UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ý
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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, 2006
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¨
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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
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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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
(Registrant's
telephone number, including area code)
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.
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Yes
¨
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No
ý
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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.
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Yes
¨
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No
ý
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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.
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Yes
ý
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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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ý
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
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Yes
¨
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No
ý
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The
aggregate market value of the voting stock held by non-affiliates of the Issuer
as of June 30, 2006 was $40,838,589.
The
number of shares of the Issuer's Common Stock, no par value, outstanding as
of
March 7, 2007 was 3,162,640.
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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; 455 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 67-67 Main Street, Warwick, New York. On November
7,
2005, the Bank entered into an agreement to purchase the Port Jervis, New York
branch office of NBT Bank, N.A. and expand its branch network outside of Sussex
County New Jersey for the first time. The transaction was consummated on March
24, 2006. As part of the transaction, the Bank assumed approximately $6.3
million in deposits and acquired approximately $3.4 million in loans. In
December, 2006, the Company applied for regulatory approval to establish a
branch in Westfall Township, Pennsylvania. It is anticipated that the branch
will open in late 2007.
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. In 2003, the Company expanded its
insurance operations through the acquisition of the Garrera Insurance Agency.
The operations of the Garrera Insurance Agency have been consolidated with
Tri-State.
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 3 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 northwest New Jersey, northeast Pennsylvania and Orange County,
New York trade areas serviced by the Company. 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.
In
order
to augment its capital base, on December 15, 2004, the Company issued 1,131,150
shares of its common stock, no par value, pursuant to a public offering
underwritten by Keefe, Bruyette & Woods, Inc. The offering raised
approximately $15.1 million in net proceeds.
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, 2006, the Company employed 110 full-time employees and 24 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
Federal Reserve Bank (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.
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 $150 million or more. The minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) is 8%. At least 4% of the total capital
is
required to be "Tier I", consisting of common stockholders' equity, certain
preferred stock and certain hybrid capital instruments, less certain goodwill
items and other intangible assets. The remainder, "Tier II Capital", may consist
of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets,
(b)
excess of qualifying preferred stock, (c) excess of hybrid capital instruments,
(d) debt, (e) mandatory convertible securities, and (f)
qualifying
subordinated
debt. Certain hybrid capital instruments, including specifically trust preferred
securities may be included in Tier I capital up to a maximum of 25% of Tier
I
capital. In 2002, the Company raised $4.8 million in net proceeds through an
offering of trust preferred securities, all of which is counted as Tier I
Capital. Total capital is the sum of Tier I and Tier II capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the FRB
(determined on a case-by-case basis or as a matter of policy after formal
rule-making).
Bank
holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In
addition, certain off-balance sheet items are given similar credit conversion
factors to convert them to asset equivalent amounts to which an appropriate
risk-weight will apply. These computations result in the total risk-weighted
assets. Most loans are assigned to the 100% risk category, except for performing
first mortgage loans fully secured by residential property which carry a 50%
risk-weighting. Most investment securities (including, primarily, general
obligation claims of states or other political subdivisions of the United
States) are assigned to the 20% category, except for municipal or state revenue
bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury
or obligations backed by the full faith and credit of the U.S. Government,
which
have a 0% risk-weight. In converting off-balance sheet items, direct credit
substitutes including general guarantees and standby letters of credit backing
financial obligations are given 100% risk-weighing. Transaction related
contingencies such as bid bonds, standby letters of credit backing non-financial
obligations, and undrawn commitments (including commercial credit lines with
an
initial maturity of more than one year) have a 50% risk-weighting. Short term
commercial letters of credit have a 20% risk-weighting and certain short-term
unconditionally cancelable commitments have a 0% risk-weighting.
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.
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
The
Bank's deposits are insured up to a maximum of $100,000 per depositor under
the
DIF. In addition, federal law provides for insurance coverage of up to $250,000
for "self-directed" retirement accounts. The FDIC has established a risk-based
insurance premium assessment system under which the FDIC has developed a matrix
that sets the assessment premium for a particular institution in accordance
with
its capital level and overall regulatory rating by the institutions' primary
federal regulators. Under the matrix that is currently in effect, the assessment
rate ranges from 5 to 43 basis points of assessed deposits. In 2006, the
assessment for federal insurance totaled $33,000.
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
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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·
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audit
committees;
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·
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certification
of financial statements by the chief executive officer and the chief
financial officer;
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·
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the
forfeiture of bonuses or other incentive-based competition and profits
from the sale of an issuer’s securities by directors and senior officers
in the twelve month period following initial publication of any financial
statements that later require
restatement;
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·
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a
prohibition on insider trading during pension plan black out
periods;
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·
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disclosure
of off-balance sheet transactions;
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·
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a
prohibition on personal loans to officers and directors, unless subject
to
Federal Reserve Regulation O;
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·
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expedited
filing requirements for Form 4 statements of changes of beneficial
ownership of securities required to be filed by officers, directors
and
10% shareholders;
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·
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disclosure
of whether or not a company has adopted a code of
ethics;
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·
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“real
time” filing of periodic reports;
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·
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auditor
independence; and
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·
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various
increased criminal penalties for violations of securities
laws.
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Complying
with the requirements of SOX as implemented by the SEC will 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
Investors
in the Company’s securities should consider the following factors before trading
in the Company’s securities:
Risks
Affecting our Business:
Our
earnings could be negatively affected if we are unable to continue our growth.
The
Company has 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,
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
future profitability depends upon our ability to manage our
growth.
The
Company expects to continue to experience growth in the scope of our operations
and correspondingly in the number of our employees and customers. Our ability
to
manage this growth will depend upon our ability to continue to attract, hire
and
retain skilled employees. This may be particularly critical as we expand out
of
our traditional Sussex County, New Jersey market into New York and Pennsylvania.
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.
Our
ability to afford and adapt to changes in technology will affect our future
profitability.
Many of
the Company’s competitors have substantially greater resources to invest in
technological improvements and have more experience in managing technological
change. Adoption of rapid technological changes by the banking industry or
the
bank's customers could put the bank at a competitive disadvantage if we do
not
have the capital or personnel necessary to implement such changes.
Our
legal lending limits are relatively low and restrict our ability to compete
for
larger customers. At
December 31, 2006, our lending limit per borrower was approximately $5.0
million, or 15% of our capital. Accordingly, the size of loans that we can
offer
to potential borrowers (without participation by other lenders) is less than
the
size of loans that many of our competitors with larger capitalization are able
to offer. Our legal lending limit also impacts the efficiency of our lending
operation because it tends to lower our average loan size, which means we have
to generate a higher number of transactions to achieve the same portfolio
volume. We may engage in loan participations with other banks for loans in
excess of our legal lending limits. However, there can be no assurance that
such
participations will be available at all or on terms which are favorable to
us
and our customers.
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.
Our
loan portfolio is concentrated in loans secured by commercial real estate.
Any
downturn in the commercial real estate market could adversely affect our results
of operations. Our
loan
portfolio is concentrated in loans secured by real estate. Loans secured by
commercial real estate account for 53.1% of our portfolio, and construction
and
land development loans account for another 11.5% of our loans. Majority of
these
properties are located in northwest New Jersey. Any sustained and material
downturn in the commercial real estate market in northwest New Jersey could
impair the value of our collateral and have an adverse effect on our results
of
operations. In addition, the federal regulatory agencies supervising our
operations have adopted policies requiring institutions with substantial
portfolios of commercial real estate loans to hold higher levels of capital.
Although the Company is not currently subject to these requirements, it could
become subject to them if it continues to increase its proportion of commercial
real estate loans. Any requirement that the Company hold additional capital
could restrict the Company’s growth and negatively affect its profitability.
Higher
interest rates and a slowing real estate market have caused our non-performing
assets to increase.
Continuation
of these trends could adversely affect our results of operations. A substantial
portion of our loans (65.7% of the portfolio) carry variable rates of interest
which reset periodically. As these loans have reset to current higher rates
of
interest, it has negatively affected the cash flow of some of our borrowers.
In
addition, the slowing real estate market has made it more difficult for
borrowers to lease or sell properties. As a result of these two trends, our
non-performing assets have increased from $1.4 million at year end 2005 to
$2.7
million at year end 2006. If these trends continue, our non-performing assets
may continue to increase, which would adversely affect our results of
operations.
Risks
Affecting the Banking Industry:
Our
operations are subject to extensive regulation. The
Company is subject to extensive federal and state legislation, regulation and
supervision that are intended primarily to protect depositors and the Federal
Deposit Insurance Corporation's Deposit Insurance Fund, rather than investors.
Legislative and regulatory changes may increase our cost of doing business
or
otherwise adversely affect the Company and create competitive advantages for
non-bank competitors. The Company can give no assurance that future changes
in
laws and regulations or changes in their interpretation will not adversely
affect our business. 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 not for
the purpose of protecting shareholders. 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
operate in a highly competitive environment. The
banking industry within the New Jersey-New York metropolitan area is highly
competitive. Although we believe that we have been and will continue to be
able
to compete effectively with our competition due to our experienced management
and personalized service, if we are wrong, our ability to grow and operate
profitably may be negatively affected. The bank's principal market area is
served by branch offices of large commercial banks and thrift institutions.
We
also face competition from other companies that provide financial services,
including consumer loan companies, credit unions, mortgage brokers, insurance
companies, securities brokerage firms, money market mutual funds, internet
banks
and private lenders. In addition, in November of 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 (the "GLB Act") was passed into law. Among
other things, the GLB Act permits insurance companies and securities firms
to
acquire or form financial institutions, thereby further increasing the
competition we face. A number of our competitors have substantially greater
resources to expend on advertising and marketing than we do, and their
substantially greater capitalization enables them to make much larger loans.
Our
success depends a great deal on our belief that large and mid-size financial
institutions do not adequately serve individuals and small businesses in our
principal market area and on 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.
Our
earnings may be adversely affected by changes in interest
rates.
The
Company may not be able to effectively manage changes in interest rates that
affect what we charge as interest on our earning assets and the expense we
must
pay on interest-bearing liabilities, which may significantly reduce our
earnings. In addition, there are costs associated with our risk management
techniques, and these costs could be material. Fluctuations in interest rates
are not predictable or controllable and, therefore, there can be no assurances
of our ability to continue to maintain a consistent positive spread between
the
interest earned on our earning assets and the interest paid on our
interest-bearing liabilities.
Economic
conditions may adversely affect our business. Deterioration
in local, regional, national or global economic conditions could cause us to
experience a reduction in deposits and new loans, an increase in the number
of
borrowers who default on their loans and a reduction in the value of the
collateral securing their loans, all of which could adversely affect our
performance and financial condition. Unlike larger banks that are more
geographically diversified, we provide banking and financial services locally.
Therefore, we are particularly vulnerable to adverse local economic
conditions.
If
the bank experiences greater loan losses than anticipated, it will have an
adverse effect on our net income and our ability to fund our growth strategy.
The
risk
of nonpayment of loans is inherent in banking. If we experience greater
nonpayment levels than anticipated, our earnings and overall financial
condition, as well as the value of our common stock, could be adversely
affected. We cannot assure you that our monitoring procedures and policies
will
reduce certain lending risks or that our allowance for loan losses will be
adequate to cover actual losses. Loan losses can cause insolvency and failure
of
a financial institution and, in such an event, our shareholders could lose
their
entire investment. In addition, future provisions for loan losses could
materially and adversely affect our results of operation. Any loan losses will
reduce the loan loss reserve. A reduction in the loan loss reserve will be
restored by an increase in our provision for loan losses and will result in
a
decrease in our net income and, possibly, our capital, and may materially affect
our results of operations in the period in which the allowance is
increased.
Our
ability to pay dividends is limited by law and federal banking regulation.
Our
ability to pay dividends to our shareholders largely depends on our receipt
of
dividends from Sussex Bank. The amount of dividends that Sussex Bank may pay
to
us is limited by federal laws and regulations. We also may decide to limit
the
payment of dividends even when we have the legal ability to pay them in order
to
retain earnings for use in our business.
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 branch offices,
its loan production office in Milford, PA and its insurance agency office.
