cost effective deposits in our primary trade
area.
Interest
Income. Total interest income,
on a fully taxable equivalent basis, remained constant at $23.1 million for both
years ended December 31, 2008 and 2007. Interest income in the
securities portfolio increased by $711 thousand, offset by a decline in interest
income in both loans receivable and other interest-earning assets.
Total
interest income on the loan portfolio decreased by $374 thousand to $19.2
million for the current year from $19.5 million in 2007. The average
balance in the loan portfolio increased $24.5 million, or 8.7%, for the year
ended December 31, 2008 compared to the year ended December 31,
2007. The average rate earned on loans decreased 67 basis points to
6.22% for the year ended December 31, 2008 from 6.89% for the same period in
2007. The impact of our non-accrual loans accounted for 9 basis
points of this decline, as average non-accrual loan balances increased $5.2
million during the year ended December 31, 2008 from the prior year
end. The remainder of the decline was due to lower market rates of
interest.
Total
interest income on securities, on a fully taxable equivalent basis, increased
$711 thousand, or 23.6%, from the year ended December 31, 2007 to the same
period in 2008, while the average balance of securities increased $11.7 million
during the same two periods. The average rate increased 16 basis
points, from 5.09% in 2007 to 5.25% for 2008. The increase in the
yield on the securities portfolio reflects an increase in the tax equivalent
yield calculation on the tax exempt municipal securities held in the portfolio
due to new tax guidelines.
Interest
Expense. The
Company’s interest expense for the year ended December 31, 2008 decreased $544
thousand, or 4.8%, to $10.8 million from $11.4 million for the same period in
2007, as the average balance in interest-bearing liabilities increased $40.6
million, or 13.3%, to $344.7 million from $304.1 million between the two
periods. The average rate paid on total interest-bearing liabilities
decreased by 59 basis points from 3.74% for the year ended December 31, 2007 to
3.15% for the same period in 2008. The decrease in interest expense
reflects a decline in current market rates of interest and the Company’s
promotion of a highly competitive savings product yielding lower average rates
of interest compared to time deposits.
During
2008 the promotion of the savings account product drew balances from other
interest bearing deposit accounts. The average balance in savings
accounts increased $47.6 million, or 124.7%, to $85.7 million for the year ended
December 31, 2008 from $38.1 million for the same period in 2007, as the average
rate paid on those deposits increased 183 basis points to 2.74% for the year
ended December 31, 2008 from 0.91% for the year ended December 31,
2007.
The
average balance of time deposits has decreased by $11.2 million, or 8.1%, to
$127.5 million for the year ended December 31, 2008 compared to $138.6 million
the prior year. The average rate paid on time deposits decreased 87
basis points from 4.85% for the period ended December 31, 2007 to 3.98% for the
same period in 2008. The average
balance in money market accounts has decreased $13.5 million, or 36.3%, to $23.8
million for the year ended December 31, 2008 from $37.3 million for the same
period in 2007. The average rate paid on money market deposits
decreased 147 basis points from 3.69% to 2.22% between year end 2007 and year
end 2008.
The
average balance in the Company’s borrowed funds increased $15.6 million, or
76.4%, to $36.0 million in the year ended December 31, 2008, as $15.0 million in
convertible notes were purchased in December of 2007 and one $2.0 million
repurchase agreement paid off in March of 2008. At December 31, 2008,
the Company’s borrowed funds consisted of six convertible notes and one
amortizing advance from the Federal Home Loan Bank totaling $33.1
million. The interest expense on borrowed funds increased $541
thousand to $1.5 million for the year ended December 31, 2008 from $1.0 million
for the same period in 2007, while the average rate paid on borrowed funds
declined 55 basis points to 4.19% for the year 2008 from 4.74% in
2007. The Company’s average balance in junior subordinated debentures
increased $3.6 million to $12.9 million for the year ended December 31,
2008. The interest rate paid on the debentures resets quarterly and
averaged 4.57% for the year ended December 31, 2008, a decline of 284 basis
points from the average rate paid in 2007 of 7.41%.
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, 2008 v. 2007
|
||||||||||||
|
Increase
(decrease)
|
||||||||||||
|
Due
to changes in:
|
||||||||||||
|
(Dollars
in thousands)
|
Volume
|
Rate
|
Total
|
|||||||||
|
Securities:
|
||||||||||||
|
Tax
exempt
|
$ | (17 | ) | $ | 158 | $ | 141 | |||||
|
Taxable
|
576 | (6 | ) | 570 | ||||||||
|
Total
securities (1)
|
559 | 152 | 711 | |||||||||
|
Total
loans receivable (2)
|
1,611 | (1,985 | ) | (374 | ) | |||||||
|
Other
interest-earning assets
|
126 | (439 | ) | (313 | ) | |||||||
|
Total
net change in income on interest-earning assets
|
2,296 | (2,272 | ) | 24 | ||||||||
|
Interest
bearing deposits:
|
||||||||||||
|
NOW
|
(31 | ) | (453 | ) | (484 | ) | ||||||
|
Money
Market
|
(405 | ) | (446 | ) | (851 | ) | ||||||
|
Savings
|
766 | 1,236 | 2,002 | |||||||||
|
Time
|
(511 | ) | (1,144 | ) | (1,655 | ) | ||||||
|
Interest
bearing deposits
|
(181 | ) | (807 | ) | (988 | ) | ||||||
|
Borrowed
funds
|
664 | (123 | ) | 541 | ||||||||
|
Junior
subordinated debentures
|
216 | (313 | ) | (97 | ) | |||||||
|
Total
net change in expense on interest-bearing
liabilities
|
699 | (1,243 | ) | (544 | ) | |||||||
|
Change
in net interest income
|
$ | 1,597 | $ | (1,029 | ) | $ | 568 | |||||
|
(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 2008 was $1.4 million compared to a provision of $1.9 million in 2007,
a decrease of $580 thousand. A loan is considered impaired when it is
probable that payments of principle or interest will not be paid according to
the contractual terms of the loan agreement. An allowance on impaired loans is
established when discounted cash flows of the impaired loan are lower than the
carrying value for that loan. The Company does not consider all of its
nonaccrual loans to be impaired. At December 31, 2008 the Company had
$4.1 million in impaired loans requiring an allowance for loan losses of $2.1
million, a decrease from the $9.7 million in impaired loans reported a year
earlier which required a related allowance for loan losses of $1.7
million. 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 decreased by $3.6 million to $2.0 million for the
year ended December 31, 2008 from $5.6 million for the same period in
2007. The decrease is primarily attributable to 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 held by the
Company. 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. While service charges on deposit
account income increased $138 thousand, or 9.9%, to $1.5 million in 2008 from
$1.4 million in 2007, the Company recorded a decrease in insurance commissions
of $181 thousand to $2.5 million for the year ended December 31, 2008 from $2.7
million for the same period in 2007. ATM and debit card fee income
increased $52 thousand, or 12.6%, to $464 thousand. Gain on the sale of
securities, available for sale increased $140 thousand, to $150 thousand for the
year ended December 31, 2008 compared to $10 thousand for the year ended
December 31, 2007, offset by a decrease in holding gains on trading securities
of $59 thousand between the same two periods. Non-interest income
from SussexMortgage.com for the year ended December 31, 2008 was $111 thousand
as compared to $105 thousand a year earlier and is included in other
non-interest income.
Non-Interest
Expense. Total non-interest
expense increased $1.4 million, or 11.0%, from $13.1 million in 2007 to $14.6
million in 2008. Salaries and employee benefits, the largest
component of non-interest expense, increased $392 thousand, or
5.5%. The increase reflects the cost of additional staff needed to
administer the Company’s growth and customary annual salary increases for the
Bank’s and Tri-State’s existing staff. Occupancy expenses and
furniture, fixtures and data processing expenses have increased $72 thousand, or
2.7% in 2008 over 2007 due to the Company’s continued additions and upgrades to
the Company’s data processing operations. Stationary and supplies and
postage expenses decreased a combined $7 thousand due to the Company outsourcing
the processing of all monthly statements and including check images rather than
physical checks. Professional fees increased $22 thousand combined
with an increase of $437 thousand attributable to the write-down of foreclosed
real estate coupled with expenses related to the foreclosed properties of $255
thousand. 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
2008, our expense for FDIC deposit insurance premiums increased by $349
thousand, due to the availability of a $127 thousand credit in 2007 and higher
assessments rates applicable to all insured institutions in 2008. Our expense
for FDIC deposit insurance will increase substantially due both to an increase
in assessments rates adopted by the FDIC effective April 1, 2009 and a likely
special assessment. The FDIC has proposed a special assessment of 20 basis
points applicable to deposits as of June 30, 2009 and payable September 30,
2009. This proposal has no yet become final. Had this assessment been in effect
as of December 31, 2008 at the 20 basis point level, we would have paid
approximately $719 thousand in additional assessments.
Income
Taxes. The
Company recognized a tax benefit of $1.1 million for the year ended December 31,
2008 and an income tax provision of $450 thousand for the year ended December
31, 2007. 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, 2008 AND 2007
At
December 31, 2008, the Company had total assets of $440.6 million compared to
total assets of $393.5 million at December 31, 2007, an increase of $47.1
million, or 12.0%. Net loans increased $19.6 million, or 6.6%, to $315.1 million
at December 31, 2008 from $295.5 million at December 31, 2007. Total
deposits increased to $360.1 million at December 31, 2008 from $308.5 million at
December 31, 2007.
Cash and Cash
Equivalents. The Company's cash and
cash equivalents increased by $9.1 million or 77.6%, at December 31, 2008 to
$20.9 million from $11.8 million at December 31, 2007. This increase
largely reflects the Company's increase in federal funds sold of $9.5 million to
$13.3 million at December 31, 2008 from $3.8 million at year-end
2007. The increase is related to the Company's offering of a high
yielding savings product and the slowing of the loan portfolio growth during
2008. Excess liquidity was temporarily invested in federal funds sold
pending increased loan demand or investment in the securities
portfolio.
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. 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.
All
securities are classified as trading securities or available for sale 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, 2008, 2007 and 2006. Securities
available for sale are stated at their fair value.
|
December
31,
|
||||||||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
U.S.
Government agencies
|
$ | 7,963 | $ | 6,740 | $ | 9,655 | ||||||
|
State
and political subdivisions
|
23,859 | 23,384 | 20,833 | |||||||||
|
Mortgage-backed
securities
|
28,701 | 16,321 | 23,168 | |||||||||
|
Equity
securities
|
1,749 | 1,952 | 979 | |||||||||
|
Total
available for sale
|
$ | 62,272 | $ | 48,397 | $ | 54,635 | ||||||
Trading
securities, at fair value, consist of the following at December 31, 2008 and
2007. There were no trading securities at December 31,
2006.
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
U.S.