The
following table set forth certain information regarding the Company's properties
as of December 31, 2006. 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
|
|
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,
2008
|
|
20-22
Fowler Street
Port
Jervis, New York
|
Leased
(2)
|
June
30, 2008
|
|
65-67
Main Street
Warwick,
New York
|
Leased
|
December,
2007
|
|
104
Bennett Ave., Suite 2D
Milford,
Pennsylvania
|
Leased
|
March,
2007
|
|
(1)
|
The
Company owns the building housing its 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 parties to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to enforce
liens, claims involving the making and servicing of real property loans, and
other issues incident to the Bank's business. Management does not believe that
there is any pending or threatened proceeding against the Company or the Bank
which, if determined adversely, would have a material effect on the business,
financial position or results of operation of the Company or the Bank.
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 2006.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
Common Stock traded on the American Stock Exchange until October 3, 2006. On
October 4, our Common Stock began trading on the NASDAQ Global Market, under
the
symbol "SBBX". As of December 31, 2006, the Company had approximately 638
holders of record of its common stock.
The
following table shows the high and low sales price, by quarter, for the common
stock, for the period of time it traded on the American Stock Exchange and
the
high and low bid price for the fourth quarter since October 4, as well as
dividends declared, for the last two fiscal years:
|
2006
|
High
Closing Price:
|
Low
Closing Price:
|
Dividends
Declared:
|
||||
|
4th
Quarter (since
October 4)
|
$16.60
|
$14.43
|
$0.070
|
||||
|
4th
Quarter (through
October 3)
|
$15.12
|
$14.62
|
-
|
||||
|
3rd
Quarter
|
$14.80
|
$14.10
|
$0.070
|
||||
|
2nd
Quarter
|
$14.85
|
$14.44
|
$0.070
|
||||
|
1st
Quarter
|
$15.10
|
$14.63
|
$0.070
|
||||
|
2005
|
High
Closing Price:
|
Low
Closing Price:
|
Dividends
Declared:
|
||||
|
4th
Quarter
|
$15.35
|
$13.48
|
-
|
||||
|
3rd
Quarter
|
$13.81
|
$13.24
|
$0.067
|
||||
|
2nd
Quarter
|
$14.05
|
$12.81
|
$0.067
|
||||
|
1st
Quarter
|
$15.03
|
$13.33
|
$0.067
|
||||
|
Comparison
of Five-Year Cumulative Total Return Among Sussex Bancorp (SBBX),
Nasdaq
Composite (COMP) and Nasdaq Bank Index (BANK)
Total
Return Assumes $100 Invested on December 31, 2001 with Reinvestment
of
Dividends
|
|||||||
|
Five-Year
Cumulative Total Return
|
|||||||
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 elsewhere herein.
|
As
of and for the Year Ended December 31
|
||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
SUMMARY
OF INCOME:
|
||||||||||||||||
|
Interest
income
|
$
|
19,998
|
$
|
15,547
|
$
|
11,791
|
$
|
10,771
|
$
|
10,860
|
||||||
|
Interest
expense
|
8,249
|
4,328
|
2,814
|
2,860
|
3,536
|
|||||||||||
|
Net
interest income
|
11,749
|
11,219
|
8,977
|
7,911
|
7,324
|
|||||||||||
|
Provision
for loan losses
|
733
|
1,138
|
558
|
405
|
300
|
|||||||||||
|
Net
interest income after provision for loan losses
|
11,016
|
10,081
|
8,419
|
7,506
|
7,024
|
|||||||||||
|
Other
income
|
5,244
|
4,873
|
4,542
|
4,103
|
3,292
|
|||||||||||
|
Other
expenses
|
12,648
|
11,603
|
10,789
|
9,663
|
8,634
|
|||||||||||
|
Income
before income taxes
|
3,612
|
3,351
|
2,172
|
1,946
|
1,682
|
|||||||||||
|
Income
taxes
|
1,148
|
952
|
581
|
505
|
526
|
|||||||||||
|
Net
income
|
$
|
2,464
|
$
|
2,399
|
$
|
1,591
|
$
|
1,441
|
$
|
1,156
|
||||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES: (a)
|
||||||||||||||||
|
Basic
|
3,154,487
|
3,163,182
|
1,965,745
|
1,879,649
|
1,835,507
|
|||||||||||
|
Diluted
|
3,188,620
|
3,200,876
|
2,046,568
|
1,952,379
|
1,911,760
|
|||||||||||
|
PER
SHARE DATA:
|
||||||||||||||||
|
Basic
earnings per share
|
$
|
0.78
|
$
|
0.76
|
$
|
0.81
|
$
|
0.77
|
$
|
0.63
|
||||||
|
Diluted
earnings per share
|
0.77
|
0.75
|
0.78
|
0.74
|
0.60
|
|||||||||||
|
Cash
dividends (b)
|
0.28
|
0.20
|
0.27
|
0.19
|
0.23
|
|||||||||||
|
Stock
dividends
|
0
|
%
|
5
|
%
|
0
|
%
|
5
|
%
|
0
|
%
|
||||||
|
BALANCE
SHEET:
|
||||||||||||||||
|
Loans,
net
|
$
|
258,936
|
$
|
208,720
|
$
|
154,642
|
$
|
132,640
|
$
|
112,069
|
||||||
|
Total
assets
|
356,297
|
313,182
|
278,275
|
240,617
|
225,904
|
|||||||||||
|
Total
deposits
|
295,770
|
256,847
|
229,827
|
207,657
|
189,858
|
|||||||||||
|
Total
stockholders’ equity
|
34,592
|
32,924
|
31,652
|
14,904
|
13,680
|
|||||||||||
|
Average
assets
|
332,912
|
291,368
|
251,338
|
233,027
|
214,897
|
|||||||||||
|
Average
stockholders’ equity
|
33,710
|
32,368
|
16,067
|
14,035
|
12,766
|
|||||||||||
|
PERFORMANCE
RATIOS:
|
||||||||||||||||
|
Return
on average assets
|
0.74
|
%
|
0.82
|
%
|
0.63
|
%
|
0.62
|
%
|
0.54
|
%
|
||||||
|
Return
on average stockholders’ equity
|
7.31
|
%
|
7.41
|
%
|
9.90
|
%
|
10.27
|
%
|
9.06
|
%
|
||||||
|
Net
interest margin
|
3.91
|
%
|
4.34
|
%
|
4.10
|
%
|
3.86
|
%
|
3.82
|
%
|
||||||
|
Efficiency
ratio (c)
|
74.43
|
%
|
72.10
|
%
|
79.81
|
%
|
80.43
|
%
|
81.33
|
%
|
||||||
|
Other
income to net interest income plus other income
|
30.86
|
%
|
30.28
|
%
|
33.60
|
%
|
34.15
|
%
|
31.01
|
%
|
||||||
|
Dividend
payout ratio
|
36
|
%
|
26
|
%
|
33
|
%
|
25
|
%
|
36
|
%
|
||||||
|
CAPITAL
RATIOS:
|
||||||||||||||||
|
Tier
I capital to average assets
|
10.48
|
%
|
11.45
|
%
|
12.86
|
%
|
7.15
|
%
|
6.66
|
%
|
||||||
|
Tier
I capital to total risk-weighted assets
|
12.84
|
%
|
15.42
|
%
|
18.84
|
%
|
11.14
|
%
|
11.77
|
%
|
||||||
|
Total
capital to total risk-weighted assets
|
14.00
|
%
|
16.55
|
%
|
20.09
|
%
|
12.37
|
%
|
13.36
|
%
|
||||||
|
Average
equity/average assets
|
10.13
|
%
|
11.11
|
%
|
6.39
|
%
|
6.02
|
%
|
5.94
|
%
|
||||||
|
ASSET
QUALITY RATIOS:
|
||||||||||||||||
|
Non-performing
loans to total gross loans
|
1.01
|
%
|
0.65
|
%
|
0.85
|
%
|
0.99
|
%
|
1.14
|
%
|
||||||
|
Non-performing
assets to total assets
|
0.75
|
%
|
0.44
|
%
|
0.48
|
%
|
0.64
|
%
|
0.66
|
%
|
||||||
|
Net
loan charge-offs to average total loans
|
0.00
|
%
|
0.43
|
%
|
0.01
|
%
|
0.05
|
%
|
0.05
|
%
|
||||||
|
Allowance
for loan losses to total gross loans at period end
|
1.27
|
%
|
1.24
|
%
|
1.45
|
%
|
1.29
|
%
|
1.22
|
%
|
||||||
|
Allowance
for loan losses to non-performing loans
|
125.61
|
%
|
190.04
|
%
|
169.96
|
%
|
130.67
|
%
|
107.11
|
%
|
||||||
|
(a) 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.
(b)
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.
(c)
Efficiency ratio is total other expenses divided by net interest
income
and total other income.
|
||||||||||||||||
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 community-oriented financial institution serving
the northwestern New Jersey, northeastern Pennsylvania and Orange County, New
York marketplace. Our market presence has expanded by opening branch offices
in
Port Jervis and Warwick, New York. In addition, in December 2006 the Company
filed applications for regulatory approval to open an office in Westfall
Township, Pennsylvania. The Company plans to open the branch in the third
quarter of 2007. Also during 2007, we intend to move the Wantage branch to
its
new location site. 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
3 to the Consolidated Financial Statements for December 31, 2006 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
as
well as changes to interest rates, the ability to control costs and expenses,
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 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, 2006 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. In addition, 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. Prior to January
1, 2006, the Company accounted for its stock option plans,
under
the
recognition and measurement provision
of APB Opinion No 25, "Accounting for Stock Issued to Employees," and related
Interpretations, as
permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation".
No stock-based employee compensation cost was recognized in the Company's
consolidated statements of income through December
31, 2005, as all options granted under the Company’s plans had an exercise price
equal to the market value
of
the underlying common stock on the date of grant.
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123(R), "Share-Based Payments." Statement No. 123(R) addresses
the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise,
or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value
of
stock options and other equity-based compensation issued to the employees in
the
income statement. The revised Statement generally requires that an entity
account for these transactions using the fair-value-based method, and eliminates
the intrinsic-value method of accounting as of January 1, 2006.
Statement
No. 123(R) was effective for periods beginning after December 15, 2005; all
public companies must use either the modified prospective or the modified
retrospective transition method. The Company adopted the modified prospective
method. Using the modified prospective method, the Company's expense for
stock-based compensation related to stock options, net of related tax effect,
was $31,000 for the year ending December 31, 2006.
Goodwill
and Other Intangible Assets. The
Company has recorded goodwill of $2.3 million at December 31, 2006 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
will
require 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 2006, 2005 and 2004.
Business
unit valuation is inherently subjective, with a number of factors based on
assumption 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 at least on 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, 2006 and
2005
Overview:
Total
assets were $356.3 million at year-end 2006 compared to $313.2 million at
year-end 2005, an increase of $43.1 million, or 13.6%. Total loans, net of
the
allowance for loan losses, increased $50.2 million, or 24.1%, to $258.9 million
at December 31, 2006 from $208.7 million at December 31, 2005. Total deposits
increased by $38.9 million, or 15.2% to $295.8 million at December 31, 2006
from
$256.8 million at December 31, 2005. In keeping with our market expansion plans,
in March of 2006 the Port Jervis branch was acquired with $6.3 million in
deposits. As of December 31, 2006 the Port Jervis branch deposits have grown
86.6% to $11.8 million.
Results
of Operations. For
the
year ended December 31, 2006, net income was $2.5 million, an increase of $65
thousand, or 2.7%, from the $2.4 million for the same period in 2005. Basic
earnings per share were $0.78 for the year ended December 31, 2006 compared
to
$0.76 for the same period last year. Diluted earnings per share were $0.77
for
the year ended December 31, 2006 compared to $0.75 for the same period last
year. For the year ended December 31, 2006 the Company had 3,154,487 average
basic shares outstanding, compared to 3,163,182 average basic shares for the
year ended December 31, 2005.
The
results reflect an increase in net interest income, an outcome of both
increasing interest income and interest expense, coupled with increases in
non-interest income, primarily due to increases in service fees on deposit
accounts and insurance commissions and fees, offset by increases in non-interest
expense associated with additional professional fees related to Section 404
requirements of the Sarbanes Oxley Act of 2002.
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,
2006, 2005 and 2004. The average balances of loans include non-accrual loans,
and associated yields include loan fees, which are considered adjustment to
yields.
|
Years
Ended December 31.
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||
|
Earning
Assets:
|
Balance
|
Interest
(1)
|
Rate
(2)
|
Balance
|
Interest
(1)
|
Rate
(2)
|
Balance
|
Interest
(1)
|
Rate
(2)
|
|||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||
|
Tax
exempt (3)
|
$
|
24,018
|
$
|
1,383
|
5.76
|
%
|
$
|
26,716
|
$
|
1,614
|
6.04
|
%
|
$
|
22,176
|
$
|
1,241
|
5.60
|
%
|
||||||||||
|
Taxable
|
35,687
|
1,455
|
4.08
|
%
|
44,849
|
1,650
|
3.68
|
%
|
51,684
|
1,812
|
3.51
|
%
|
||||||||||||||||
|
Total
securities
|
59,705
|
2,838
|
4.75
|
%
|
71,565
|
3,264
|
4.56
|
%
|
73,860
|
3,053
|
4.13
|
%
|
||||||||||||||||
|
Total
loans receivable (4)
|
239,831
|
17,009
|
7.09
|
%
|
185,287
|
12,331
|
6.66
|
%
|
143,916
|
8,954
|
6.22
|
%
|
||||||||||||||||
|
Other
interest-earning assets
|
10,244
|
502
|
4.90
|
%
|
12,600
|
421
|
3.34
|
%
|
10,409
|
156
|
1.50
|
%
|
||||||||||||||||
|
Total
earning assets
|
309,780
|
$
|
20,349
|
6.57
|
%
|
269,452
|
$
|
16,016
|
5.94
|
%
|
228,185
|
$
|
12,163
|
5.33
|
%
|
|||||||||||||
|
Non-interest
earning assets
|
26,126
|
24,146
|
25,311
|
|||||||||||||||||||||||||
|
Allowance
for loan losses
|
(2,994
|
)
|
(2,230
|
)
|
(1,958
|
)
|
||||||||||||||||||||||
|
Total
Assets
|
$
|
332,912
|
$
|
291,368
|
$
|
251,538
|
||||||||||||||||||||||
|
Sources
of Funds:
|
||||||||||||||||||||||||||||
|
Interest
bearing deposits:
|
||||||||||||||||||||||||||||
|
NOW
|
$
|
57,974
|
$
|
1,306
|
2.25
|
%
|
$
|
43,939
|
$
|
299
|
0.68
|
%
|
$
|
42,412
|
$
|
196
|
0.46
|
%
|
||||||||||
|
Money
market
|
30,773
|
1,200
|
3.90
|
%
|
22,083
|
534
|
2.42
|
%
|
16,878
|
184
|
1.09
|
%
|
||||||||||||||||
|
Savings
|
45,916
|
401
|
0.87
|
%
|
62,025
|
456
|
0.74
|
%
|
66,322
|
439
|
0.66
|
%
|
||||||||||||||||
|
Time
|
100,061
|
4,190
|
4.19
|
%
|
71,174
|
1,997
|
2.81
|
%
|
58,443
|
1,213
|
2.08
|
%
|
||||||||||||||||
|
Total
interest bearing deposits
|
234,724
|
7,097
|
3.02
|
%
|
199,221
|
3,286
|
1.65
|
%
|
184,055
|
2,032
|
1.10
|
%
|
||||||||||||||||
|
Borrowed
funds
|
14,359
|
707
|
4.92
|
%
|
14,771
|
686
|
4.64
|
%
|
10,630
|
522
|
4.91
|
%
|
||||||||||||||||
|
Junior
subordinated debentures
|
5,155
|
445
|
8.63
|
%
|
5,155
|
356
|
6.91
|
%
|
5,155
|
260
|
5.05
|
%
|
||||||||||||||||
|
Total
interest bearing liabilities
|
254,238
|
$
|
8,249
|
3.24
|
%
|
219,147
|
$
|
4,328
|
1.97
|
%
|
199,840
|
$
|
2,814
|
1.41
|
%
|
|||||||||||||
|
Non-interest
bearing liabilities:
|
||||||||||||||||||||||||||||
|
Demand
deposits
|
43,036
|
38,068
|
33,627
|
|||||||||||||||||||||||||
|
Other
liabilities
|
1,928
|
1,785
|
2,004
|
|||||||||||||||||||||||||
|
Total
non-interest bearing liabilities
|
44,964
|
39,853
|
35,631
|
|||||||||||||||||||||||||
|
Stockholders'
equity
|
33,710
|
32,368
|
16,067
|
|||||||||||||||||||||||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
332,912
|
$
|
291,368
|
$
|
251,538
|
||||||||||||||||||||||
|
Net
Interest Income and Margin (5)
|
$
|
12,100
|
3.91
|
%
|
$
|
11,688
|
4.34
|
%
|
$
|
9,349
|
4.10
|
%
|
||||||||||||||||
|
(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
$412 thousand, or 3.5%, to $12.1 million for the year ended December 31, 2006
compared to $11.7 million in 2005. Total interest income, on a fully taxable
equivalent basis, increased by $4.3 million to $20.3 million for the year ended
December 31, 2006 compared to $16.0 million in 2005. The
increase in total interest income reflects both increases on the volume of
interest earning assets and the average rate earned on those assets. Total
average earning assets increased by $40.3 million to $309.8 million from $269.5
million for the year ended December 31, 2005. The majority of the increase
in
average earning assets was in the loan portfolio. The average loan portfolio
balance increased by $54.5 million, to $239.8 million in the current year from
$185.3 million in 2005. Higher market rates of interest and the increase in
the
average balance in loans increased the average rate earned on earning assets
63
basis points from 5.94% for 2005 to 6.57% in 2006.
Interest
expense increased by $3.9 million to $8.2 million for the year ended December
31, 2006 from $4.3 million for the year ago period as a result of increases
in
market rates of interest, as the average balance interest
bearing
liabilities increased $35.1million, to $254.2 million for the year ended
December 31, 2006 from $219.1 million the year earlier. The average rate paid
on
interest bearing liabilities increased by 127 basis points to 3.24% for the
current year from 1.97% for the year ended December 31, 2005.
The
net
interest margin decreased, on a fully taxable equivalent basis, by 43 basis
points to 3.91% in the year ended December 31, 2006 compared to 4.34% for the
same period in 2005.
Interest
Income. Total
interest income, on a fully taxable equivalent basis, increased by $4.3 million
to $20.3 million for the year ended December 31, 2006 compared to $16.0 million
in 2005. The largest component of the increase was in federal funds sold and
the
loan portfolio.
Total
interest income on the loan portfolio increased by $4.7 million to $17.0 million
for the current year from $12.3 million in 2005. Comparing the average balance
in the loan portfolio for the year ended December 31, 2006 to the same period
in
2005, the average balance in loans increased $54.5 million, or 29.4%. The
increase in our loan portfolio reflects our continuing efforts to enhance our
loan origination capacity. The average rate earned on loans increased 43 basis
points from 6.66% for the period ended December 31, 2005 to 7.09% for the same
period in 2006. This was due to competitive pricing in a competitive market
rate
environment.
Total
interest income on securities, on a fully taxable equivalent basis, decreased
$426 thousand, or 13.1%, from the year ended December 31, 2005 to the same
period in 2006. The average balance of securities decreased $11.9 million,
as
cash flow from repayments and prepayments was primarily used to fund new loan
origination. The average rate increased 19 basis points, from 4.56% in 2005
to
4.75% for 2006. The increase in yield reflects the repricing of rates on the
mortgage-backed securities held in the portfolio.
Interest
Expense. The
Company’s interest expense for the year ended December 31, 2006 increased $3.9
million, or 90.6%, to $8.2 million from $4.3 million for the same period in
2005, as the average interest-bearing liabilities increased $35.1 million,
or
16.0%, to $254.2 million from $219.1 million between the same two periods.
The
average rate paid on total interest-bearing liabilities has increased by 127
basis points from 1.97% for the year ended December 31, 2005 to 3.24% for the
same period in 2006. The increase in interest expense reflects continued
competition for deposits in our primary market. In order to attract and retain
deposits to fund our growing loan portfolio, the Company has had to offer higher
rates and emphasize more expensive accounts, such as time deposits and money
market accounts, which typically bear higher rates than transactional or savings
accounts. The average balance of time deposits has increased by $28.9 million,
or 40.6%, to $100.1 million for the year ended December 31, 2006 compared to
$71.2 million the prior year. The average rate paid on time deposits increased
138 basis points from 2.81% for the period ended December 31, 2005 to 4.19%
for
the same period in 2006.
The
average balance in money market accounts has increased $8.7 million, or 39.4%,
to $30.8 million for the year ended December 31, 2006 from $22.1 million for
the
same period in 2005. The average rate paid on money market deposits has
increased 148 basis points from 2.42% to 3.90% between year end 2005 to year
end
2006, as the Company has promoted a business money market sweep product with
its
interest rate based on economic market conditions and a tiered personal money
market product which offers higher rates of interest on larger average
balances.
At
December 31, 2006, the Company’s borrowed funds consisted of four convertible
notes and one amortizing advance from the Federal Home Loan Bank totaling $18.3
million. The Company also has $5.2 million in junior subordinated debentures.
The debentures bear a floating rate of interest, which averaged 8.63% for the
year ended December 31, 2006, up 172 basis points from 6.91% in the same period
in 2005.
The
following table reflects the impact on net interest income of changes in the
volume of earnings 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, 2006 v. 2005
|
December
31, 2005 v. 2004
|
||||||||||||||||||
|
Increase
(decrease)
|
Increase
(decrease)
|
||||||||||||||||||
|
Due
to changes in:
|
Due
to changes in:
|
||||||||||||||||||
|
(Dollars
in thousands)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||
|
Securities:
|
|||||||||||||||||||
|
Tax
exempt
|
($158
|
)
|
($73
|
)
|
($231
|
)
|
$
|
269
|
$
|
104
|
$
|
373
|
|||||||
|
Taxable
|
(361
|
)
|
166
|
(195
|
)
|
(249
|
)
|
87
|
(162
|
)
|
|||||||||
|
Total
securities (1)
|
(519
|
)
|
93
|
(426
|
)
|
20
|
191
|
211
|
|||||||||||
|
Total
loans receivable (2)
|
3,825
|
853
|
4,678
|
2,718
|
659
|
3,377
|
|||||||||||||
|
Other
interest-earning assets
|
(89
|
)
|
170
|
81
|
39
|
226
|
265
|
||||||||||||
|
Total
net change in income on
interest-earning
assets
|
3,217
|
1,116
|
4,333
|
2,777
|
1,076
|
3,853
|
|||||||||||||
|
Interest
bearing deposits:
|
|||||||||||||||||||
|
NOW
|
122
|
885
|
1,007
|
7
|
96
|
103
|
|||||||||||||
|
Money
Market
|
260
|
406
|
666
|
71
|
279
|
350
|
|||||||||||||
|
Savings
|
(131
|
)
|
76
|
(55
|
)
|
(30
|
)
|
47
|
17
|
||||||||||
|
Time
|
991
|
1,202
|
2,193
|
300
|
484
|
784
|
|||||||||||||
|
Interest
bearing deposits
|
1,242
|
2,569
|
3,811
|
348
|
906
|
1,254
|
|||||||||||||
|
Borrowed
funds
|
(19
|
)
|
40
|
21
|
194
|
(30
|
)
|
164
|
|||||||||||
|
Junior
subordinated debentures
|
-
|
89
|
89
|
-
|
96
|
96
|
|||||||||||||
|
Total
net change in expense on
interest-bearing
liabilities
|
1,223
|
2,698
|
3,921
|
542
|
972
|
1,514
|
|||||||||||||
|
Change
in net interest income
|
$
|
1,994
|
($1,582
|
)
|
$
|
412
|
$
|
2,235
|
$
|
104
|
$
|
2,339
|
|||||||
|
(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 2006 was $733 thousand compared to a provision
of
$1.1 million in 2005, a decrease of $405 thousand or 35.6%. During 2005 the
Company experienced approximately $1.0 million in charge-offs, compared with
$94
thousand in 2006 and $35 thousand in 2004, which required additional provisions
in 2005 to replenish the allowance due to these charge-offs. 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 is primarily generated through insurance
commissions earned through the operation of Tri-State and service charges on
deposit accounts.