Government agencies
|
$ | 5,744 | $ | 4,242 | ||||
|
Mortgage-backed
securities
|
7,546 | 10,017 | ||||||
|
Total
trading securities
|
$ | 13,290 | $ | 14,259 | ||||
The
Company's securities, available for sale, increased by $13.9 million, or 28.7%,
to $62.3 million at December 31, 2008 from $48.4 million at December 31,
2007. The Company purchased $36.7 million in new securities during
2008, $9.7 million in securities were sold and $8.8 million in securities
matured, were called and were repaid. There was a $922 thousand net
increase in unrealized losses in the available for sale portfolio, a $150
thousand realized gain on the sale of available for sale securities and $12
thousand in net amortization expense recorded during 2008. As of
December 31, 2008 trading securities balances decreased $969 thousand to $13.3
million due to $2.7 million in paydowns and amortization expense and $4.7
million in new security purchases, $3.2 million in sales or called securities
and a realized gain of $199 thousand. This overall increase in the
Company's securities was funded through an increase in deposits. The
securities portfolio contained no high-risk securities or derivatives as of
December 31, 2008.
The
contractual maturity distribution and weighted average yield of the Company's
securities, available for sale, at December 31, 2008 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, 2008
|
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
|
$ | - | - | $ | 7,751 | 4.10 | % | $ | - | - | $ | - | - | |||||||||||||||||||
|
State
and political subdivisions
|
1,810 | 2.28 | % | - | - | 204 | 4.03 | % | 23,013 | 4.21 | % | |||||||||||||||||||||
|
Mortgage-backed
securities
|
7 | 5.13 | % | 56 | 5.20 | % | 571 | 4.58 | % | 27,676 | 5.17 | % | ||||||||||||||||||||
|
Equity
securities
|
- | - | - | - | - | - | 2,081 | 2.35 | % | |||||||||||||||||||||||
|
Total
available for sale
|
$ | 1,817 | 2.29 | % | $ | 7,807 | 4.11 | % | $ | 775 | 4.44 | % | $ | 52,770 | 4.64 | % | ||||||||||||||||
The
Company holds $2.0 million in Federal Home Loan Bank of New York stock at
December 31, 2008 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 part of the Company's earning assets. Total
loans receivable, net of unearned income, at December 31, 2008 increased $20.2
million, or 6.7% to $320.9 million from $300.6 million at year-end
2007. During the year ended December 31, 2008, new originations have
exceeded payoffs both through scheduled maturities and prepayments. The balance
in construction and land development loans decreased $3.5 million, or 8.4%,
residential 1- 4 family real estate loans have increased $13.8 million, or
19.6%, loans secured by non-residential real estate increased $10.5 million, or
6.8%, and commercial and industrial loans increased $1.6 million, or 7.9%, from
December 31, 2007 to December 31, 2008. The Company continued to
process mortgage originations in-house, with FNMA/Freddie Mac qualifying
residential mortgage loans being originated and funded directly by the Bank and
non-qualifying loans being referred to SussexMortgage.com, the Company's joint
venture with the National City Mortgage Corporation.
The
following table summarizes the composition of the Company's loan portfolio by
type as of December 31, 2004 through 2008:
|
December
31,
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Commercial
and industrial loans
|
$ | 22,346 | $ | 20,702 | $ | 18.298 | $ | 16,667 | $ | 14,233 | ||||||||||
|
Non-residential
real estate loans
|
165,019 | 154,559 | 139,428 | 110,391 | 69,778 | |||||||||||||||
|
One
to four family residential property loans
|
84,412 | 70,597 | 60,960 | 47,409 | 41,971 | |||||||||||||||
|
Construction
and land development loans
|
38,413 | 41,954 | 30,094 | 23,154 | 19,863 | |||||||||||||||
|
Consumer
loans
|
1,248 | 1,483 | 1,620 | 1,550 | 1,500 | |||||||||||||||
|
Other
loans
|
9,572 | 11,470 | 12,055 | 12,318 | 9,690 | |||||||||||||||
|
Total
gross loans
|
$ | 321,010 | $ | 300,765 | $ | 262,455 | $ | 211,489 | $ | 157,035 | ||||||||||
The
increase in loans was funded during 2008 by an increase in the Company's
deposits. The end of year loan to deposit ratios for 2008 and 2007 were 87.5%
and 95.8%, 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, 2008 are presented in the following table.
|
December
31, 2008
|
||||||||||||
|
Due
Under
|
Due
1-5
|
Due
Over
|
||||||||||
|
(Dollars
in thousands)
|
One
Year
|
Years
|
Five
Years
|
|||||||||
|
Real
estate:
|
||||||||||||
|
Commercial
mortgage
|
$ | 16,308 | $ | 12,894 | $ | 135,817 | ||||||
|
Construction
and land development
|
31,587 | 2,850 | 3,976 | |||||||||
|
Residential
mortgage
|
1,532 | 6,079 | 76,801 | |||||||||
|
Total
real estate
|
49,427 | 21,823 | 216,594 | |||||||||
|
Commercial
and industrial
|
3,594 | 11,921 | 6,831 | |||||||||
|
Consumer
and other
|
280 | 1,023 | 9,517 | |||||||||
|
Total
loans
|
$ | 53,301 | $ | 34,767 | $ | 232,942 | ||||||
|
Interest
rates:
|
||||||||||||
|
Predetermined
|
19,337 | 23,141 | 77,770 | |||||||||
|
Floating
|
33,964 | 11,626 | 155,172 | |||||||||
|
Total
loans
|
$ | 53,301 | $ | 34,767 | $ | 232,942 | ||||||
Loan and Asset
Quality. Non-performing assets
consist of non-accrual loans, loans over ninety days delinquent and still
accruing interest, renegotiated loans, foreclosed other real estate owned
("OREO") and impaired securities. Total non-performing assets
increased by $2.1 million to $15.0 million at year end 2008 from $12.9 million
at year end 2007. The increase reflects the overall decline in the economy and
real estate market, which has made it more difficult for borrowers to meet the
terms of their loans and lease or sell properties. The Company's non-accrual
loan balance decreased $2.6 million to $9.7 million at December 31, 2008 from
$12.3 million at December 31, 2007, largely due to the reclassification of one
loan with a value of $2.5 million from non-accrual to OREO, as
the Company foreclosed on the property securing the
loan. There were no loans past due over 90 days and still accruing
interest, $1.3 million in renegotiated loans, $3.9 million in OREO properties
and $93 thousand in impaired securities at December 31, 2008.
The
Company seeks to actively manage its non-performing assets. In
addition to active monitoring and collecting on delinquent loans, management has
an active 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. During 2008 the Company brought the credit review
process in-house through the hiring of a credit review officer.
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, 2004 through 2008.
|
December
31,
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Non-accrual
loans:
|
||||||||||||||||||||
|
Commercial
|
$ | 336 | $ | 449 | $ | - | $ | - | $ | 726 | ||||||||||
|
Consumer
|
11 | 11 | - | - | - | |||||||||||||||
|
Construction
|
5,042 | 10,210 | 465 | - | - | |||||||||||||||
|
Mortgage
|
4,356 | 1,631 | 942 | 816 | 578 | |||||||||||||||
|
Total
nonaccrual loans
|
9,745 | 12,301 | 1,407 | 816 | 1,304 | |||||||||||||||
|
Loans
past due 90 days and still accruing
|
- | 69 | 746 | 535 | 34 | |||||||||||||||
|
Restructured
loans
|
1,302 | 494 | 506 | 25 | - | |||||||||||||||
|
Total
non-performing loans
|
11,047 | 12,864 | 2,659 | 1,376 | 1,338 | |||||||||||||||
|
Impaired
securities
|
93 | - | - | - | - | |||||||||||||||
|
Foreclosed
real estate
|
3,864 | - | - | - | - | |||||||||||||||
|
Total
non-performing assets
|
$ | 15,004 | $ | 12,864 | $ | 2,659 | $ | 1,376 | $ | 1,338 | ||||||||||
|
Non-performing
loans to total loans
|
3.44 | % | 4.28 | % | 1.01 | % | 0.65 | % | 0.85 | % | ||||||||||
|
Non-performing
assets to total assets
|
3.41 | % | 3.27 | % | 0.75 | % | 0.44 | % | 0.48 | % | ||||||||||
|
Interest
income received on nonaccrual loans
|
$ | 61 | $ | 50 | $ | 10 | $ | 42 | N/A | |||||||||||
|
Interest
income that would have been recorded under the original terms of the
loans
|
$ | 858 | $ | 653 | $ | 127 | $ | 48 | $ | 88 | ||||||||||
Allowance for
Loan Losses. The allowance is
allocated to specific loan categories based upon management's classification of
problem loans under the bank's internal loan grading system and to pools of
other loans that are not individually analyzed. Management makes
allocations to specific loans based on the present value of expected future cash
flows or the fair value of the underlying collateral for impaired loans and to
other classified loans based on various credit risk factors. These
factors include collateral values, the financial condition of the borrower and
industry and current economic trends.
Allocations
to commercial loan pools are categorized by commercial loan type and are based
on management's judgment concerning historical loss trends and other relevant
factors. Installment and residential mortgage loan allocations are
made at a total portfolio level based on historical loss experience adjusted for
portfolio activity and current conditions. Additionally, all other
delinquent loans are grouped by the number of days delinquent with this amount
assigned a general reserve amount.
At
December 31, 2008, the allowance for loan losses was $5.8 million, an increase
of $673 thousand, or 13.1%, from $5.1 million at December 31,
2007. The provision for loan losses was $1.4 million and there were
$716 thousand in charge-offs and $39 thousand in recoveries during
2008. The allowance for loan losses as a percentage of total loans
was 1.81% at December 31, 2008 compared to 1.71% on December 31,
2007. The increase in the allowance reflects the growth in the
Company’s loan portfolio and additional reserves required to adequately reserve
for impaired and past due loans.
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.
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)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Balance
at beginning of year
|
$ | 5,140 | $ | 3,340 | $ | 2,615 | $ | 2,274 | $ | 1,734 | ||||||||||
|
Provision
charged to operating expenses
|
1,350 | 1,930 | 733 | 1,138 | 558 | |||||||||||||||
|
Recoveries
of loans previously charged-off:
|
||||||||||||||||||||
|
Commercial
|
- | 2 | - | 198 | 10 | |||||||||||||||
|
Consumer
|
30 | 46 | 86 | 11 | 3 | |||||||||||||||
|
Real
Estate
|
9 | 6 | - | 1 | 4 | |||||||||||||||
|
Total
recoveries
|
39 | 54 | 86 | 210 | 17 | |||||||||||||||
|
Loans
charged-off:
|
||||||||||||||||||||
|
Commercial
|
34 | 70 | - | 398 | 15 | |||||||||||||||
|
Consumer
|
110 | 102 | 94 | 80 | 16 | |||||||||||||||
|
Real
Estate
|
572 | 12 | - | 529 | 4 | |||||||||||||||
|
Total
charge-offs
|
716 | 184 | 94 | 1,007 | 35 | |||||||||||||||
|
Net
charge-offs
|
677 | 130 | 8 | 797 | 18 | |||||||||||||||
|
Balance
at end of year
|
$ | 5,813 | $ | 5,140 | $ | 3,340 | $ | 2,615 | $ | 2,274 | ||||||||||
|
Net
charge-offs to average loans outstanding
|
0.22 | % | 0.05 | % | 0.00 | % | 0.43 | % | 0.01 | % | ||||||||||
|
Allowance
for loan losses to year-end loans
|
1.81 | % | 1.71 | % | 1.27 | % | 1.24 | % | 1.45 | % | ||||||||||
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,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
%
of
|
%
of
|
%
of
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Gross
Loans
|
Amount
|
Gross
Loans
|
Amount
|
Gross
Loans
|
||||||||||||||||||
|
Commercial
|
$ | 526 | 6.96 | % | $ | 438 | 6.88 | % | $ | 405 | 6.97 | % | ||||||||||||
|
Consumer
and other loans
|
55 | 3.37 | % | 72 | 4.31 | % | 66 | 5.21 | % | |||||||||||||||
|
Real
estate, construction and development:
|
||||||||||||||||||||||||
|
Commercial
|
4,519 | 63.37 | % | 4,367 | 65.34 | % | 2,674 | 64.59 | % | |||||||||||||||
|
Residential
|
713 | 26.30 | % | 263 | 23.47 | % | 195 | 23.23 | % | |||||||||||||||
|
Total
|
$ | 5,813 | 100.00 | % | $ | 5,140 | 100.00 | % | $ | 3,340 | 100.00 | % | ||||||||||||
|
Allowance
for Loans Losses at December 31,
|
||||||||||||||||
|
2005
|
2004
|
|||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Gross
Loans
|
Amount
|
Gross
Loans
|
||||||||||||
|
Commercial
|
$ | 477 | 7.88 | % | $ | 519 | 9.06 | % | ||||||||
|
Consumer
and other loans
|
42 | 6.55 | % | 29 | 7.13 | % | ||||||||||
|
Real
estate, construction and development:
|
||||||||||||||||
|
Commercial
|
1,939 | 63.15 | % | 1,584 | 57.08 | % | ||||||||||
|
Residential
|
157 | 22.42 | % | 142 | 26.73 | % | ||||||||||
|
Total
|
$ | 2,615 | 100.00 | % | $ | 2,274 | 100.00 | % | ||||||||
Premises and
Equipment; Other Assets. Premises and equipment
decreased by $586 thousand, or 6.4%, from $9.1 million at December 31, 2007 to
$8.5 million at December 31, 2008. This decrease is largely due to
leasehold improvement being completely amortized and the disposal of obsolete
furniture, fixtures and equipment.
Other
assets increased from $7.5 million at December 31, 2007 to $9.7 million at
December 31, 2008, an increase of $2.2 million, or 28.8%. This
increase was primarily generated from the prepayment of the Company's expenses
and increases in deferred tax asset balances and the cash surrender value of
life insurance polices.
Deposits. Total deposits increased
$51.5 million, or 16.7%, from $308.6 million at December 31, 2007 to $360.1
million at December 31, 2008. Non-interest bearing deposits decreased
$1.9 million, or 5.0%, to $34.8 million at December 31, 2008 from $36.6 million
at December 31, 2007; interest-bearing deposits increased $53.4 million,
or
19.6%, to
$325.3 million at December 31, 2008 from $271.9 million at December 31, 2007.
The increase in interest bearing deposits was attributable to the Company’s
offering of a high yielding savings product. Although this product has increased
the rate paid on savings accounts, management believes it is a more cost effect
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 $23.0 million from $312.1 million at year-end 2007 to
$335.1 million at year-end 2008, a 7.4% increase. Average time
deposits decreased to $11.2 million to $127.5 million at December 31, 2008, or
8.1%, from $138.6 million at year-end 2007. Average money market
accounts decreased to $23.8 million, a decrease of $13.5 million, or 36.3%, from
$37.3 million at year-end 2007. The change in the deposit portfolio
reflects the offering of a competitive savings product. The average savings
account balances increased $47.6 million, or 124.7% from $38.1 million at
year-end 2007 to $85.7 million at year-end 2008. The Company’s
average non-interest bearing demand deposits increased $1.6 million, or 4.4%,
during 2008
The
average balances and weighted average rates paid on deposits for 2008, 2007 and
2006 are presented below.
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2008
Average
|
2007
Average
|
2006
Average
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
||||||||||||||||||
|
Demand,
non-interest bearing
|
$ | 39,303 | $ | 37,663 | $ | 43,036 | ||||||||||||||||||
|
Now
accounts
|
58,878 | 1.36 | % | 60,377 | 2.12 | % | 57,974 | 2.25 | % | |||||||||||||||
|
Money
market accounts
|
23,769 | 2.22 | % | 37,317 | 3.69 | % | 30,773 | 3.90 | % | |||||||||||||||
|
Savings
|
85,707 | 2.74 | % | 38,142 | 0.91 | % | 45,916 | 0.87 | % | |||||||||||||||
|
Time
|
127,475 | 3.98 | % | 138,633 | 4.85 | % | 100,061 | 4.19 | % | |||||||||||||||
|
Total
deposits
|
$ | 335,132 | $ | 312,132 | $ | 277,760 | ||||||||||||||||||
The
remaining maturity for certificates of deposit accounts of $100,000 or more as
of December 31, 2008 is presented in the following table.
|
(Dollars
in thousands)
|
2008
|
|||
|
3
months or less
|
$ | 6,084 | ||
|
3
to 6 months
|
14,539 | |||
|
6
to 12 months
|
18,229 | |||
|
Over
12 months
|
3,126 | |||
|
Total
|
$ | 41,978 | ||
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, 2008 the Company had $33.1 million in notes outstanding at a
weighted average interest rate of 4.25% compared to $35.2 million in notes
outstanding at a weighted average rate of 4.30% on December 31,
2007. During 2008, $5.1 million in advances were called and
repaid.
The
Company had no short-term borrowings outstanding at December 31,
2008. 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)
|
2008
|
2007
|
2006
|
|||||||||
|
Average
daily amount of short-term borrowings outstanding during the
period
|
$ | 185 | $ | 28 | $ | 29 | ||||||
|
Weighted
average interest rate on average daily short-term
borrowings
|
2.87 | % | 5.67 | % | 4.96 | % | ||||||
|
Maximum
short-term borrowings outstanding at any month-end
|
$ | 1,175 | $ | 2,650 | $ | 1,815 | ||||||
|
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 an additional $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, 2008
was 3.44%. 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”, 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 (loss), net of income
taxes, was $31.9 million at December 31, 2008, a decrease of $2.5 million from
the $34.4 million at year-end 2007. Stockholders' equity decreased
due to $1.0 million in net losses recorded in 2008, a $390 thousand decrease in
common stock due to the purchase and retirement of treasury shares, cash
dividends paid of $654 thousand and an unrealized loss on securities available
for sale, net of income tax, of $553 thousand. These decreases were
offset by $34 thousand from the exercise of stock options and $77 thousand
through the compensation expense of stock options granted, restricted stock
grants and stock awards and the tax benefit of stock options
exercised.
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, 2008, had the ability to
borrow up to $74.5 million against selected mortgages and investment securities
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 $40.3 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, 2008 and are secured under terms of a blanket collateral agreement
by a pledge of qualifying investment securities and 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, 2008, 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, 2008, liquid investments totaled $20.9
million, and all mature within 30 days.
At
December 31, 2008, the Company had $13.3 million in trading securities and $62.3
million in securities available for sale. Of the available for sale
securities, $29.7 million had $1.7 million 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 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, 2008, the
Bank's Tier I and Tier II capital ratios were 11.04% and 12.29%, respectively.
The Company also maintained $1.0 million 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 to 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, 2008, the Bank had
a leverage ratio of 8.59%.
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, 2008 totaled $48.9 million. This consisted of $2.3 million in
commitments to grant commercial and residential loans, $12.3 million in
commercial construction lines of credit, $12.9 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 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, 2008 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, 2008
and 2007. 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.
|
2008
|
2007
|
|||||||||||||||||||||||
|
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
|
$ | (412 | ) | -0.09 | % | 4.71 | % | $ | (267 | ) | -0.07 | % | 3.42 | % | ||||||||||
|
Down
100 basis points
|
76 | 0.02 | % | -1.74 | % | 155 | 0.04 | % | -3.96 | % | ||||||||||||||
|
Up
100 basis points
|
(497 | ) | -0.11 | % | -11.37 | % | (456 | ) | -0.12 | % | -11.69 | % | ||||||||||||
|
Up
200 basis points
|
(1,376 | ) | -0.32 | % | -15.75 | % | (1,299 | ) | -0.33 | % | -16.65 | % | ||||||||||||
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 to gap, thus seeking to minimize the potential effect of
inflation.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not
Applicable
TABLE
OF CONTENTS
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL
STATEMENTS
|
27
|
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
|
28
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND
2007
|
29
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007
|
30
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND
2007
|
31
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
32
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM-ON
CONSOLIDATED FINANCIAL STATEMENTS
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, 2008 and 2007, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. The Company's management is responsible for those consolidated
financial statements. Our responsibility is to express an opinion on
these consolidated 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, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 3 to the consolidated financial statements, Sussex Bancorp and
its subsidiary early adopted the provisions of FASB Statement No. 157, “Fair
Value Measurements” and FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115.”