The
Company’s non-interest income increased by $371 thousand, or 7.6%, to $5.2
million for the year ended December 31, 2006 from $4.9 million for the same
period in 2005. The increase is primarily attributable to the Company’s service
fees on deposit accounts increasing $145 thousand or 11.8%, to $1.4 million
for
the year ended December 31, 2006 from $1.2 million in the previous year and
the
increase in insurance commission income of $249 thousand to $2.6 million in
2006
from $2.3 million in 2005. Net gain on the sale of securities was $90 thousand
for the year ended December 31, 2006 compared to $35 thousand for the year
ended
December 31, 2005. These increases were partially offset by a decline in
investment brokerage fees and mortgage brokerage fee income.
Non-Interest
Expense. Total
non-interest expense increased from $11.6 million in 2005 to $12.6 million
in
2006, an increase of $1.0 million, or 9.0%. Salaries and employee benefits,
the
largest component of non-interest expense, increased $532 thousand, or 8.4%.
The
increase reflects both the additions to staff due to the Company’s continued
growth and expansion 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, 8.9% and 12.2% respectively, in 2006 over
2005 due to the Company’s expansion into New York and renovations to the
Company’s data operations area in Newton. The largest increase in non-interest
expense was an increase of $123 thousand, or 22.6%, in professional fees. This
increase was due to the continued costs associated with the
implementation
of internal control requirements of Section 404 of the Sarbanes Oxley Act of
2002 and increased legal fees as a result of the Company’s expansion. Other
expenses increased $175 thousand, or 12.7%, to $1.5 million in 2006 largely
due
to check and ATM losses increasing $45 thousand and auto and travel expenses
increasing $32 thousand, as several Directors attended conferences as now
required by the Sarbanes Oxley Act of 2002.
Income
Taxes. The
Company’s income tax provision, which includes both federal and state taxes, was
$1.1 million and $952 thousand for the years ended December 31, 2006 and 2005,
respectively. This 20.6% increase in income taxes resulted from an increase
in
income before taxes of $261 thousand, or 7.8%, and the decrease in tax-exempt
securities income for the year ended December 31, 2006 compared to the same
period in 2005. The Company’s effective tax rate of 31.8% and 28.4% for the
years ended December 31, 2006 and 2005, respectively, is below the statutory
tax
rate due to tax-exempt interest on securities and earnings on the Company’s
investment in life insurance on two of our executive officers.
COMPARISION
OF OPERATING RESULTS AT YEAR-END DECEMBER 31, 2005 AND
2004
Overview.
For the
year ended December 31, 2005, net income was $2.4 million, an increase of $808
thousand, or 50.8%, from the $1.6 million for the same period in 2004. Basic
earnings per share were $0.76 for the year ended December 31, 2005 compared
to
$0.81 for the same period last year, a decrease of 6.2%. Diluted earnings per
share were $0.75 for the year ended December 31, 2005 compared to $0.78 for
the
same period last year, a decrease of 3.9 %. The decreased earnings per share
reflects the issuance of an additional 1,131,150 shares of the Company’s stock
from a public offering in December of 2004. For the year ended December 31,
2005, the Company had 3,163,189 average basic shares outstanding, compared
to
1,965,745 average basic shares outstanding for the year ended December 31,
2004.
The
results reflect an increase in net interest income, an outcome of both
increasing interest income and interest expense, coupled with increases in
non-interest income, primarily due to an increase in service fees on deposit
accounts, offset by increases in non-interest expenses associated with
additional professional fees related to the preliminary implementation of
Section 404 requirements of the Sarbanes Oxley Act of 2002.
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
$2.3 million, or 25.0%, to $11.7 million for the year ended December 31, 2005
compared to $9.3 million in 2004. Total interest income, on a fully taxable
equivalent basis, increased by $3.9 million to $16.0 million for the year ended
December 31, 2005 compared to $12.2 million in 2004. Total average earning
assets increased by $41.3 million to $269.5 million from $228.2 million for
the
year ended December 31, 2004. The majority of the increase in average earning
assets was in the loan portfolio. The average loan portfolio balance increased
by $41.4 million, to $185.3 million in the current year from $143.9 million
in
2004. Higher market rates of interest and the increase in the average balance
in
loans increased the average rate earned on earning assets 61 basis points from
5.33% for 2004 to 5.94% in 2005.
Interest
expense increased by $1.5 million to $4.3 million from $2.8 million for the
year
ended December 31, 2005 as a result of increases in market rates of interest,
as
the average balance in interest bearing liabilities increased $19.3 million,
to
$219.1 million for the year ended December 31, 2005 from $199.8 million the
year
earlier. The average rate paid on interest bearing liabilities increased by
56
basis points to 1.97% for the current year from 1.41% for the year ended
December 31, 2004.
The
net
interest margin increased, on a fully taxable equivalent basis, by 24 basis
points to 4.34% in the year ended December 31, 2005 compared to 4.10% for the
same period in 2004.
Interest
Income.
Total
interest income, on a fully taxable equivalent basis, increased by $3.9 million
to $16.0 million for the year ended December 31, 2005 compared to $12.2 million
in 2004. The largest components of the increase were on tax-exempt investment
securities and on the loan portfolio.
Total
interest income on the loan portfolio increased by $3.4 million to $12.3 million
for the current year from $9.0 million in 2004. Comparing the average balance
in
the loan portfolio for the year ended December 31, 2005 to the same period
in
2004, the average balance in loans increased $41.4 million, or 28.8%. The
increase in our loan portfolio reflects our continuing efforts to enhance our
loan origination capacity. In particular, we have enhanced our loan department
through the hiring of additional lending staff and originators. The average
rate
earned on loans increased 44 basis points from 6.22% for the period ended
December 31, 2004 to 6.66% for the same period in 2005. This was due to
competitive pricing in an increasing market rate environment.
Total
interest income on securities, on a fully taxable equivalent basis, increased
$211 thousand, or 6.9%, from the year ended December 31, 2004 to the same period
in 2005. While the average balance of securities decreased $2.3 million, the
average rate earned increased 43 basis points, from 4.13% in 2004 to 4.56%
for
2005. The decrease in the total securities portfolio reflects the reallocation
of funds to meet increasing loan demand. The increase in yield was accomplished
through increasing the tax-exempt securities portfolio by $4.5 million and
increasing the tax equivalent yield by 44 basis points to 6.04% for the year
ended December 31, 2005 from 5.60% the year earlier.
Interest
Expense.
The
Company’s interest expense for the year ended December 31, 2005 increased $1.5
million, or 53.8 %, to $4.3 million from $2.8 million for the same period in
2004, as the balance in average interest-bearing liabilities increased $19.3
million, or 9.7% to $219.1 million from $199.8 million between the two periods.
The average rate paid on total interest-bearing liabilities has increased by
56
basis points from 1.41% for the year ended December 31, 2004 to 1.97% for the
same period in 2005. This increase is largely due to time deposit promotions
that have increased the average balance by $12.7 million, or 21.8%, to $71.2
million for the year ended 2005 compared to $58.4 million the prior year. The
average rate paid on time deposits increased 73 basis points from 2.08% for
the
period ended December 31, 2004 to 2.81% for the same period in 2005. The average
balance in money market accounts has increased $5.2 million, or 30.8%, to $22.1
million for the year ended December 31, 2005 from $16.9 million for the same
period in 2004. The average rate paid on money market deposits has increased
133
basis points from 1.09% to 2.42% between year end 2004 and year end 2005, as
the
Company has promoted a business money market sweep product with an interest
rate
tied to economic market conditions and a new tiered personal money market
product which offers higher rates of interest on larger average balances.
At
December 31, 2005, the Company’s borrowed funds consisted of four convertible
notes and one amortizing advance from the Federal Home Loan Bank totaling $16.3
million. The Company also has $5.2 million in junior subordinated debentures.
The debentures bear a floating rate of interest, which averaged 6.91% for the
year ended December 31 2005, up 186 basis points from 5.05% in the same period
of 2004.
Provision
for Loan Losses.
The
provision for loan losses in 2005 was $1.1 million compared to a provision
of
$558 thousand in 2004, an increase of $580 thousand or 103.9%. The increase
reflects growth in the Company’s loan portfolio of $54.4 million from $156.9
million for the year ended December 31, 2004 to $211.3 million at December
31,
2005 and the need to replenish the allowance due to increased charge-offs in
2005, as well as the continued emphasis on the origination of commercial real
estate loans, which increased by $40.6 million from the year ended December
31,
2004 to December 31, 2005. These loans may be considered to involve a greater
degree of risk than other types of lending. The provision for loan losses
reflects management’s judgment concerning the risks inherent in the Company’s
existing loan portfolio and the size of the allowance necessary to absorb the
risks, as well as the average balance of the portfolio over both periods.
Management reviews the adequacy of its allowance on an ongoing basis and will
provide additional provisions, as management may deem necessary.
Non-Interest
Income.
The
Company’s non-interest income is primarily generated through insurance
commissions earned through the operation of Tri-State and service charges on
deposit accounts.
The
Company’s non-interest income increased by $331 thousand, or 7.29%, to $4.9
million for the year ended December 31, 2005 from $4.5 million for the same
period in 2004. The increase is primarily attributable to the Company’s service
fees on deposit accounts increasing $477 thousand or 63.8%, to $1.2 million
for
the year ended December 31, 2005 from $748 thousand in the previous year. This
increase is attributed to a no return service privilege program that began
in
February of 2005. Net gain on the sale of securities was $35,000 for the year
ended December 31, 2005 compared to $16,000 for the year ended December 31,
2004. Mortgage broker fees decreased $408 thousand to $212 thousand for the
year
ended December 31, 2005 from $620 thousand. The Company became a 49% partner
in
a joint venture, SussexMortgage.com, with National City Mortgage Corporation
on
August 1, 2005. The majority of the Company’s residential lending broker
activities have been transferred to the new joint venture, while loans secured
by one to four family residential properties generated internally by the Bank
are mostly retained in the Company’s loan portfolio.
Non-Interest
Expense.
Total
non-interest expense increased from $10.8 million in 2004 to $11.6 million
in
2005, an increase of $814 thousand, or 7.5%. Salaries and employee benefits,
the
largest component of non-interest expense, increased $132 thousand, or 2.3%.
This increase reflects customary annual salary increases for the Bank’s and
Tri-State’s existing staff and lower commission costs associated with several
former commission based employees of the Company becoming employees of the
joint
venture, SussexMortgage.com. Both occupancy and furniture, fixtures and data
processing expenses have increased, 15.8% and 19.5% respectively, in 2005 over
2004 due to the Company’s expansion into Pennsylvania and New York in 2005 and
continual upgrades to the Company’s data processing infrastructure. The largest
increase in non-interest expense was an increase in professional fees of $189
thousand, or 53.1%, to $545 thousand for the year ended December 31, 2005 from
$356 thousand the prior year. This increase is the result of the Company hiring
a third party to assist in its implementation of internal control requirements
of Section 404 of the Sarbanes Oxley act of 2002. Management’s assessment of
internal controls under Section 404 will be applicable to the Company in 2007.
Advertising and marketing expenses increased 23.4% for the year ended December
31, 2004 to the same period in 2005, from the advertising of the Company’s time
and money market deposit products and through the promotion of a new internal
cross selling initiative.
Income
Taxes.
The
Company’s income tax provision, which includes both federal and state taxes, was
$952 thousand and $581 thousand for the years ended December 31, 2005 and 2004,
respectively. This increase in income taxes resulted from an increase in income
before taxes of $1.2 million, or 54.3% for the year ended December 31, 2005
as
compared to the same period in 2004. The Company’s effective tax rate of 28% and
27% for the years ended December 31, 2005 and 2004, respectively, is below
the
statutory tax rate due to tax-exempt interest on securities and earnings on
the
Company’s investment in life insurance.
COMPARISION
OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2006 AND
2005
At
December 31, 2006, the Company had total assets of $356.3 million compared
to
total assets of $313.2 million at December 31, 2005, an increase of $43.1
million, or 13.8%. Net loans increased $50.2 million, or 24.1%, to $258.9
million at December 31, 2006 from $208.7 million at December 31, 2005. Total
deposits increased to $295.8 million at December 31, 2006 from $256.8 million
at
December 31, 2005.
Cash
and Cash Equivalents. The
Company's cash and cash equivalents decreased by $2.6 million or 10.6%, for
the
year ended December 31, 2006 to $22.2 million from $24.8 million at December
31,
2005. This decrease largely reflects the Company's decrease in federal funds
sold of $1.4 million to $12.0 million at December 31, 2006 from $13.4 million
at
year-end 2005. The decrease is related to the Company's increase in net loans
receivable and the need to fund that increase.