Beard
Miller Company LLP
Allentown,
Pennsylvania
March 13,
2009
|
SUSSEX
BANCORP
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31,
|
||||||||
|
(Dollars
In Thousands, Except Share Data)
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 7,602 | $ | 7,985 | ||||
|
Federal
funds sold
|
13,310 | 3,790 | ||||||
|
Cash
and cash equivalents
|
20,912 | 11,775 | ||||||
|
Interest
bearing time deposits with other banks
|
100 | 100 | ||||||
|
Trading
securities
|
13,290 | 14,259 | ||||||
|
Securities
available for sale
|
62,272 | 48,397 | ||||||
|
Federal
Home Loan Bank Stock, at cost
|
1,975 | 2,032 | ||||||
|
Loans
receivable, net of unearned income
|
320,880 | 300,646 | ||||||
|
Less: allowance
for loan losses
|
5,813 | 5,140 | ||||||
|
Net
loans receivable
|
315,067 | 295,506 | ||||||
|
Foreclosed
real estate, net of allowance for losses of $437 for 2008
|
3,864 | - | ||||||
|
Premises
and equipment, net
|
8,526 | 9,112 | ||||||
|
Accrued
interest receivable
|
2,115 | 2,035 | ||||||
|
Goodwill
|
2,820 | 2,820 | ||||||
|
Other
assets
|
9,654 | 7,496 | ||||||
|
Total
Assets
|
$ | 440,595 | $ | 393,532 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest
bearing
|
$ | 34,784 | $ | 36,625 | ||||
|
Interest
bearing
|
325,297 | 271,913 | ||||||
|
Total
Deposits
|
360,081 | 308,538 | ||||||
|
Borrowings
|
33,146 | 35,200 | ||||||
|
Accrued
interest payable and other liabilities
|
2,571 | 2,467 | ||||||
|
Junior
subordinated debentures
|
12,887 | 12,887 | ||||||
|
Total
Liabilities
|
408,685 | 359,092 | ||||||
|
Stockholders'
Equity:
|
||||||||
|
Common
stock, no par value, authorized 5,000,000 shares;
|
||||||||
|
issued
shares 3,261,362 in 2008 and 3,104,374 in 2007;
|
||||||||
|
outstanding
shares 3,248,417 in 2008 and 3,093,699 in 2007
|
27,783 | 26,651 | ||||||
|
Retained
earnings
|
4,665 | 7,774 | ||||||
|
Accumulated
other comprehensive (loss)
|
(538 | ) | 15 | |||||
|
Total
Stockholders' Equity
|
31,910 | 34,440 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 440,595 | $ | 393,532 | ||||
|
See
Notes to Consolidated Financial Statements
|
||||||||
|
SUSSEX
BANCORP
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
Ended December 31,
|
||||||||
|
(Dollars
In Thousands Except Per Share Data)
|
2008
|
2007
|
||||||
|
INTEREST
INCOME
|
||||||||
|
Loans
receivable, including fees
|
$ | 19,150 | $ | 19,524 | ||||
|
Securities:
|
||||||||
|
Taxable
|
2,266 | 1,696 | ||||||
|
Tax-exempt
|
976 | 1,014 | ||||||
|
Federal
funds sold
|
259 | 569 | ||||||
|
Interest
bearing deposits
|
2 | 5 | ||||||
|
Total
Interest Income
|
22,653 | 22,808 | ||||||
|
INTEREST
EXPENSE
|
||||||||
|
Deposits
|
8,746 | 9,734 | ||||||
|
Borrowings
|
1,507 | 966 | ||||||
|
Junior
subordinated debentures
|
590 | 687 | ||||||
|
Total
Interest Expense
|
10,843 | 11,387 | ||||||
|
Net
Interest Income
|
11,810 | 11,421 | ||||||
|
PROVISION
FOR LOAN LOSSES
|
1,350 | 1,930 | ||||||
|
Net
Interest Income after Provision for Loan Losses
|
10,460 | 9,491 | ||||||
|
OTHER
INCOME
|
||||||||
|
Service
fees on deposit accounts
|
1,534 | 1,396 | ||||||
|
ATM
fees
|
464 | 412 | ||||||
|
Insurance
commissions and fees
|
2,507 | 2,688 | ||||||
|
Investment
brokerage fees
|
151 | 282 | ||||||
|
Holding
gains on trading securities
|
199 | 258 | ||||||
|
Gain
on sale of securities, available for sale
|
150 | 10 | ||||||
|
Loss
on sale of foreclosed real estate
|
(58 | ) | - | |||||
|
Impairment
write-downs on equity securities
|
(3,526 | ) | - | |||||
|
Other
|
570 | 570 | ||||||
|
Total
Other Income
|
1,991 | 5,616 | ||||||
|
OTHER
EXPENSES
|
||||||||
|
Salaries
and employee benefits
|
7,545 | 7,153 | ||||||
|
Occupancy,
net
|
1,299 | 1,246 | ||||||
|
Furniture,
equipment and data processing
|
1,481 | 1,462 | ||||||
|
Stationary
and supplies
|
192 | 187 | ||||||
|
Professional
fees
|
621 | 599 | ||||||
|
Advertising
and promotion
|
469 | 556 | ||||||
|
Insurance
|
171 | 176 | ||||||
|
FDIC
Assessment
|
385 | 36 | ||||||
|
Postage
and freight
|
155 | 167 | ||||||
|
Amortization
of intangible assets
|
49 | 93 | ||||||
|
Write-down
on foreclosed real estate
|
437 | - | ||||||
|
Expenses
related to foreclosed real estate
|
255 | - | ||||||
|
Other
|
1,530 | 1,473 | ||||||
|
Total
Other Expenses
|
14,589 | 13,148 | ||||||
|
Income
(Loss) before Income Taxes
|
(2,138 | ) | 1,959 | |||||
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
(1,096 | ) | 450 | |||||
|
Net
Income (Loss)
|
$ | (1,042 | ) | $ | 1,509 | |||
|
EARNINGS
(LOSS) PER SHARE
|
||||||||
|
Basic
|
$ | (0.32 | ) | $ | 0.45 | |||
|
Diluted
|
$ | (0.32 | ) | $ | 0.45 | |||
|
See
Notes to Consolidated Financial
Statements
|
|
SUSSEX
BANCORP
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
Years
Ended December 31, 2008 and 2007
|
|
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, 2006
|
3,152,374 | $ | 27,306 | $ | 7,415 | $ | (129 | ) | $ | - | $ | 34,592 | ||||||||||||
|
Adjustment
to opening balance, net of tax, for the adoption of SFAS No. 159 (see Note
3)
|
- | - | (262 | ) | 262 | - | - | |||||||||||||||||
|
Adjusted
opening balance, January 1, 2007
|
3,152,374 | 27,306 | 7,153 | 133 | - | 34,592 | ||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | 1,509 | - | - | 1,509 | ||||||||||||||||||
|
Change
in unrealized losses on securities for available for sale, net of
tax
|
- | - | - | (118 | ) | - | (118 | ) | ||||||||||||||||
|
Total
Comprehensive Income
|
1,391 | |||||||||||||||||||||||
|
Treasury
shares purchased
|
(82,451 | ) | - | - | - | (1,020 | ) | (1,020 | ) | |||||||||||||||
|
Treasury
shares retired
|
- | (1,020 | ) | - | - | 1,020 | - | |||||||||||||||||
|
Exercise
of stock options
|
20,851 | 257 | - | - | - | 257 | ||||||||||||||||||
|
Income
tax benefit of stock options exercised
|
- | 18 | - | - | - | 18 | ||||||||||||||||||
|
Restricted
stock vested during the period (a)
|
1,925 | - | - | - | - | - | ||||||||||||||||||
|
Compensation
expense related to stock option
|
||||||||||||||||||||||||
|
and
restricted stock grants
|
- | 75 | - | - | - | 75 | ||||||||||||||||||
|
Compensation
expense related to stock awards
|
1,000 | 15 | - | - | - | 15 | ||||||||||||||||||
|
Dividends
on common stock ($0.26 per share)
|
- | - | (888 | ) | - | - | (888 | ) | ||||||||||||||||
|
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 | ||||||||||||
|
(a)
Balance of unvested shares of restricted stock; 12,945 in 2008 and 10,675
in 2007
|
|
See
Notes to Consolidated Financial Statements
|
|
SUSSEX
BANCORP
|
|||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in Thousands)
|
2008
|
2007
|
||||||
|
Cash
Flows from Operating Activities
|
||||||||
|
Net
income (loss)
|
$ | (1,042 | ) | $ | 1,509 | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
|
Provision
for loan losses
|
1,350 | 1,930 | ||||||
|
Provision
for depreciation and amortization
|
1,005 | 1,033 | ||||||
|
Net
change in trading securities
|
969 | 133 | ||||||
|
Impairment
charge on preferred securities
|
3,526 | - | ||||||
|
Net
amortization of securities premiums and discounts
|
12 | (54 | ) | |||||
|
Net
realized gain on sale of securities
|
(150 | ) | (10 | ) | ||||
|
Net
realized loss on sale of foreclosed real estate
|
58 | - | ||||||
|
Provision
for foreclosed real estate
|
437 | - | ||||||
|
Deferred
income taxes
|
(1,844 | ) | (556 | ) | ||||
|
Earnings
on investment in life insurance
|
(105 | ) | (106 | ) | ||||
|
Compensation
expense for stock options and stock awards
|
76 | 90 | ||||||
|
(Increase)
decrease in assets:
|
||||||||
|
Accrued
interest receivable
|
(80 | ) | (125 | ) | ||||
|
Other
assets
|
111 | (100 | ) | |||||
|
Increase
(decrease) in accrued interest payable and other
liabilities
|
105 | (44 | ) | |||||
|
Net
Cash Provided by Operating Activities
|
4,428 | 3,700 | ||||||
|
Cash
Flows from Investing Activities
|
||||||||
|
Securities
available for sale:
|
||||||||
|
Purchases
|
(36,692 | ) | (19,635 | ) | ||||
|
Proceeds
from sale of securities
|
9,679 | 2,335 | ||||||
|
Maturities,
calls and principal repayments
|
8,828 | 9,014 | ||||||
|
Net
increase in loans
|
(26,008 | ) | (38,500 | ) | ||||
|
Proceeds
from the sale of foreclosed real estate
|
738 | - | ||||||
|
Purchases
of bank premises and equipment
|
(370 | ) | (2,258 | ) | ||||
|
Increase
in FHLB stock
|
57 | (844 | ) | |||||
|
Net
Cash Used in Investing Activities
|
(43,768 | ) | (49,888 | ) | ||||
|
Cash
Flows from Financing Activities
|
||||||||
|
Net
increase in deposits
|
51,543 | 12,768 | ||||||
|
Proceeds
from borrowings
|
3,000 | 23,000 | ||||||
|
Repayments
of borrowings
|
(5,054 | ) | (6,051 | ) | ||||
|
Proceeds
from junior subordinated debentures
|
- | 12,887 | ||||||
|
Repayments
of junior subordinated debentures
|
- | (5,155 | ) | |||||
|
Proceeds
from the exercise of stock options
|
34 | 257 | ||||||
|
Purchase
of treasury stock
|
(390 | ) | (1,020 | ) | ||||
|
Dividends
paid, net of reinvestments
|
(656 | ) | (888 | ) | ||||
|
Net
Cash Provided by Financing Activities
|
48,477 | 35,798 | ||||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
9,137 | (10,390 | ) | |||||
|
Cash
and Cash Equivalents - Beginning
|
11,775 | 22,165 | ||||||
|
Cash
and Cash Equivalents - Ending
|
$ | 20,912 | $ | 11,775 | ||||
|
Supplementary
Cash Flows Information
|
||||||||
|
Interest
paid
|
$ | 10,997 | $ | 10,989 | ||||
|
Income
taxes paid
|
$ | 450 | $ | 1,579 | ||||
|
Supplementary
Schedule of Noncash Investing and Financing Activities Supplementary Cash
Flows Information
|
||||||||
|
Foreclosed
real estate acquired in settlement of loans
|
$ | 5,097 | $ | - | ||||
|
See
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
investments. Tri-State Insurance Agency, Inc. provides insurance
agency services mostly through the sale of property and casualty insurance
policies. In 2005, the Company formed a joint venture with National
City Mortgage Inc., called SussexMortgage.com LLC to originate 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 losses,
valuation of goodwill and intangible assets and the valuation of deferred tax
assets.
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. Note 5 discusses the types of lending that the Company
engages in. 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.
Presentation
of Cash Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods.
Trading
Activities
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 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 carried at fair
value. Trading securities are recorded at fair value with changes in
fair value included in earnings. Fair values for securities are based
upon quoted market prices or dealer prices, if available. If quoted
market prices or dealer prices are not available, fair value is estimated using
quoted market prices or dealer prices for similar securities. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movement in interest rates, changes in
maturity mix of the Company’s assets and liabilities, liquidity needs,
regulatory capital considerations and other similar
factors. Unrealized gains or losses are reported as increases or
decreases in other comprehensive income, net of the related deferred tax
effect. Realized gains or losses, determined on the basis of the cost
of the specific securities sold, are included in earnings. Premiums
and discounts are recognized in interest
income
using the interest method over the terms of the securities. Equity
securities are comprised of stock in various companies and mutual funds.
Declines in the fair value of securities below their cost that are deemed to be
other-than-temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (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) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.
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. The
restricted stock is recorded at cost. The Federal Home Loan Bank
stock was carried at $1,975,000 and $2,032,000 for the years ended December 31,
2008 and 2007, 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 (or 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.
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.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify
individual consumer, residential and home equity loans for impairment
disclosures, unless such loans are the subject of a restructuring
agreement.
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 and loans classified as in-substance
foreclosure. A loan is classified as in-substance foreclosure when
the Bank has taken possession of the collateral regardless of whether formal
foreclosure proceedings take place. Foreclosed assets initially are
recorded at fair value, net of estimated selling costs, at the date of
foreclosure, establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of cost or fair value minus estimated costs to sell. Revenues and
expenses from operations and changes in the valuation allowance are included in
other expenses.
Premises
and Equipment
Bank
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, 2008 and 2007 was $956 thousand and
$940 thousand, respectively.
Goodwill
and Other Intangibles
Goodwill
represents the excess of the purchase price over the fair market value of net
assets acquired. The Company has recorded goodwill of $2.8 million at
December 31, 2008 and 2007, related to the acquisition of an insurance
agency on October 1, 2001 with an additional $486 thousand in December 31,
2006 for the acquisition of the Port Jervis, New York branch. 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. Goodwill was tested for impairment during
2008. 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. As of December
31, 2007 net amortizable intangible assets was $26 thousand, net of accumulated
amortization of $497 thousand.
The
Company had two amortizable core deposit intangible assets related to the
premiums paid on the acquisition of deposits. One core deposit was
being amortized on a straight-line basis over 15 years and was fully amortized
during the year ended December 31, 2007, with accumulated amortization of $1.3
million. The second 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 $48 thousand and
$71 thousand, net of accumulated amortization of $72 thousand and $49 thousand
as of December 31, 2008 and 2007, respectively.
Other
intangible assets are included in other assets on the balance sheets for
December 31, 2008 and 2007. Amortization expense on intangible
assets was $49 thousand and $93 thousand for the years ended December 31,
2008, and 2007, respectively. Amortization expense is estimated to be
$18 thousand for the year ending December 31, 2009, $14 thousand for the
year ending December 31, 2010, $10 thousand for the year ending December
31, 2011, $5 thousand for the year ending December 31, 2012 and $1 thousand in
2013.
Advertising
Costs
The Bank
follows the policy of charging the costs of advertising to expense as
incurred.
Income
Taxes
Deferred
income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment. Sussex Bancorp and its subsidiaries file a consolidated
federal income tax return.
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-Based
Compensation
The
Company currently has several stock option plans in place for employees and directors
of the Company. The Company accounts for stock options under the
fair value
recognition provisions of the Financial Accounting Standards Board (FASB)
Statement No. 123(R), "Share-Based
Payment," using the modified-prospective transition
method. Stock-based compensation expense related to stock options for
the year ended December 31, 2008 and 2007 was $12 thousand and $20 thousand,
respectively. There was no tax benefit recognized related to this
compensation expense for the year ended December 31, 2008 and $2 thousand for
the year ended December 31, 2007.
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 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). Although Tri-State typically bills customers 60 days prior
to the effective date of a policy, revenues for the first installment are
recorded at 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.
New
Accounting Standards
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.” The Company is
currently evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets.” This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). The intent of this FSP is to improve the consistency between
the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141R, and other GAAP. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is
prohibited. The Company is currently evaluating the potential impact
the new pronouncement will have on its consolidated financial
statements.
In June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” This FSP clarifies that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable
dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. This FSP is effective for fiscal years
beginning after December 15, 2008. The Company is currently
evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(Statement 161). Statement 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives. Statement 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 have been
applied, and the impact that hedges have on an entity’s financial position,
financial performance, and cash flows. Statement 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company is currently evaluating the
potential impact the new pronouncement will have on its consolidated financial
statements.
In
February 2008, the FASB issued a Staff Position (FSP) FAS 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP
addresses the issue of whether or not these transactions should be viewed as two
separate transactions or as one "linked" transaction. The FSP includes a
"rebuttable presumption" that presumes linkage of the two transactions unless
the presumption can be overcome by meeting certain criteria. The FSP will be
effective for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be allowed.
The Company is currently evaluating the potential impact the new pronouncement
will have on its consolidated financial statements.
FASB
statement No. 141(R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its consolidated financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the consolidated financial
statements to evaluate the nature and financial effects of the business
combination. The guidance will become effective as of the beginning of the
Company’s fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
FASB
statement No. 160 “Noncontrolling Interests in Consolidated Financial
Statements—an amendment of ARB No. 51” was issued in December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of the Company’s fiscal year
beginning after December 15, 2008. The Company is currently evaluating the
potential impact the new pronouncement will have on its consolidated financial
statements.
In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN
45-4 amends and enhances disclosure requirements for sellers of credit
derivatives and financial guarantees. It also clarifies that the
disclosure requirements of SFAS No. 161 are effective for quarterly periods
beginning after November 15, 2008, and fiscal years that include those
periods. FSP 133-1 and FIN 45-4 is effective for reporting periods
(annual or interim) ending after November 15, 2008. The
implementation of this standard will not have a material impact on our
consolidated financial position and results of operation.
In
September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for
Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF
08-5). EITF 08-5 provides guidance for measuring liabilities issued
with an attached third-party credit enhancement (such as a
guarantee). It clarifies that the issuer of a liability with a
third-party credit enhancement should not include the effect of the credit
enhancement in the fair value measurement of the liability. EITF 08-5
is effective for the first reporting period beginning after December 15,
2008. The Company is currently assessing the impact of EITF 08-5 on
its consolidated financial position and results of operations.
In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN)
46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4
and FIN 46(R)-8. FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”’ to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46(R),
“Consolidation of Variable Interest Entities”’ to require public enterprises,
including sponsors that have a variable interest in a variable interest entity,
to provide additional disclosures about their involvement with variable interest
entities. Additionally, this FSP requires certain disclosures to be
provided by a public enterprise that is (a) a sponsor of a qualifying special
purpose entity (SPE) that holds a variable interest in the qualifying SPE but
was not the transferor of financial assets to the qualifying SPE and (b) a
servicer of a qualifying SPE that holds a significant variable interest in the
qualifying SPE but was not the transferor of financial assets to the qualifying
SPE. The disclosures required by FSP SFAS 140-4 and FIN 46(R)-8 are
intended to provide greater transparency to financial statement users about a
transferor’s continuing involvement with transferred financial assets and an
enterprise’s involvement with variable interest entities and qualifying
SPEs. FSP SFAS 140-4 and FIN 46(R) is effective for the reporting
periods (annual or interim) ending December 15, 2008. The Company
does not expect FSP FSAS 140-4 and FIN 46(R)-8 to have a material impact on its
consolidated financial statements.
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment of
Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF
99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets”’ to achieve more consistent determination of whether an
other-than-temporary impairment has occurred. FSP EITF 99-20-1 also
retains and emphasizes the objective of an other than temporary impairment
assessment and the related disclosure requirements in SFAS No. 115, “Accounting
for Certain Investments in Debt and Equity Securities”’ and other related
guidance. FSP EITF 99-20-1 is effective for interim and annual
reporting periods ending after December 15, 2008, and shall be applied
prospectively. Retrospective application to a prior interim or annual
reporting period is not permitted. The adoption of this new
pronouncement did not have a material effect on the Company’s consolidated
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 2008 and 2007 is as follows:
|
Banking
and
|
Insurance
|
|||||||||||
|
(Dollars
in thousands)
|
Financial Services |
Services
|
Total
|
|||||||||
|
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
|
968 | 37 | 1,005 | |||||||||
|
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 | |||||||||
|
Year
Ended December 31, 2007:
|
||||||||||||
|
Net
interest income from external sources
|
$ | 11,421 | $ | - | $ | 11,421 | ||||||
|
Other
income from external sources
|
2,928 | 2,688 | 5,616 | |||||||||
|
Depreciation
and amortization
|
989 | 44 | 1,033 | |||||||||
|
Income
before income taxes
|
1,728 | 231 | 1,959 | |||||||||
|
Income
tax expense (1)
|
358 | 92 | 450 | |||||||||
|
Total
assets
|
390,301 | 3,231 | 393,532 | |||||||||
|
(1)
Calculated at statutory tax rate of 40%
|
||||||||||||
NOTE
3 – TRADING ACTIVITIES
In 2007,
the Company elected to early adopt Statement of Financial Accounting Standards
(“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities,” including an amendment of FASB Statement No. 115 and FASB
Statement No. 157, “Fair Value Measurements.” SFAS No. 157, issued in
September 2006, defines fair value, establishes a framework for measuring fair
value under GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 applies to other accounting pronouncements
that require or permit fair value measurements. SFAS No. 159, which
was issued in February 2007, generally permits the measurement of selected
eligible financial instruments at fair value at specified election dates,
subject to the conditions set forth in the standard, one of which is a
requirement to adopt all the requirements of SFAS No. 157 at the early adoption
date of SFAS No. 159 or earlier.
In 2007,
the Company elected to early adopt SFAS No. 159 for 28, or 20.3%, of its 138
available for sale securities and reclassified them as trading
securities. At December 31, 2006, it was the Company’s intent to hold
these investments until maturity or market price recovery and classified the
securities as available for sale. In the weeks following the filing
of the Company’s annual report on Form 10-K, the Company evaluated the impact of
the adoption of each of the statements on the Company’s consolidated balance
sheets and consolidated statements of income. The purposes weighing
most heavily in favor of adoption of SFAS No. 159 included the potential
net-interest margin improvements afforded by the election and the balance sheet
management flexibility which the Company has achieved.
Upon
adoption of SFAS No. 159, the Company selected the fair value option for $14.4
million of its $23.2 million in mortgage-backed securities as of January 1,
2007. The Company selected these mortgage-backed securities primarily
on the basis of yield.
The
initial fair value measurement of these securities resulted in a $262 thousand
cumulative effect adjustment, net of tax, recorded as a reduction in retained
earnings as of January 1, 2007 as shown in the table below:
|
Balance
|
Balance
|
|||||||||||
|
Sheet
|
Balance
|
Sheet
|
||||||||||
|
1/1/2007
|
Sheet
|
1/1/2007
|
||||||||||
|
prior
to
|
Adjustment
|
after
FVO
|
||||||||||
|
(Dollars
in thousands)
|
adoption
|
Pretax
|
adoption
|
|||||||||
|
Securities,
available for sale, at amortized cost
|
$ | 54,851 | $ | (14,828 | ) | $ | 40,023 | |||||
|
Net
unrealized gains (losses) on securities available for sale
|
(216 | ) | 436 | 220 | ||||||||
|
Securities
available for sale, at fair value
|
54,635 | (14,392 | ) | 40,243 | ||||||||
|
Trading
securities
|
- | 14,392 | 14,392 | |||||||||
| $ | 54,635 | $ | - | $ | 54,635 | |||||||
|
Pretax
cumulative effect of adoption
|
||||||||||||
|
of
the fair value option
|
$ | (436 | ) | |||||||||
|
Increase
in deferred tax assets
|
174 | |||||||||||
|
Cumulative
effect of adoption of the
|
||||||||||||
|
fair
value option (charge to retained earnings)
|
$ | (262 | ) | |||||||||
The
charge to retained earnings has no overall effect on total stockholders’ equity
because the fair value adjustment had previously been included as an element in
accumulated other comprehensive loss account.