Securities
Portfolio.
The
Company's securities portfolio is comprised of securities that not only provide
interest income, including tax-exempt income, but also provide a source of
liquidity (as all securities are classified as available for sale, as discussed
below), diversify the earning assets portfolio, allow for management of interest
rate risk, and provide collateral for public fund deposits and borrowings.
The
portfolio is composed primarily of obligations of U.S. Government agencies
and
government sponsored entities including collateralized mortgage obligations
issued by such agencies and entities, and tax-exempt municipal
bonds.
The
Company has no securities classified as held to maturity or as trading
securities. All securities are classified as available for sale, and are stated
at fair value. 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. Management determines the appropriate classification
of
securities at the time of purchase.
The
following table shows the carrying value of the Company's security portfolio
as
of December 31, 2006, 2005 and 2004. Securities available for sale are stated
at
their fair value.
|
(Dollars
in thousands)
|
December
31,
|
|||||||||
|
Available
for sale
|
2006
|
2005
|
2004
|
|||||||
|
U.S.
Government agencies
|
$
|
9,655
|
$
|
10,851
|
$
|
11,673
|
||||
|
State
and political subdivisions
|
20,833
|
23,757
|
25,909
|
|||||||
|
Mortgage-backed
securities
|
23,168
|
24,940
|
33,679
|
|||||||
|
Corporate
securities
|
-
|
751
|
2,570
|
|||||||
|
Equity
securities
|
979
|
881
|
905
|
|||||||
|
Total
available for sale
|
$
|
54,635
|
$
|
61,180
|
$
|
74,736
|
||||
The
Company's securities decreased by $6.5 million, or 10.7%, to $54.6 million
at
December 31, 2006 from $61.2 million at December 31, 2005. The Company purchased
$13.4 million in new securities during 2006, $6.9 million were sold and $13.2
million matured, were called and were repaid. There was a $148 thousand net
decrease in unrealized losses in the available for sale portfolio; a $90
thousand realized gain on the sale of available for sale securities and $101
thousand in net amortization expenses recorded during 2006. This decrease in
the
Company's securities provided cash to fund the growth in the loan portfolio.
The
securities portfolio contained no high-risk securities or derivatives as of
December 31, 2006.
The
contractual maturity distribution and weighted average yield of the Company's
securities portfolio at December 31, 2006 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, 2006
|
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
|
$
|
5,241
|
4.05
|
%
|
$
|
4,436
|
5.05
|
%
|
$
|
-
|
-
|
$
|
-
|
-
|
|||||||||||
|
State
and political subdivisions
|
1,159
|
3.64
|
%
|
-
|
-
|
-
|
-
|
19,395
|
4.29
|
%
|
|||||||||||||||
|
Mortgage-backed
securities
|
50
|
3.89
|
%
|
6,273
|
4.25
|
%
|
5,140
|
4.42
|
%
|
12,175
|
4.39
|
%
|
|||||||||||||
|
Equity
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
982
|
3.71
|
%
|
||||||||||||||||
|
Total
available for sale
|
$
|
6,450
|
3.98
|
%
|
$
|
10,709
|
4.58
|
%
|
$
|
5,140
|
4.42
|
%
|
$
|
32,552
|
4.31
|
%
|
|||||||||
The
Company holds $1,188,000 in Federal Home Loan Bank of New York stock at December
31, 2006 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, 2006 increased $51.0
million, or 24.1% to $262.3 million from $211.3 million at year-end 2005. During
the year ended December 31, 2006, new originations have exceeded payoffs both
through scheduled maturities and prepayments. The Company has also increased
its
activity in the loan participation market as a tool to increase the loan
portfolio. The majority of the originated and sold participations are commercial
real estate related loans that exceed the Company's legal lending limit. The
balance in construction and land development loans increased $6.9 million,
or
30.0%, residential 1 - 4 family real estate loans have increased $13.6 million,
or 28.6%, non-residential real estate increased $29.0 million, or 26.3%,
and
commercial
and industrial loans increased $1.6 million, or 9.8%, from December 31, 2005
to
December 31, 2006. During 2006, the Company brought more of the mortgage
origination process in-house, with FNMA/Freddie Mac qualifying residential
mortgage loans being originated and funded directly by the Bank. Management
referred non-qualifying loans 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, 2002 through 2006:
|
December
31,
|
||||||||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Commercial
and industrial loans
|
$
|
18,298
|
$
|
16,667
|
$
|
14,233
|
$
|
12,392
|
$
|
10,985
|
||||||
|
Non-residential
real estate loans
|
139,428
|
110,391
|
69,778
|
59,182
|
41,035
|
|||||||||||
|
One
to four family residential property loans
|
60,960
|
47,409
|
41,971
|
46,587
|
49,517
|
|||||||||||
|
Construction
and land development loans
|
30,094
|
23,154
|
19,863
|
8,656
|
8,310
|
|||||||||||
|
Consumer
loans
|
1,620
|
1,550
|
1,500
|
1,430
|
2,189
|
|||||||||||
|
Other
loans
|
12,055
|
12,318
|
9,690
|
6,114
|
1,335
|
|||||||||||
|
Total
gross loans
|
$
|
262,455
|
$
|
211,489
|
$
|
157,035
|
$
|
134,361
|
$
|
113,371
|
||||||
The
increase in loans was funded during 2006 by an increase in the Company's
deposits, as well as maturities and payments on securities in the investment
portfolio and a decrease in federal funds sold. The end of the year loan to
deposit ratios for 2006 and 2005 were 87.6% and 81.3%,
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, 2006 are presented in the following table.
|
|
December
31, 2006
|
|||||||||
|
Due
Under
|
Due
1-5
|
Due
Over
|
||||||||
|
(Dollars
in thousands)
|
One
Year
|
Years
|
Five
Years
|
|||||||
|
Real
estate:
|
||||||||||
|
Commercial
mortgage
|
$
|
8,800
|
$
|
14,849
|
$
|
115,779
|
||||
|
Construction
and land development
|
21,438
|
7,076
|
1,580
|
|||||||
|
Residential
mortgage
|
939
|
5,050
|
54,971
|
|||||||
|
Total
real estate
|
31,177
|
26,975
|
172,330
|
|||||||
|
Commercial
and industrial
|
4,768
|
9,794
|
3,736
|
|||||||
|
Consumer
and other
|
382
|
1,302
|
11,991
|
|||||||
|
Total
loans
|
$
|
36,327
|
$
|
38,071
|
$
|
188,057
|
||||
|
Interest
rates:
|
||||||||||
|
Predetermined
|
$
|
3,615
|
$
|
20,327
|
$
|
66,131
|
||||
|
Floating
|
32,712
|
17,744
|
121,926
|
|||||||
|
Total
loans
|
$
|
36,327
|
$
|
38,071
|
$
|
188,057
|
||||
Loan
and Asset Quality. Non-performing
assets consist of non-accrual loans and all loans over ninety days delinquent
and foreclosed other real estate owned ("OREO"). The Company's non-accrual
loans
increased to $1.4 million at December 31, 2006 from $816 thousand at December
31, 2005. There were $746 thousand in past due loans over 90 days and still
accruing interest and no OREO properties at December 31, 2006. Total
non-performing assets, which include non-accrual loans, loans past due 90 days
and still accruing and restructured loans, increased by $1.3 million to $2.7
million at year end 2006 from $1.4 million at year end 2005. The increase
reflects both the impact of variable rate loans resetting at current higher
market rates of interest, which increases borrowers’ costs of servicing the
loans, and a slowdown in the real estate market, which has made it more
difficult for borrowers to lease or sell properties. Management believes these
non-performing assets are well collateralized.
The
Company seeks to actively manage its non-performing assets. In addition to
active monitoring and collecting or delinquent loans management has an active
loan review process for customers with aggregate relationships
of
$250,000
or more if the credit(s) are unsecured or secured, in whole or substantial
part,
by collateral other than real estate and $1,000,000 or more if the credit(s)
are
secured in whole or substantial part by real estate.
Management
continues to monitor the Company's asset quality and believes that the
non-accrual loans are adequately collateralized and anticipated material losses
have been adequately reserved for in the allowance for loan losses.
The
following table provides information regarding risk elements in the loan
portfolio as of December 31, 2002 through 2006.
|
|
December
31,
|
|||||||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Non-accrual
loans:
|
||||||||||||||||
|
Commercial
|
$
|
-
|
$
|
-
|
$
|
726
|
$
|
343
|
$
|
256
|
||||||
|
Consumer
|
-
|
-
|
-
|
-
|
21
|
|||||||||||
|
Construction
|
465
|
-
|
-
|
-
|
145
|
|||||||||||
|
Mortgage
|
942
|
816
|
578
|
834
|
836
|
|||||||||||
|
Total
nonaccrual loans
|
1,407
|
816
|
1,304
|
1,177
|
1,258
|
|||||||||||
|
Loans
past due 90 days and still accruing
|
746
|
535
|
34
|
-
|
36
|
|||||||||||
|
Restructured
loans
|
506
|
25
|
-
|
150
|
-
|
|||||||||||
|
Total
non-performing loans
|
2,659
|
1,376
|
1,338
|
1,327
|
1,294
|
|||||||||||
|
Foreclosed
real estate
|
-
|
-
|
-
|
223
|
187
|
|||||||||||
|
Total
non-performing assets
|
$
|
2,659
|
$
|
1,376
|
$
|
1,338
|
$
|
1,550
|
$
|
1,481
|
||||||
|
Non-performing
loans to total loans
|
1.01
|
%
|
0.65
|
%
|
0.85
|
%
|
0.99
|
%
|
1.14
|
%
|
||||||
|
Non-performing
assets to total assets
|
0.75
|
%
|
0.44
|
%
|
0.48
|
%
|
0.64
|
%
|
0.66
|
%
|
||||||
|
Interest
income received on nonaccrual loans
|
$
|
10
|
$
|
42
|
N/A
|
$
|
33
|
$
|
16
|
|||||||
|
Interest
income that would have been recorded
|
||||||||||||||||
|
under
the original terms of the loans
|
$
|
127
|
$
|
48
|
$
|
88
|
$
|
117
|
$
|
118
|
||||||
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, 2006, the allowance for loan losses was $3.3 million, an increase
of 27.7% from $2.6 million at December 31, 2005. The provision for loan losses
was $733 thousand and there were $94 thousand in charge-offs and $86 thousand
in
recoveries for the year of 2006. The allowance for loan losses as percentage
total loans was 1.27% at December 31, 2006 compared to 1.24% on December 31,
2005. The increase in the allowance reflects the growth in the Company’s loan
portfolio of $51.1 million from $211.4 million at December 31, 2005 to $262.5
million at December 31, 2006 and the higher specific allowance allocations
for
commercial and industrial loans and non-residential real estate
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)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Balance
at beginning of year
|
$
|
2,615
|
$
|
2,274
|
$
|
1,734
|
$
|
1,386
|
$
|
1,143
|
||||||
|
Provision
charged to operating expenses
|
733
|
1,138
|
558
|
405
|
300
|
|||||||||||
|
Recoveries
of loans previously charged-off:
|
||||||||||||||||
|
Commercial
|
-
|
198
|
10
|
-
|
-
|
|||||||||||
|
Consumer
|
86
|
11
|
3
|
1
|
2
|
|||||||||||
|
Real
Estate
|
-
|
1
|
4
|
4
|
-
|
|||||||||||
|
Total
recoveries
|
86
|
210
|
17
|
5
|
2
|
|||||||||||
|
Loans
charged-off:
|
||||||||||||||||
|
Commercial
|
-
|
398
|
15
|
-
|
-
|
|||||||||||
|
Consumer
|
94
|
80
|
16
|
31
|
19
|
|||||||||||
|
Real
Estate
|
-
|
529
|
4
|
31
|
40
|
|||||||||||
|
Total
charge-offs
|
94
|
1,007
|
35
|
62
|
59
|
|||||||||||
|
Net
charge-offs
|
8
|
797
|
18
|
57
|
57
|
|||||||||||
|
Balance
at end of year
|
$
|
3,340
|
$
|
2,615
|
$
|
2,274
|
$
|
1,734
|
$
|
1,386
|
||||||
|
Net
charge-offs to average loans outstanding
|
0.00
|
%
|
0.43
|
%
|
0.01
|
%
|
0.05
|
%
|
0.05
|
%
|
||||||
|
Allowance
for loan losses to year-end loans
|
1.27
|
%
|
1.24
|
%
|
1.45
|
%
|
1.29
|
%
|
1.22
|
%
|
||||||
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,
|
||||||||||||||||||
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
%
of
|
%
of
|
%
of
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Gross
Loans
|
Amount
|
Gross
Loans
|
Amount
|
Gross
Loans
|
|||||||||||||
|
Commercial
|
$
|
405
|
6.97
|
%
|
$
|
477
|
7.88
|
%
|
$
|
519
|
9.06
|
%
|
|||||||
|
Consumer
and other loans
|
66
|
5.21
|
%
|
42
|
6.55
|
%
|
29
|
7.13
|
%
|
||||||||||
|
Real
estate, construction and development:
|
|||||||||||||||||||
|
Commercial
|
2,674
|
64.59
|
%
|
1,939
|
63.15
|
%
|
1,584
|
57.08
|
%
|
||||||||||
|
Residential
|
195
|
23.23
|
%
|
157
|
22.42
|
%
|
142
|
26.73
|
%
|
||||||||||
|
Total
|
$
|
3,340
|
100.00
|
%
|
$
|
2,615
|
100.00
|
%
|
$
|
2,274
|
100.00
|
%
|
|||||||
|
Allowance
for Loans Losses at December 31,
|
|||||||||||||
|
|
2003
|
2002
|
|||||||||||
|
%
of
|
%
of
|
||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Gross
Loans
|
Amount
|
Gross
Loans
|
|||||||||
|
Commercial
|
$
|
494
|
9.22
|
%
|
$
|
396
|
9.69
|
%
|
|||||
|
Consumer
and other loans
|
109
|
5.62
|
%
|
45
|
3.11
|
%
|
|||||||
|
Real
estate, construction and development:
|
|||||||||||||
|
Commercial
|
990
|
50.49
|
%
|
681
|
43.52
|
%
|
|||||||
|
Residential
|
141
|
34.67
|
%
|
264
|
43.68
|
%
|
|||||||
|
Total
|
$
|
1,734
|
100.00
|
%
|
$
|
1,386
|
100.00
|
%
|
|||||
Premises
and Equipment; Other Assets. Premises
and equipment increased by $1.2 million, or 17.8%, from $6.6 million at December
31, 2005 to $7.8 million at December 31, 2006. This increase is largely due
to
the renovations of the data operations center in Newton, New
Jersey.
Other
assets increased from $8.6 million at December 31, 2005 to $9.6 million at
December 31, 2006, an increase of $1.0 million, or 11.5%. This increase was
generated from the prepayment of the Company's expenses and insurance policies
and increases in deferred tax asset balances.
Deposits. Total
deposits increased $38.9 million, or 15.2%, from $256.8 million at December
31,
2005 to $295.8 million at December 31, 2006. Non-interest bearing deposits
decreased $2.1 million, or 4.9%, to $40.1 million at December 31, 2006 from
$42.1 million at December 31, 2005, although the average balance of these
deposits increased, as discussed below; interest-bearing deposits increased
$41.0 million, or 19.1%, to $255.7 million at December 31, 2006 from $214.7
million at December 31, 2005. Management continues to monitor the shift in
deposits through its Asset/Liability Committee.
Total
average deposits increased $40.5 million from $237.3 million at year-end 2005
to
$277.8 million at year-end 2006, a 17.1% increase. Average time deposits
increased to $100.1 million, an increase of $28.9 million, or 40.6%, from $71.2
million at year-end 2005. Average money market accounts increased to $30.8
million an increase of $8.7 million or 39.4% from $22.1 million at year-end
2005. The change in the deposit portfolio reflects continued competition for
deposits in our primary market. In order to attract and retain deposits to
fund
our growing loan portfolio, the Company has had to offer higher rates and
emphasize more expensive accounts, such as time deposits and money market
accounts, which typically bear higher rates than transactional or savings
accounts. The $5.0 million increase in average non-interest demand deposits
is
attributed to the Company's efforts to cultivate commercial deposit
relationships with its commercial loan customers. Lastly the $16.1 million
average balance decrease in savings deposits from $62.0 million at year-end
2005
to $45.9 million at year-end 2006 represents a shift by our customer’s transfer
of their deposits from lower yielding savings accounts to a higher earning
money
market and time deposits.
The
average balances and weighted average rates paid on deposits for 2006, 2005
and
2004 are presented below.
|
|
Year
Ended December 31,
|
||||||||||||||||||
|
2006
Average
|
2005
Average
|
2004
Average
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||
|
Demand,
non-interest bearing
|
$
|
43,036
|
$
|
38,068
|
$
|
33,627
|
|||||||||||||
|
Now
accounts
|
57,974
|
2.25
|
%
|
43,939
|
0.68
|
%
|
42,412
|
0.46
|
%
|
||||||||||
|
Money
market accounts
|
30,773
|
3.90
|
%
|
22,083
|
2.42
|
%
|
16,878
|
1.09
|
%
|
||||||||||
|
Savings
|
45,916
|
0.87
|
%
|
62,025
|
0.74
|
%
|
66,322
|
0.66
|
%
|
||||||||||
|
Time
|
100,061
|
4.19
|
%
|
71,174
|
2.81
|
%
|
58,443
|
2.08
|
%
|
||||||||||
|
Total
deposits
|
$
|
277,760
|
|
$
|
237,289
|
|
$
|
217,682
|
|
||||||||||
The
remaining maturity for certificates of deposit accounts or $100,000 or more
as
of December 31, 2006 is presented in the following table.
|
(Dollars
in thousands)
|
2006
|
|||
|
3
months or less
|
$
|
20,934
|
||
|
3
to 6 months
|
8,853
|
|||
|
6
to 12 months
|
4,036
|
|||
|
Over
12 months
|
1,932
|
|||
|
Total
|
$
|
35,755
|
||
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. For the year ended
December 31, 2006 the Company had $14.4 million in average notes outstanding
at
an average interest rate of 4.92% compared to $14.8 million in average notes
outstanding at an average rate of 4.64% for the year ended December 31,
2005.
The
Company had no short-term borrowings outstanding at December 31, 2006. 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)
|
2006
|
2005
|
2004
|
|||||||
|
Average
daily amount of short-term borrowings outstanding during the
period
|
$
|
29
|
$
|
202
|
$
|
64
|
||||
|
Weighted
average interest rate on average daily short-term
borrowings
|
4.96
|
%
|
2.74
|
%
|
1.81
|
%
|
||||
|
Maximum
short-term borrowings outstanding at any month-end
|
$
|
1,815
|
$
|
2,195
|
$
|
2,385
|
||||
|
Short-term
borrowings outstanding at period end
|
-
|
-
|
-
|
|||||||
|
Weighted
average interest rate on short-term borrowings at period
end
|
-
|
-
|
-
|
|||||||
Junior
Subordinated Debentures. On
July
11, 2002, the Company raised an additional $4.8 million, net of offering costs,
in capital through the issuance of junior subordinated debentures to a
non-consolidated statutory trust subsidiary. The subsidiary in turn issued
$5.0
million in variable rate capital trust pass through securities to investors
in a
private placement. The interest rate is based on the three-month LIBOR plus
365
basis points adjusted quarterly. The rate at December 31, 2006 was 9.02%. The
rate is capped at 12.50% through the first five years, and the securities may
be
called at par anytime after July 11, 2007 or if regulatory capital or tax
treatment of the securities is substantially changed. These trust preferred
securities are included in the Company's and the Bank's capital ratio
calculations.
Equity.
Stockholders' equity inclusive of accumulated other comprehensive income (loss),
net of income taxes, was $34.6 million at December 31, 2006, an increase of
$1.7
million over the $32.9 million at year-end 2005. Stockholders' equity increased
due to $2.5 million in net income earned for 2006, $111 thousand from the
issuance of common stock and exercise of stock options, $93 thousand from the
shares issued through the dividend reinvestment plan and $120 thousand through
the compensation expense of stock options, restricted stock grants and stock
awards. These increases were offset by a $336 thousand decrease in common stock
due to the purchase and retirement of treasury shares and cash dividends paid
of
$891 thousand. An unrealized gain on securities available for sale, net of
income tax, increased stockholders' equity by $89 thousand.
LIQUIDITY
AND CAPITAL RESOURCES
It
is
management's intent to fund future loan demand with deposits and maturities
and
pay downs on investments. In addition, the Company is a member of the Federal
Home Loan Bank of New York and at December 31, 2006, had the ability to borrow
up to $25.2 million against its 1 - 4 family mortgages and selected 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 of an amount of $32.2 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 $18.3 million at December
31,
2006 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 three long-term notes that mature on December 21, 2010 each with
a
convertible quarterly option which allows the Federal Home Loan Bank to change
the note to then current market rates and one long-term note that matures on
December 21, 2016, with an initial conversion date of December 7, 2008 and
one
$3.3 million amortizing advance that matures on November 3, 2010. The interest
rates on these borrowings range from 4.00% to 5.14%.
At
December 31, 2006, 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, 2006, liquid investments totaled $22.2 million, and all mature
within 30 days.
At
December 31, 2006, the Company had $54.6 million of securities as available
for
sale. Of these securities, $30.8 million had $563 thousand of unrealized losses
and therefore are not available for liquidity purposes because management’s
intent is to hold them until market recovery.
The
Company's and the Bank's regulators have classified and defined bank holding
company capital as consisting of Tier 1 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
Company's and the Bank's regulators have implemented risk based guidelines
which
require banks and bank holding companies 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 and holding
companies 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, 2006, the Company's Tier I and Tier II capital ratios
were 12.84% and 14.00% respectively. The Bank's Tier I and Tier II capital
ratios were 10.46% and 11.63%, respectively.
In
addition to the risk-based guidelines discussed above, the Company's and the
Bank's regulators require that banks and bank holding companies 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 and bank holding companies with higher levels of risk or that is
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, 2006, the Company had leverage ratio of 10.48% and the Bank
had
a leverage ratio of 8.54%.
Contractual
Obligations.
For
year-end 2006 contractual obligations were as follows:
|
|
Payments
due by period
|
|||||||||||||||
|
Less
than
|
More
than
|
|||||||||||||||
|
(Dollars
in thousands)
|
Total
|
1
year
|
1-3
years
|
3-5
years
|
5
years
|
|||||||||||
|
Borrowings
|
$
|
18,251
|
$
|
51
|
$
|
110
|
$
|
13,090
|
$
|
5,000
|
||||||
|
Operating
lease obligations
|
2,473
|
438
|
650
|
455
|
930
|
|||||||||||
|
Purchase
obligations
|
1,145
|
1,145
|
-
|
-
|
-
|
|||||||||||
|
Time
deposits
|
123,748
|
117,083
|
5,678
|
904
|
83
|
|||||||||||
|
Nonqualified
supplemental salary continuation plan
|
2,115
|
-
|
132
|
163
|
1,820
|
|||||||||||
|
Junior
subordinated debentures
|
5,155
|
-
|
-
|
-
|
5,155
|
|||||||||||
|
Total
|
$
|
152,887
|
$
|
118,717
|
$
|
6,570
|
$
|
14,612
|
$
|
12,988
|
||||||
The
Company has no investment or financial relationship with any unconsolidated
entities that are reasonably likely to have a material effect on liquidity
or
the availability of capital resources, except for the junior subordinated
debentures of Sussex Capital Trust I which are included in the above table.
The
Company is not aware of any known trends or any known demands, commitments,
events or uncertainties, which would result in any material increase or decrease
in liquidity.
Off-Balance
Sheet Arrangements. The
company's financial statements do not reflect off-balance sheet arrangements
that are made in the normal course of business. These off-balance sheet
arrangements consist of unfunded loans and letters of credit made under the
same
standards as on-balance sheet instruments. These unused commitments, at December
31, 2006 totaled $69.5 million. This consisted of $7.4 million in commitments
to
grant commercial and residential loans, $24.6 million in commercial construction
lines of credit, $13.8 million in home equity lines of credit, and the remainder
in other unused commitments. These instruments have fixed maturity dates, and
because many of them will expire without being drawn upon, they do not generally
present any significant liquidity risk to the Company. Management
believes that any amounts actually drawn upon can be funded in the normal course
of operations.