The
Company records trading securities at fair value. Any holding gains
and losses on those trading securities are reflected in the consolidated
statement of income. The degree of judgment utilized in measuring the fair value
of trading securities generally correlates to the level of pricing
observability. Pricing observability is impacted by a number of
factors, including the type of asset, whether the asset has an established
market and the characteristics specific to the transaction. Trading
securities with readily active quoted prices or for which fair value can be
measured from actively quoted prices generally will have a higher degree of
pricing observability and a lesser degree of judgment utilized in measuring fair
value. Conversely, assets rarely traded or not quoted will generally
have less, or no, pricing observability and a higher degree of judgment utilized
in measuring fair value.
|
Trading
securities, at fair value, consist of the following as of December 31,
2008 and 2007:
|
|
2008
|
2007
|
|||||||
|
U.S.
Government agencies
|
$ | 5,744 | $ | 4,242 | ||||
|
Mortgage-backed
securities
|
7,546 | 10,017 | ||||||
| $ | 13,290 | $ | 14,259 | |||||
NOTE
4 – SECURITIES
The
amortized cost and approximate fair value of securities available for sale as of
December 31, 2008 and 2007 are summarized as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
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 | ||||||||
|
December
31, 2007
|
||||||||||||||||
|
U.S.
Government agencies
|
$ | 6,730 | $ | 13 | $ | (3 | ) | $ | 6,740 | |||||||
|
State
and political subdivisions
|
23,465 | 176 | (257 | ) | 23,384 | |||||||||||
|
Mortgage-backed
securities
|
16,176 | 168 | (23 | ) | 16,321 | |||||||||||
|
Equity
securities
|
2,001 | 12 | (61 | ) | 1,952 | |||||||||||
| $ | 48,372 | $ | 369 | $ | (344 | ) | $ | 48,397 | ||||||||
The
following table shows our investments’ gross unrealized losses and fair value,
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, 2008 and 2007.
|
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, 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 | ) | |||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | 2,989 | $ | (3 | ) | $ | - | $ | - | $ | 2,989 | $ | (3 | ) | ||||||||||
|
State
and political subdivisions
|
8,821 | (232 | ) | 1,025 | (25 | ) | 9,846 | (257 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
649 | (4 | ) | 1,755 | (19 | ) | 2,404 | (23 | ) | |||||||||||||||
|
Equity
securities
|
235 | (36 | ) | 824 | (25 | ) | 1,059 | (61 | ) | |||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | 12,694 | $ | (275 | ) | $ | 3,604 | $ | (69 | ) | $ | 16,298 | $ | (344 | ) | |||||||||
The
Company has 78 and 46 securities in an unrealized loss position as of December
31, 2008 and 2007, respectively. The unrealized losses on the
Company’s investments in state and political subdivisions and mortgage-backed
securities which are backed implicitly by the government were caused by
increases in spreads for all products and market illiquidity. The
unrealized losses on equity securities were caused by market
illiquidity.
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 has 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.
Other
declines in fair value are attributable to changes in spread and market
conditions and not credit quality, and because the Company has the intent and
ability to hold such investments to maturity or market price recovery, no other
securities are deemed to be other than temporarily impaired.
The
amortized cost and fair value of securities available for sale at
December 31, 2008 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
|
$ | 1,810 | $ | 1,810 | ||||
|
Due
after one year through five years
|
7,752 | 7,964 | ||||||
|
Due
after five years through ten years
|
204 | 206 | ||||||
|
Due
after ten years
|
23,012 | 21,842 | ||||||
|
Total
bonds and obligations
|
32,778 | 31,822 | ||||||
|
Mortgage-backed
securities
|
28,310 | 28,701 | ||||||
|
Equity
securities
|
2,081 | 1,749 | ||||||
|
Total
debt securities
|
$ | 63,169 | $ | 62,272 | ||||
Gross
gains on sales of securities were $157 thousand and $14 thousand and gross
losses were $7 thousand and $4 thousand for the years ended December 31,
2008 and 2007, respectively.
Securities
with a carrying value of approximately $24.7 million and $22.4 million at
December 31, 2008 and 2007, respectively, were pledged to secure public
deposits and for other purposes required or permitted by applicable laws and
regulations.
NOTE
5 – LOANS
The
composition of net loans receivable at December 31, 2008 and 2007 is as
follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Loans
secured by one to four family residential properties
|
$ | 84,412 | $ | 70,597 | ||||
|
Loans
secured by nonresidential properties
|
165,019 | 154,559 | ||||||
|
Loans
for construction and land development
|
38,413 | 41,954 | ||||||
|
Loans
secured by farmland
|
8,561 | 10,636 | ||||||
|
Commercial
and industrial loans
|
22,346 | 20,702 | ||||||
|
Consumer
|
1,248 | 1,483 | ||||||
|
Other
loans
|
1,011 | 834 | ||||||
| 321,010 | 300,765 | |||||||
|
Unearned
net loan origination (fees) costs
|
(130 | ) | (119 | ) | ||||
|
Allowance
for loan losses
|
(5,813 | ) | (5,140 | ) | ||||
|
Net
Loans Receivable
|
$ | 315,067 | $ | 295,506 | ||||
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 $2.0 million and $2.1 million at December 31, 2008 and
2007, respectively.
NOTE
6 – ALLOWANCE FOR LOAN LOSSES
The
following table presents changes in the allowance for loan losses for the years
ended December 31, 2008 and 2007:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Balance,
at beginning of year
|
$ | 5,140 | $ | 3,340 | ||||
|
Provision
for loan losses
|
1,350 | 1,930 | ||||||
|
Loans
charged off
|
(716 | ) | (184 | ) | ||||
|
Recoveries
|
39 | 54 | ||||||
|
Balance,
at end of year
|
$ | 5,813 | $ | 5,140 | ||||
Loans on
which the accrual of interest has been discontinued amounted to approximately
$9.7 million and $12.3 million at December 31, 2008 and 2007,
respectively. There was no loan balance past due 90 days or
more and still accruing interest, but which management expects will eventually
be paid in full, at December 31, 2008 and $69 thousand at December 31,
2007.
The total
recorded investment in impaired loans was $11.3 million and $15.2 million at
December 31, 2008 and 2007, respectively. Impaired loans not
requiring an allowance for loan losses were $7.2 million and $5.5 million at
December 31, 2008 and 2007, respectively. Impaired loans
requiring an allowance for loan losses were $4.1 million and $9.7 million at
December 31, 2008 and 2007, respectively. At December 31,
2008 and 2007, the related allowance for loan losses associated with those loans
was $2.1 million and $1.7 million respectively. For the years ended
December 31, 2008 and 2007, the average recorded investment in impaired
loans was $13.1 million and $6.8 million, respectively. Interest
income recognized on such loans during the time each was impaired was $61
thousand and $50 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 – PREMISES AND EQUIPMENT
The
components of bank premises and equipment at December 31, 2008 and 2007 are
as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Land
and land improvements
|
$ | 2,111 | $ | 1,650 | ||||
|
Building
and building improvements
|
6,726 | 6,581 | ||||||
|
Leasehold
improvements
|
310 | 344 | ||||||
|
Furniture,
fixtures and equipment
|
6,122 | 6,542 | ||||||
|
Assets
in progress
|
118 | 461 | ||||||
| 15,387 | 15,578 | |||||||
|
Accumulated
depreciation
|
(6,861 | ) | (6,466 | ) | ||||
|
Premises
and equipment, net
|
$ | 8,526 | $ | 9,112 | ||||
During
the years ended December 31, 2008 and 2007, depreciation expense totaled
$959 thousand and $940 thousand, respectively. As of
December 31, 2008, the Company had outstanding commitments of approximately
$15 thousand for computer software upgrades.
NOTE
8 – DEPOSITS
The
components of deposits at December 31, 2008 and 2007 are as
follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Demand,
non-interest bearing
|
$ | 34,784 | $ | 36,625 | ||||
|
Savings,
club and interest-bearing demand
|
207,080 | 130,894 | ||||||
|
Time,
other
|
76,239 | 106,239 | ||||||
|
Time,
$100,000 and more
|
41,978 | 34,780 | ||||||
|
Total
deposits
|
$ | 360,081 | $ | 308,538 | ||||
At
December 31, 2008, the scheduled maturities of time deposits are as follows
(in thousands):
|
2009
|
$ | 106,408 | ||
|
2010
|
5,607 | |||
|
2011
|
288 | |||
|
2012
|
38 | |||
|
2013
|
5,776 | |||
|
Thereafter
|
100 | |||
| $ | 118,217 |
NOTE
9 – BORROWINGS
At
December 31, 2008, the Bank has a line of credit commitment from the
Federal Home Loan Bank of New York for borrowings up to $80.5 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,
2008.
At
December 31, 2008 and 2007, 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
|
2008
|
2007
|
||||||||||||
|
March
7, 2008
|
N/A | 5.15 | % | $ | - | $ | 2,000 | |||||||||
|
November
3, 2010
|
N/A | 5.00 | % | 3,146 | 3,200 | |||||||||||
|
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 | |||||||||||
| $ | 33,146 | $ | 35,200 | |||||||||||||
Maturities
of long-term debt in years subsequent to December 31, 2008 are as follows
(in thousands):
|
2009
|
$ | 56 | ||
|
2010
|
7,090 | |||
|
2011
|
- | |||
|
2012
|
- | |||
|
2013
|
- | |||
|
Thereafter
|
26,000 | |||
| $ | 33,146 |
The above
convertible notes contain a convertible 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, 2008, the above borrowings are secured by a pledge of
qualifying one-to-four family mortgage loans and selected investment securities,
having an aggregate unpaid principal balance of approximately $104.6 million of
which the Bank has borrowing capacity of at least 71%.
NOTE
10 – 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 3.44% at December 31, 2008. 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. The Company's $5.2
million in trust preferred securities issued on July 11, 2002, were called on
July 9, 2007.
NOTE
11 – 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):
|
2008
|
$ | 468 | ||
|
2009
|
438 | |||
|
2010
|
419 | |||
|
2011
|
396 | |||
|
2012
|
394 | |||
|
Thereafter
|
494 | |||
| $ | 2,609 |
Rent
expense was $493 thousand and $488 thousand for the years ended December 31,
2008 and 2007, respectively.
NOTE
12 – EMPLOYEE BENEFIT PLANS
The
Company has a 401(k) Profit Sharing 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 amount
charged to expense related to this Plan for the years ended December 31, 2008
and 2007 was $117 thousand and $114 thousand, respectively.
The
Company also has nonqualified Supplemental Salary Continuation Plans for two
executive officers. Under the provisions of the Plans, the Company
has executed agreements providing the officers a retirement
benefit. For the years ended December 31, 2008 and 2007, $164
thousand and $182 thousand, respectively was charged to expense in connection
with the Plans. At December 31, 2008 and 2007, the Bank had an
investment in life insurance of $3.2 million and $3.1 million, respectively,
related to these Plans which are included in other assets. Earnings
on the investment in life insurance, included in other income, were $106
thousand and $105 thousand the years ended December 31, 2008 and 2007,
respectively.
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 year ended December 31, 2008 and approximately $35 thousand for
the year ended December 31, 2007 was expensed. Participants may elect
to receive their award in cash 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. The 2007 incentive
award of $35 thousand was deferred and $12 thousand in compensation was deferred
in 2008.