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
rate 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 asset 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
The
two
biggest risks faced by the Company’s operations are interest rate risk and
credit quality risk. See “Loan and Asset Quality” and Allowance for Loan Losses”
in Item 7 regarding credit quality risk.
Interest
Rate Sensitivity. An
interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Interest rate sensitivity is the volatility
of a
Company's earnings from a movement in market interest rates. Interest rate
"gap"
analysis is a common, though imperfect, measure of interest rate risk. We do
not
employ gap analysis as a rate risk management tool, but rather we rely upon
earnings at risk analysis to forecast the impact on our net interest income
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. Through year end 2006, we sought to remain relatively balanced,
and
our policies provide for a variance of no more than 25% of net interest income,
at a 100 and 200 basis point increase or decrease. At December 31, 2006 the
percentage of change were 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, 2006
and 2005. 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.
|
2006
|
2005
|
|||||
|
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
|
($31)
|
-0.01%
|
0.43%
|
($620)
|
-0.20%
|
10.04%
|
|
Down
100 basis points
|
256
|
0.07%
|
-7.24%
|
(83)
|
-0.03%
|
2.69%
|
|
Up
100 basis points
|
(529)
|
-0.15%
|
-14.95%
|
(129)
|
-0.04%
|
-4.18%
|
|
Up
200 basis points
|
(1,337)
|
-0.38%
|
-18.91%
|
(607)
|
-0.20%
|
-9.83%
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
TABLE
OF CONTENTS
|
31
|
|
|
32
|
|
|
33
|
|
|
34
|
|
|
35
|
|
|
36
|
|
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
subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. 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
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Note 1 to the consolidated financial statements, Sussex Bancorp
and
its subsidiaries changed their method of accounting for share-based payments
in
2006.
|
/s/
Beard Miller Company LLP
|
Beard
Miller Company LLP
Allentown,
Pennsylvania
March
5,
2007
|
CONSOLIDATED
BALANCE
SHEETS
|
|||||||
|
December
31,
|
|||||||
|
(Dollars
In Thousands, Except Per Share Data)
|
2006
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Cash
and due from banks
|
$
|
10,170
|
$
|
11,395
|
|||
|
Federal
funds sold
|
11,995
|
13,385
|
|||||
|
Cash
and cash equivalents
|
22,165
|
24,780
|
|||||
|
Interest
bearing time deposits with other banks
|
100
|
500
|
|||||
|
Securities
available for sale
|
54,635
|
61,180
|
|||||
|
Federal
Home Loan Bank Stock, at cost
|
1,188
|
1,025
|
|||||
|
Loans
receivable, net of unearned income
|
262,276
|
211,335
|
|||||
|
Less:
allowance for loan losses
|
3,340
|
2,615
|
|||||
|
Net
loans receivable
|
258,936
|
208,720
|
|||||
|
Premises
and equipment, net
|
7,794
|
6,619
|
|||||
|
Accrued
interest receivable
|
1,910
|
1,778
|
|||||
|
Goodwill
|
2,820
|
2,334
|
|||||
|
Other
assets
|
6,749
|
6,246
|
|||||
|
Total
Assets
|
$
|
356,297
|
$
|
313,182
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Liabilities:
|
|||||||
|
Deposits:
|
|||||||
|
Non-interest
bearing
|
$
|
40,083
|
$
|
42,142
|
|||
|
Interest
bearing
|
255,687
|
214,705
|
|||||
|
Total
Deposits
|
295,770
|
256,847
|
|||||
|
Borrowings
|
18,251
|
16,300
|
|||||
|
Accrued
interest payable and other liabilities
|
2,529
|
1,956
|
|||||
|
Junior
subordinated debentures
|
5,155
|
5,155
|
|||||
|
Total
Liabilities
|
321,705
|
280,258
|
|||||
|
Stockholders'
Equity:
|
|||||||
|
Common
stock, no par value, authorized 5,000,000 shares;
|
|||||||
|
issued
shares 3,158,399 in 2006 and 3,153,004 in 2005;
|
|||||||
|
outstanding
shares 3,152,374 in 2006 and 3,153,004 in 2005
|
27,306
|
27,300
|
|||||
|
Retained
earnings
|
7,415
|
5,842
|
|||||
|
Accumulated
other comprehensive loss
|
(129
|
)
|
(218
|
)
|
|||
|
Total
Stockholders' Equity
|
34,592
|
32,924
|
|||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
356,297
|
$
|
313,182
|
|||
|
See
Notes to Consolidated Financial
Statements
|
|||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
In Thousands Except Per Share Data)
|
2006
|
2005
|
2004
|
|||||||
|
INTEREST
INCOME
|
||||||||||
|
Loans
receivable, including fees
|
$
|
17,009
|
$
|
12,331
|
$
|
8,954
|
||||
|
Securities:
|
||||||||||
|
Taxable
|
1,455
|
1,650
|
1,812
|
|||||||
|
Tax-exempt
|
1,032
|
1,145
|
869
|
|||||||
|
Federal
funds sold
|
490
|
359
|
97
|
|||||||
|
Interest
bearing deposits
|
12
|
62
|
59
|
|||||||
|
Total
Interest Income
|
19,998
|
15,547
|
11,791
|
|||||||
|
INTEREST
EXPENSE
|
||||||||||
|
Deposits
|
7,097
|
3,286
|
2,032
|
|||||||
|
Borrowings
|
707
|
686
|
522
|
|||||||
|
Junior
subordinated debentures
|
445
|
356
|
260
|
|||||||
|
Total
Interest Expense
|
8,249
|
4,328
|
2,814
|
|||||||
|
Net
Interest Income
|
11,749
|
11,219
|
8,977
|
|||||||
|
PROVISION
FOR LOAN LOSSES
|
733
|
1,138
|
558
|
|||||||
|
Net
Interest Income after Provision for Loan Losses
|
11,016
|
10,081
|
8,419
|
|||||||
|
OTHER
INCOME
|
||||||||||
|
Service
fees on deposit accounts
|
1,370
|
1,225
|
748
|
|||||||
|
ATM
fees
|
374
|
347
|
324
|
|||||||
|
Insurance
commissions and fees
|
2,576
|
2,327
|
2,195
|
|||||||
|
Investment
brokerage fees
|
265
|
291
|
292
|
|||||||
|
Net
realized gain on sale of securities
|
90
|
35
|
16
|
|||||||
|
Net
(loss) gain on sale of foreclosed real estate
|
-
|
6
|
(5
|
)
|
||||||
|
Other
|
569
|
642
|
972
|
|||||||
|
Total
Other Income
|
5,244
|
4,873
|
4,542
|
|||||||
|
OTHER
EXPENSES
|
||||||||||
|
Salaries
and employee benefits
|
6,872
|
6,340
|
6,208
|
|||||||
|
Occupancy,
net
|
1,077
|
989
|
854
|
|||||||
|
Furniture,
equipment and data processing
|
1,210
|
1,078
|
902
|
|||||||
|
Stationary
and supplies
|
199
|
179
|
181
|
|||||||
|
Professional
fees
|
668
|
545
|
356
|
|||||||
|
Advertising
and promotion
|
518
|
507
|
411
|
|||||||
|
Insurance
|
197
|
170
|
167
|
|||||||
|
Postage
and freight
|
208
|
171
|
175
|
|||||||
|
Amortization
of intangible assets
|
150
|
250
|
200
|
|||||||
|
Other
|
1,549
|
1,374
|
1,335
|
|||||||
|
Total
Other Expenses
|
12,648
|
11,603
|
10,789
|
|||||||
|
Income
before Income Taxes
|
3,612
|
3,351
|
2,172
|
|||||||
|
PROVISION
FOR INCOME TAXES
|
1,148
|
952
|
581
|
|||||||
|
Net
Income
|
$
|
2,464
|
$
|
2,399
|
$
|
1,591
|
||||
|
EARNINGS
PER SHARE
|
||||||||||
|
Basic
|
$
|
0.78
|
$
|
0.76
|
$
|
0.81
|
||||
|
Diluted
|
$
|
0.77
|
$
|
0.75
|
$
|
0.78
|
||||
|
See
Notes to Consolidated Financial
Statements
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS'
EQUITY
|
|||||||||||||||||||
|
Years
Ended December 31, 2006, 2005 and 2004
|
|||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||
|
Number
of
|
Other
|
Total
|
|||||||||||||||||
|
Shares
|
Common
|
Retained
|
Comprehensive
|
Treasury
|
Stockholders'
|
||||||||||||||
|
(Dollars
In Thousands, Except Per Share Amounts)
|
Outstanding
|
Stock
|
Earnings
|
Income
(loss)
|
Stock
|
Equity
|
|||||||||||||
|
Balance
December 31, 2003
|
1,811,460
|
$
|
9,616
|
$
|
5,040
|
$
|
248
|
$
|
-
|
$
|
14,904
|
||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
-
|
-
|
1,591
|
-
|
-
|
1,591
|
|||||||||||||
|
Change
in unrealized gains on securities available for sale, net of
tax
|
-
|
-
|
-
|
(109
|
)
|
-
|
(109
|
)
|
|||||||||||
|
Total
Comprehensive Income
|
1,482
|
||||||||||||||||||
|
Treasury
shares purchased
|
(1,346
|
)
|
-
|
-
|
-
|
(23
|
)
|
(23
|
)
|
||||||||||
|
Treasury
shares retired
|
-
|
(23
|
)
|
-
|
-
|
23
|
-
|
||||||||||||
|
Issuance
of common stock and exercise of stock options
|
42,384
|
505
|
-
|
-
|
-
|
505
|
|||||||||||||
|
Income
tax benefit of stock options exercised
|
-
|
52
|
-
|
-
|
-
|
52
|
|||||||||||||
|
Shares
issued through dividend reinvestment plan
|
11,226
|
179
|
-
|
-
|
-
|
179
|
|||||||||||||
|
Sale
of common stock, at $14.25 per share, net of offering costs of
$1,051
|
1,131,150
|
15,068
|
15,068
|
||||||||||||||||
|
Dividends
on common stock ($0.27 per share)
|
-
|
-
|
(515
|
)
|
-
|
-
|
(515
|
)
|
|||||||||||
|
Balance
December 31, 2004
|
2,994,874
|
25,397
|
6,116
|
139
|
-
|
31,652
|
|||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
-
|
-
|
2,399
|
-
|
-
|
2,399
|
|||||||||||||
|
Change
in unrealized gains (losses) on securities available for sale,
net of
tax
|
-
|
-
|
-
|
(357
|
)
|
-
|
(357
|
)
|
|||||||||||
|
Total
Comprehensive Income
|
2,042
|
||||||||||||||||||
|
Treasury
shares purchased
|
(45,955
|
)
|
-
|
-
|
-
|
(683
|
)
|
(683
|
)
|
||||||||||
|
Treasury
shares retired
|
-
|
(683
|
)
|
-
|
-
|
683
|
-
|
||||||||||||
|
Exercise
of stock options
|
45,526
|
374
|
-
|
-
|
-
|
374
|
|||||||||||||
|
Income
tax benefit of stock options exercised
|
-
|
92
|
-
|
-
|
-
|
92
|
|||||||||||||
|
Shares
issued through dividend reinvestment plan
|
7,773
|
109
|
-
|
-
|
-
|
109
|
|||||||||||||
|
Additional
expenses for stock offering
|
-
|
(25
|
)
|
-
|
-
|
-
|
(25
|
)
|
|||||||||||
|
Dividends
on common stock ($0.20 per share)
|
-
|
-
|
(633
|
)
|
-
|
-
|
(633
|
)
|
|||||||||||
|
5%
Stock Dividend
|
150,786
|
2,036
|
(2,040
|
)
|
-
|
-
|
(4
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance
December 31, 2005
|
3,153,004
|
27,300
|
5,842
|
(218
|
)
|
-
|
32,924
|
||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
-
|
-
|
2,464
|
-
|
-
|
2,464
|
|||||||||||||
|
Change
in unrealized gains (losses) on securities available
|
|||||||||||||||||||
|
for
sale, net of tax
|
-
|
-
|
-
|
89
|
-
|
89
|
|||||||||||||
|
Total
Comprehensive Income
|
2,553
|
||||||||||||||||||
|
Treasury
shares purchased
|
(23,458
|
)
|
-
|
-
|
-
|
(336
|
)
|
(336
|
)
|
||||||||||
|
Treasury
shares retired
|
-
|
(336
|
)
|
-
|
-
|
336
|
-
|
||||||||||||
|
Exercise
of stock options
|
11,979
|
111
|
-
|
-
|
-
|
111
|
|||||||||||||
|
Income
tax benefit of stock options exercised
|
-
|
18
|
-
|
-
|
-
|
18
|
|||||||||||||
|
Issuance
of 6,025 unvested shares of restricted common
|
|||||||||||||||||||
|
stock,
net of related unearned compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Compensation
expense related to stock option and
|
|||||||||||||||||||
|
restricted
stock grants
|
-
|
55
|
-
|
-
|
-
|
55
|
|||||||||||||
|
Compensation
expense related to stock awards
|
4,368
|
65
|
-
|
-
|
-
|
65
|
|||||||||||||
|
Shares
issued through dividend reinvestment plan
|
6,481
|
93
|
-
|
-
|
-
|
93
|
|||||||||||||
|
Dividends
on common stock ($0.28 per share)
|
-
|
-
|
(891
|
)
|
-
|
-
|
(886
|
)
|
|||||||||||
|
Balance
December 31, 2006
|
3,152,374
|
$
|
27,306
|
$
|
7,415
|
($129
|
)
|
$
|
-
|
$
|
34,592
|
||||||||
See
Notes
to Consolidated Financial Statements
|
SUSSEX
BANCORP
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in Thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Cash
Flows from Operating Activities
|
||||||||||
|
Net
income
|
$
|
2,464
|
$
|
2,399
|
$
|
1,591
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Provision
for loan losses
|
733
|
1,138
|
558
|
|||||||
|
Provision
for depreciation and amortization
|
911
|
945
|
791
|
|||||||
|
Net
amortization of securities premiums and discounts
|
101
|
234
|
537
|
|||||||
|
Net
realized gain on sale of securities
|
(90
|
)
|
(35
|
)
|
(16
|
)
|
||||
|
Realized
(gain) loss on sale of foreclosed real estate
|
-
|
(6
|
)
|
5
|
||||||
|
Deferred
income taxes
|
(375
|
)
|
(93
|
)
|
(46
|
)
|
||||
|
Earnings
on investment in life insurance
|
(98
|
)
|
(93
|
)
|
(107
|
)
|
||||
|
Compensation
expense for stock options and stock awards
|
120
|
-
|
-
|
|||||||
|
Increase
in assets:
|
||||||||||
|
Accrued
interest receivable
|
(132
|
)
|
(448
|
)
|
(89
|
)
|
||||
|
Other
assets
|
(222
|
)
|
(341
|
)
|
(519
|
)
|
||||
|
Increase
(decrease) in accrued interest payable and other
liabilities
|
591
|
407
|
(363
|
)
|
||||||
|
Net
Cash Provided by Operating Activities
|
4,003
|
4,107
|
2,342
|
|||||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Securities