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 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 either (i) the average interest
rate earned by the Company on its investment portfolio or (ii) the total return
on the Company’s common stock, at the election of the
participant. 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
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 or in a lump sum, if the obligation is settled in
Company stock. As of the years ended December 31, 2008 and 2007, $85
thousand and $46 thousand, respectively has 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, 2008 and 2007 were $40 thousand and $30 thousand,
respectively. At December 31, 2008 and 2007, 54,631 and 41,458
shares, respectively, of the Company's common stock were held in the
Plan.
NOTE
13 – 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, 2008 and 2007 are as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Unrealized
losses on available for sale securities
|
$ | (4,297 | ) | $ | (186 | ) | ||
|
Less:
reclassification adjustments for gains (losses) included in net income
(loss)
|
(3,375 | ) | 10 | |||||
|
Net
unrealized losses
|
(922 | ) | (196 | ) | ||||
|
Tax
effect
|
369 | 78 | ||||||
|
Net
of tax amount
|
$ | (553 | ) | $ | (118 | ) | ||
NOTE
14– 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, 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 | ) | |||||
|
Year
Ended December 31, 2007:
|
||||||||||||
|
Basic
earnings per share:
|
||||||||||||
|
Net
income applicable to common stockholders
|
$ | 1,509 | 3,355 | $ | 0.45 | |||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options and nonvested stock awards
|
- | 30 | ||||||||||
|
Diluted
earnings per share:
|
||||||||||||
|
Net
income applicable to common stockholders
|
||||||||||||
|
and
assumed conversions
|
$ | 1,509 | 3,385 | $ | 0.45 | |||||||
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
15 – STOCKHOLDERS’ EQUITY, STOCK OPTION PLANS AND SUBSEQUENT
EVENTS
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.
The
Company had received preliminary approval to participate in the US Department of
Treasury Capital Purchase Program, “CPP” in December of 2008. On
February 25, 2009 the stockholders of the Company approved an amendment to its
Certificate of Incorporation to permit the issuance of 1,000,000 shares of
series preferred stock required to participate in the CPP. Subsequent
to the stockholders’ February vote, on March 2, 2009, the Company announced that
its Board of Directors elected not to participate in CPP.
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, 2008, there were
39,137 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, 2008, there were 192,877
shares available for future grants under the Plan.
Restricted
stock activity for the years ended December 31, 2008 and 2007 are as
follows:
|
Number
of Shares
|
||||||||
|
2008
|
2007
|
|||||||
|
Accumulated
shares granted
|
18,895 | 12,600 | ||||||
|
Vested
during the year
|
4,025 | 1,925 | ||||||
Remaining
unvested restricted stock grants are expected to vest as follows:
|
Number
of Shares
|
||||
|
2009
|
4,894 | |||
|
2010
|
3,544 | |||
|
2011
|
2,194 | |||
|
2012
|
1,519 | |||
|
2013
|
794 | |||
| 8,051 | ||||
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, 2008,
7,464 options were outstanding and will expire from October 2009 to October
2014.
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, 2006
|
261,233 | $ | 12.20 | 12.34 | ||||||||||||
|
Options
exercised
|
(22,206 | ) | 11.53 | |||||||||||||
|
Options
expired
|
- | - | ||||||||||||||
|
Options
forfeited
|
(7,051 | ) | 10.69 | |||||||||||||
|
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 | 6.74 | $ | - | ||||||||||
|
Exercisable,
December 31, 2008
|
217,371 | $ | 12.34 | 6.74 | $ | - | ||||||||||
The
following table summarizes information about stock options outstanding at
December 31, 2008 as adjusted for stock dividends:
|
Exercise
|
Number
|
Remaining
|
Number
|
|||||||||||
|
Price
|
Outstanding
|
Contractual
Life
|
Exercisable
|
|||||||||||
| 6.88 | 1,234 | 1.8 | 1,234 | |||||||||||
| 8.86 | 27,759 | 4.1 | 27,759 | |||||||||||
| 8.90 | 10,015 | 3.1 | 10,015 | |||||||||||
| 8.99 | 5,870 | 4.8 | 5,870 | |||||||||||
| 8.99 | 11,154 | 4.8 | 11,154 | |||||||||||
| 9.33 | 5,875 | 3.8 | 5,875 | |||||||||||
| 9.51 | 1,234 | 0.8 | 1,234 | |||||||||||
| 12.25 | 40,068 | 14.5 | 40,068 | |||||||||||
| 12.63 | 7,826 | 6.8 | 7,826 | |||||||||||
| 13.39 | 32,139 | 6.1 | 32,139 | |||||||||||
| 14.67 | 67,489 | 5.1 | 67,489 | |||||||||||
| 16.45 | 6,708 | 5.8 | 6,708 | |||||||||||
| 217,371 | 217,371 | |||||||||||||
The total
intrinsic value or fair market price over the exercise price of stock options
exercised during 2008 was $7 thousand.
Information
regarding the Company's restricted stock grants activity for the year ended
December 31, 2008 is as follows:
|
Weighted
Average
|
||||||||
|
Number
of
|
Grant
Date
|
|||||||
|
Shares
|
Fair
Value
|
|||||||
|
Restricted
stock, beginning of year
|
10,675 | $ | 14.14 | |||||
|
Granted
|
6,795 | 9.77 | ||||||
|
Forfeited
|
(500 | ) | 13.03 | |||||
|
Vested
|
(4,025 | ) | 13.80 | |||||
|
Restricted
stock, end of year
|
12,945 | $ | 12.68 | |||||
Total
stock-based compensation related to stock option awards and restricted stock
awards totaled $76 thousand for the year ended December 31, 2008. Tax
benefits recognized related to such stock-based compensation was $1
thousand. As of December 31, 2008 there was $112 thousand of
unrecognized compensation cost related to non vested stock options and stock
awards which is expected to be recognized over a weighted average period of 2.61
years.
NOTE
16 – INCOME TAXES
In July
2006 the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement 109,
Accounting for Income Taxes. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted FIN 48 as of
January 1, 2007. The Company has evaluated its tax positions as of
January 1, 2007. A tax position is recognized as a benefit only if it
is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that has a likelihood of
being realized on examination of more than 50 percent. For the tax
positions not meeting the “more likely than not” test, no tax benefit is
recorded. Under the “more likely than not” threshold guidelines, the
Company believes no significant uncertain tax positions exist, either
individually or in the aggregate, that would give rise to the
non-recognition of an existing tax benefit. As of January 1, 2007,
the Company had no material unrecognized tax benefits or accrued interest or
penalties. The Company’s policy is to account for interest as a
component of
interest
expense and penalties as a component of other expense. 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,
2008 and 2007 are as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Current:
|
||||||||
|
Federal
|
$ | 412 | $ | 860 | ||||
|
State
|
336 | 320 | ||||||
| 748 | 1,180 | |||||||
|
Deferred:
|
||||||||
|
Federal
|
(1,442 | ) | (590 | ) | ||||
|
State
|
(402 | ) | (140 | ) | ||||
| (1,844 | ) | (730 | ) | |||||
| $ | (1,096 | ) | $ | 450 | ||||
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, 2008 and 2007 is as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||||||||||
|
Federal
income tax (benefit) at statutory rate
|
$ | (727 | ) | (34 | %) | $ | 666 | 34 | % | |||||||
|
Tax
exempt interest
|
(329 | ) | (15 | ) | (338 | ) | (17 | ) | ||||||||
|
State
income tax (benefit), net of federal income tax effect
|
(43 | ) | (2 | ) | 119 | 6 | ||||||||||
|
Other
|
3 | - | 3 | - | ||||||||||||
| $ | (1,096 | ) | (51 | %) | $ | 450 | 23 | % | ||||||||
The
income tax provision includes $60 thousand and $4 thousand in 2008 and 2007,
respectively, of income tax expense related to net gains on sales of
securities.
The
components of the net deferred tax asset at December 31, 2008 and 2007 are
as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 2,322 | $ | 2,053 | ||||
|
Deferred
compensation
|
402 | 358 | ||||||
|
Other
than temporary impairment
|
1,408 | - | ||||||
|
Unrealized
losses on securities available for sale
|
359 | - | ||||||
|
Intangible
assets
|
58 | 63 | ||||||
|
Other
|
90 | 85 | ||||||
|
Total
Deferred Tax Assets
|
4,639 | 2,559 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Bank
premises and equipment
|
(177 | ) | (279 | ) | ||||
|
Prepaid
expenses
|
(176 | ) | (197 | ) | ||||
|
Unrealized
gain on securities, available for sale
|
- | (10 | ) | |||||
|
Total
Deferred Tax Liabilities
|
(353 | ) | (486 | ) | ||||
|
Net
Deferred Tax Asset
|
$ | 4,286 | $ | 2,073 | ||||
NOTE
17 – 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, 2008 is
summarized as follows:
|
(Dollars
in thousands)
|
2008
|
|||
|
Balance,
beginning
|
$ | 3,001 | ||
|
Disbursements
|
- | |||
|
Repayments
|
(320 | ) | ||
|
Balance,
ending
|
$ | 2,681 | ||
Certain
related parties of the Company provided legal and appraisal services to the
Company. Such services rendered totaled $30 thousand and $17 thousand
during 2008 and 2007, respectively. The Company paid rent to related
parties for an office location in the amount of $166 thousand in 2008 and $162
thousand in 2007.
NOTE
18 – 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, 2008 and 2007 is as
follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Commitments
to grant loans
|
$ | 2,275 | $ | 5,889 | ||||
|
Unfunded
commitments under lines of credit
|
44,005 | 54,969 | ||||||
|
Outstanding
standby letters of credit
|
2,580 | 2,389 | ||||||
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 written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. 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 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, 2008 and 2007 for guarantees
under standby letters of credit issued is not material.
NOTE
19 – 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 $1.8 million at December 31, 2008.
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, 2008, that the Bank meets all capital adequacy requirements to
which they are subject.
As of
December 31, 2008, 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, 2008 and 2007 are
presented below:
|
To
be Well Capitalized
|
||||||||||||
|
under
Prompt
|
||||||||||||
|
For
Capital Adequacy
|
Corrective
Action
|
|||||||||||
|
Actual
|
Purposes
|
Provisions
|
||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
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
|
||||||
|
As
of December 31, 2007
|
||||||||||||
|
Total
capital (to risk-weighted assets)
|
$ | 34,666 | 10.91 | % |
$>25,414
|
>8.00%
|
$>31,767
|
>10.00%
|
||||
|
Tier
I capital (to risk-weighted assets)
|
30,678 | 9.66 |
>12,707
|
>4.00
|
>19,060
|
>6.00
|
||||||
|
Tier
I capital (to average assets)
|
30,678 | 7.72 |
>15,902
|
>4.00
|
>19,878
|
>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, 2008, the Bank’s funds available for payment of dividends were
$32.8 million. Accordingly, $7.5 million of the Company’s equity in
the net assets of the Bank was restricted as of December 31,
2008.
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.
NOTE
20 – FAIR VALUE OF FINANCIAL INSTRUMENTS
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
SFAS No. 157, 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 SFAS No. 157
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 SFAS No. 157 pricing observability
levels as of December 31, 2008 and 2007:
|
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, 2008:
|
||||||||||||||||
|
Trading
securities
|
$ | 13,290 | $ | - | $ | 13,290 | $ | - | ||||||||
|
Available
for sale securities
|
62,272 | - | 62,272 | - | ||||||||||||
|
December
31, 2007:
|
||||||||||||||||
|
Trading
securities
|
$ | 14,259 | $ | - | $ | 14,259 | $ | - | ||||||||
|
Available
for sale securities
|
48,397 | - | 48,397 | - | ||||||||||||
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, 2008
and 2007 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, 2008:
|
||||||||||||||||
|
Impaired
loans
|
$ | 9,184 | $ | - | $ | - | $ | 9,184 | ||||||||
|
Foreclosed
real estate
|
3,864 | - | - | 3,864 | ||||||||||||
|
December
31, 2007:
|
||||||||||||||||
|
Impaired
loans
|
$ | 13,461 | $ | - | $ | - | $ | 13,461 | ||||||||
The
Company has delayed its disclosure requirements of non-financial assets and
liabilities. Certain foreclosed real estate with write-downs
subsequent to foreclosure, intangible assets and goodwill are carried at fair
value at the balance sheet date for which the Bank has not yet adopted the
provisions of SFAS No. 157.
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, 2008 and 2007:
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)
are 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 (“SFAS 114”), 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
$9.2 million and $13.5 million, net of valuation allowance of $2.1 million and
$1.7 million. Additional provisions for loan losses of $1.0 million
and $1.8 million for 2008 and 2007, respectively were recorded during these
periods
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 flows 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 flows 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 approximates 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, 2008 and 2007 were as follows:
|
2008
|
2007
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 20,912 | $ | 20,912 | $ | 11,775 | $ | 11,775 | ||||||||
|
Time
deposits with other banks
|
100 | 100 | 100 | 100 | ||||||||||||
|
Trading
securities
|
13,290 | 13,290 | 14,259 | 14,259 | ||||||||||||
|
Securities
available for sale
|
62,272 | 62,272 | 48,397 | 48,397 | ||||||||||||
|
Federal
Home Loan Bank stock
|
1,975 | 1,975 | 2,032 | 2,032 | ||||||||||||
|
Loans
receivable, net of allowance
|
315,067 | 324,787 | 295,506 | 296,289 | ||||||||||||
|
Accrued
interest receivable
|
2,115 | 2,115 | 2,035 | 2,035 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
360,081 | 360,900 | 308,538 | 309,225 | ||||||||||||
|
Borrowings
|
33,146 | 37,373 | 35,200 | 36,318 | ||||||||||||
|
Junior
subordinated debentures
|
12,887 | 12,888 | 12,887 | 12,893 | ||||||||||||
|
Accrued
interest payable
|
741 | 741 | 895 | 895 | ||||||||||||
|
Off-balance
financial instruments:
|
||||||||||||||||
|
Commitments
to extend credit
|
- | - | - | - | ||||||||||||
|
Outstanding
letters of credit
|
- | - | - | - | ||||||||||||
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)
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Cash
|
$ | 1,012 | $ | 9,817 | ||||
|
Investment
in subsidiaries
|
40,192 | 34,029 | ||||||
|
Securities,
available for sale
|
1,140 | 1,286 | ||||||
|
Loans
|
1,038 | 1,068 | ||||||
|
Accrued
interest and other assets
|
1,477 | 1,183 | ||||||
|
Total
Assets
|
$ | 44,859 | $ | 47,383 | ||||
|
Liabilities
and Stockholders' Equity:
|
||||||||
|
Other
liabilities
|
$ | 62 | $ | 56 | ||||
|
Junior
subordinated debentures
|
12,887 | 12,887 | ||||||
|
Stockholders'
Equity
|
31,910 | 34,440 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 44,859 | $ | 47,383 | ||||
|
STATEMENTS
OF INCOME
|
||||||||
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Dividends
from banking subsidiary
|
$ | 656 | $ | 888 | ||||
|
Interest
and fees on loans
|
68 | 42 | ||||||
|
Interest
on investments
|
32 | 29 | ||||||
|
Interest
expense on debentures
|
(590 | ) | (687 | ) | ||||
|
Other
expenses
|
(131 | ) | (113 | ) | ||||
|
Income
before Income Tax Benefit and Equity in
|
||||||||
|
Undistributed
Net Income of Banking Subsidiary
|
35 | 159 | ||||||
|
Income
tax benefit
|
211 | 248 | ||||||
|
Income
before Equity in Undistributed Net
|
||||||||
|
Income
of Banking Subsidiary
|
246 | 407 | ||||||
|
Equity
in undistributed net income (loss) of banking subsidiary
|
(1,675 | ) | 715 | |||||
|
Equity
in undistributed net income of nonbanking subsidiary
|
387 | 387 | ||||||
|
Net
Income (Loss)
|
$ | (1,042 | ) | $ | 1,509 | |||
|
STATEMENTS
OF CASH FLOWS
|
||||||||
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
Income (Loss)
|
$ | (1,042 | ) | $ | 1,509 | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
||||||||
|
(used
in) operating activities:
|
||||||||
|
Net
change in other assets and liabilities
|
(208 | ) | (509 | ) | ||||
|
Equity
in undistributed net income (loss) of banking subsidiary
|
1,288 | (1,102 | ) | |||||
|
Net
Cash Provided by (Used In) Operating Activities
|
38 | (102 | ) | |||||
|
Cash
Flows Used In Investing Activities:
|
||||||||
|
Securities
available for sale:
|
||||||||
|
Purchases
|
- | (772 | ) | |||||
|
Maturities,
calls and principal repayments
|
139 | 890 | ||||||
|
Net
(increase) decrease in loans
|
30 | (708 | ) | |||||
|
Capital
contribution to banking subsidiary
|
(8,000 | ) | - | |||||
|
Net
Cash Used In Investing Activities
|
(7,831 | ) | (590 | ) | ||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Proceeds
from junior subordinated debentures
|
- | 12,887 | ||||||
|
Repayments
of junior subordinated debentures
|
- | (5,155 | ) | |||||
|
Cash
dividends paid, net of reinvestments
|
(656 | ) | (888 | ) | ||||
|
Purchase
of treasury stock
|
(390 | ) | (1,020 | ) | ||||
|
Proceeds
from exercise of stock options
|
34 | 257 | ||||||
|
Net
Cash Provided By (Used In) Financing Activities
|
(1,012 | ) | 6,081 | |||||
|
Net
Increase (decrease) in Cash and Cash Equivalents
|
(8,805 | ) | 5,389 | |||||
|
Cash
and Cash Equivalents - Beginning of Year
|
9,817 | 4,428 | ||||||
|
Cash
and Cash Equivalents - End of Year
|
$ | 1,012 | $ | 9,817 | ||||
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, 2008. 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, 2008, 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/ Donald L. Kovach
|
By: /s/ Candace A.
Leatham
|
|
Chairman
and Chief Executive Officer
|
Executive
Vice President and Treasurer
|
(c) Changes
in Internal Control over Financial Reporting
Not
applicable
ITEM 9B. OTHER
INFORMATION
Not
applicable
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 2009 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, 2009.
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
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
|
50
|
Executive
Vice President, Loan Administration; Formerly Senior Lending Officer,
Newton Trust Company
|
2004
|
N/A
|
|
George
B. Harper
|
54
|
President,
Tri-State Insurance Agency, Inc.
|
2001
|
N/A
|
|
Candace
A. Leatham
|
54
|
Executive
Vice President and Treasurer of the Bank
|
1984
|
N/A
|
|
George
Lista
|
49
|
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 2009 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, 2009.
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 2009 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, 2009.
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
(a)
|
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and
rights
(b)
|
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
217,317
|
$12.34
|
232,014
|
|
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
|
Total
|
217,317
|
$12.34
|
232,014
|
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 2009 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, 2009.
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 2009
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, 2009.
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 Terry Thompson dated February 20, 2008
(g)
|
||
|
10.5
|
Employment
Agreement with Tammy Case dated February 20, 2008 (g)
|
||
|
10.6
|
Employment
Agreement with George Lista dated September 28, 2004
(h)
|
||
|
10.7
|
Employment
Agreement with George B. Harper dated September 28, 2004
(h)
|
||
|
10.8
|
Amendment,
dated January 7, 2004, to Salary Continuation Agreement dated March 15,
2002 with Donald L. Kovach (i)
|
||
|
10.8
|
Amendment,
dated October 17, 2007, to Salary Continuation Agreement dated March 15,
2002 with Donald L. Kovach
(j)
|
||
|
10.9
|
Salary
Continuation Agreement dated January 8, 2004 with Terry Thompson
(k)
|
||
|
10.10
|
First
Amendment, dated October 17, 2007 to Salary Continuation Agreement with
Terry Thompson (j)
|
||
|
10.11
|
2004
Equity Incentive Plan (l)
|
||
|
10.12
|
Amended
and Restated Director Deferred Cooperation Agreement
(m)
|
||
|
21
|
Subsidiaries
of Sussex Bancorp
|
||
|
23
|
Consent
of Beard Miller Company LLP
|
||
|
31.1
|
Rule
13a-14(a) Certification of Donald L. Kovach
|
||
|
31.2
|
Rule
13a-14(a) Certification of Candace Leatham
|
||
|
32
|
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 10.3 of the Company’s Form 10-KSB for the
year ended December 31, 2003.
|
|
(l)
|
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.
|
|
(m)
|
Incorporated
herein by reference to Exhibit 10 of the Company’s Form 8-K filed December
19, 2008
|
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
|
||
|
By: /s/ Donald L. Kovach
|
||
|
Donald
L. Kovach
|
||
|
Chairman
of the Board and
|
||
|
Chief
Executive Officer
|
||
|
Dated:
March 23, 2009
|
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/
Donald L. Kovach
Donald
L. Kovach
|
|
President,
Chief Executive Officer and Director (Chairman of the
Board)
|
March
23, 2009
|
|
|
/s/
Candace A. Leatham
Candace
A. Leatham
|
|
Executive
Vice President (Principal Financial and Accounting
Officer)
|
March
23, 2009
|
|
|
/s/
Anthony S. Abbate
Anthony
S. Abbate
|
|
Director
|
March
23, 2009
|
|
|
/s/
Irvin Ackerson
Irvin
Ackerson
|
|
Director
|
March
23, 2009
|
|
|
/s/
Patrick Brady
Patrick
Brady
|
|
Director
|
March
23, 2009
|
|
|
/s/
Richard Branca
Richard
Branca
|
|
Director
|
March
23, 2009
|
|
|
/s/
Mark J. Hontz
Mark
J. Hontz
|
|
Director
|
March
23, 2009
|
|
|
/s/
Edward J. Leppert
Edward
J. Leppert
|
|
Director
|
March
23, 2009
|
|
|
/s/
Timothy Marvil
Timothy
Marvil
|
|
Director
|
March
23, 2009
|
|
|
/s/
Richard W. Scott
Richard
W. Scott
|
|
Director
|
March
23, 2009
|
|
|
/s/
Terry H. Thompson
Terry
H. Thompson
|
|
Director
|
March
23, 2009
|
61