available for sale:
|
||||||||||
|
Purchases
|
(13,434
|
)
|
(7,424
|
)
|
(37,279
|
)
|
||||
|
Proceeds
from sale of securities
|
6,942
|
14,689
|
24,491
|
|||||||
|
Maturities,
calls and principal repayments
|
13,174
|
5,497
|
13,894
|
|||||||
|
Net
increase in loans
|
(47,513
|
)
|
(55,486
|
)
|
(22,851
|
)
|
||||
|
Purchases
of bank premises and equipment
|
(1,936
|
)
|
(1,696
|
)
|
(1,559
|
)
|
||||
|
Decrease
(increase) in FHLB stock
|
(163
|
)
|
(335
|
)
|
70
|
|||||
|
Net
decrease (increase) in interest bearing time deposits with other
banks
|
400
|
3,400
|
(400
|
)
|
||||||
|
Net
cash received for branch acquisition
|
2,354
|
-
|
-
|
|||||||
|
Purchase
of investment in life insurance
|
-
|
-
|
(1,500
|
)
|
||||||
|
Proceeds
from sale of foreclosed real estate
|
-
|
276
|
509
|
|||||||
|
Net
Cash Used in Investing Activities
|
(40,176
|
)
|
(41,079
|
)
|
(24,625
|
)
|
||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Net
increase in deposits
|
32,630
|
27,020
|
22,170
|
|||||||
|
Proceeds
from borrowings
|
5,000
|
6,300
|
-
|
|||||||
|
Repayments
of borrowings
|
(3,049
|
)
|
-
|
(1,000
|
)
|
|||||
|
Net
proceeds (costs) from issuance of common stock
|
-
|
(25
|
)
|
15,068
|
||||||
|
Proceeds
from the exercise of stock options
|
111
|
374
|
202
|
|||||||
|
Purchase
of treasury stock
|
(336
|
)
|
(683
|
)
|
(23
|
)
|
||||
|
Dividends
paid, net of reinvestments
|
(798
|
)
|
(528
|
)
|
(336
|
)
|
||||
|
Net
Cash Provided by Financing Activities
|
33,558
|
32,458
|
36,081
|
|||||||
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(2,615
|
)
|
(4,514
|
)
|
13,798
|
|||||
|
Cash
and Cash Equivalents - Beginning
|
24,780
|
29,294
|
15,496
|
|||||||
|
Cash
and Cash Equivalents - Ending
|
$
|
22,165
|
$
|
24,780
|
$
|
29,294
|
||||
|
Supplementary
Cash Flows Information
|
||||||||||
|
Interest
paid
|
$
|
8,088
|
$
|
4,217
|
$
|
2,817
|
||||
|
Income
taxes paid
|
$
|
1,186
|
$
|
936
|
$
|
909
|
||||
|
Supplementary
Schedule of Noncash Investing and Financing
Activities
|
||||||||||
|
Foreclosed
real estate acquired in settlement of loans
|
$
|
-
|
$
|
270
|
$
|
291
|
||||
See
Notes to Consolidated Financial
Statements
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of Sussex Bancorp (the
“Company”) and its wholly-owned subsidiary, Sussex Bank (the “Bank”). The Bank’s
wholly-owned subsidiaries are SCB Investment Company, Sussex Bancorp Mortgage
Co., 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 ten branches located in Sussex County, New Jersey. 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
holds
investments. Tri-State Insurance Agency, Inc. provides insurance agency services
mostly through the sale of property and casualty insurance policies. Sussex
Bancorp Mortgage Co., Inc. brokered mortgage loans for the Bank and third
parties, but was inactive in 2005 and 2006 and dissolved as of January 26,
2007.
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 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. Note 4 discusses 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.
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. 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
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Loans
Receivable
Loans
receivable that management has the intent and ability to hold for the
foreseeable future 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 collectibility 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 collectibility 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 collectibility 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 either 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
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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. Foreclosed assets are
included in other assets on the balance sheets.
Bank
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
|
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 $2,820,000 and $2,334,000
at December 31, 2006 and 2005, respectively, related to the acquisition of
an insurance agency on October 1, 2001 with an additional $486,000 in 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 2006. 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 value of the acquired book of businesses, which are being amortized
on a
straight-line basis over 3 to 7 years. The total net amortizable intangible
assets were $60,000 and $104,000, net of accumulated amortization of $463,000
and $419,000 at December 31, 2006 and 2005, respectively.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company has two amortizable core deposit intangible assets related to the
premiums paid on the acquisition of deposits. One is being amortized on a
straight-line basis over 15 years. This core deposit intangible was $32,000
and
$116,000, net of accumulated amortization of $1,226,000 and $1,142,000 as of
December 31, 2006 and 2005, respectively. 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 $98,000, net of accumulated amortization of $22,000 as of
December 31, 2006.
Other
intangible assets are included in other assets on the balance sheets for
December 31, 2006 and 2005. Amortization expense on intangible assets was
$150,000, $250,000 and $200,000 for the years ended December 31, 2006, 2005
and 2004, respectively. Amortization expense is estimated to be $94,000 for
the
year ending December 31, 2007; $48,000 for the year ending
December 31, 2008; $18,000 for the year ending December 31, 2009,
$14,000 for the year ending December 31, 2010, $10,000 for the year ending
December 31, 2011 and $6,000 in the years thereafter.
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. Prior to January
1, 2006, the Company accounted for its stock option plans,
under
the
recognition and measurement provision
of APB Opinion No 25, "Accounting for Stock Issued to Employees," and related
Interpretations, as
permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation".
No stock-based employee compensation cost was recognized in the Company's
consolidated statements of income through December
31, 2005, as all options granted under the Company’s plans had an exercise price
equal to the market value
of
the underlying common stock on the date of grant.
Effective
January 1, 2006, the Company adopted 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 2006 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 or 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. Stock-based compensation expense related to stock options
for
the year ended December 31, 2006 was $33,000. The tax benefit recognized related
to this compensation expense for the year ended December 31, 2006 was
$2,000.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
a
result of adopting FASB Statement No. 123(R) on January 1, 2006, the Company’s
income before income taxes and net income for the year ended December 31, 2006
was $33,000 and $31,000, respectively, than if the Company had continued to
use
APB Opinion No. 25 to account for stock-based compensation. Basic and diluted
earnings per share were decreased by $0.01 for 2006.
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 3 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.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
New
Accounting Standards
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” SFAS No. 155 amends FASB Statement No. 133 and FASB
Statement No. 140, and improves the financial reporting of certain hybrid
financial instruments by requiring more consistent accounting that eliminates
exemptions and provides a means to simplify the accounting for these
instruments. Specifically, SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for
the
whole instrument on a fair value basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The Company is required
to adopt the provisions of SFAS No. 155, as applicable beginning in fiscal
year
2007. Management does not believe the adoption of SFAS No. 155 will have a
material impact on the Company’s financial position and results of
operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets - An Amendment of FASB Statement No. 140”. SFAS No. 156 requires that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. The statement permits, but does not
require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. SFAS No. 156 is effective as of the beginning of
an
entity’s first fiscal year that begins after September 15, 2006, which for the
Company will be as of the beginning of fiscal 2007. The Company does not believe
that the adoption of SFAS No. 156 will have a significant effect on its
financial statements.
In
July
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes." The interpretation clarifies the accounting for uncertainty
in
income taxes recognized in a company's financial statements in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Specifically, the pronouncement prescribes a recognition threshold
and a
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on the related derecognition, classification, interest
and penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions. The interpretation is effective for fiscal years
beginning after December 15, 2006. The Company does not anticipate a significant
impact of this new pronouncement on its consolidated financial
statements.
In
February 2006, the FASB issued Staff Position No. FAS 123(R)-4, “Classification
of Options and Similar Instruments Issued as Employee Compensation That Allow
for Cash Settlement upon the Occurrence of a Contingent Event”. This position
amends SFAS No. 123(R) to incorporate that a cash settlement feature that can
be
exercised only upon the occurrence of a contingent event that is outside the
employee’s control does not meet certain conditions in SFAS No. 123(R) until it
becomes probable that the event will occur. The guidance in this FASB Staff
position shall be applied upon initial adoption of Statement 123(R). The
adoption of this FASB Staff Position did not have a material impact on the
Company’s consolidated financial statements.
In
October 2006, the FASB issued FASB Staff Position No. 123 (R)-5, “Amendment of
FASB Staff Position FAS 123(R)-1 (“FSB 123(R)-5”). FSP 123(R)-5 amends FSP
123(R)-1 for equity instruments that were originally issued as employee
compensation and then modified, with such modification made solely to reflect
an
equity restructuring that occurs when the holders are no longer employees.
The
new guidance is effective for the Company in the 2007 fiscal year. The adoption
of FSP 123(R)-5 will not have a material impact on the Company’s consolidated
financial condition, results of operations or cash flows.
In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements,” which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements,
FASB Statement No. 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating the
potential impact, if any, of the adoption of FASB Statement 157 on our
consolidated financial position, results of operations and cash
flows.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
September 13, 2006, the Securities and Exchange Commission “SEC” issued Staff
Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement.
Prior
to SAB 108, Companies might evaluate the materiality of financial-statement
misstatements using either the income statement or balance sheet approach,
with
the income statement approach focusing on new misstatements added in the current
year, and balance sheet approach focusing on the cumulative amount of
misstatement present in a company’s balance sheet. Misstatements that would be
material under one approach could be viewed as immaterial under another
approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according
to
either the income statement or balance sheet approach. The Company has analyzed
SAB 108 and determined that upon adoption it will have no impact on the reported
consolidated results of operations or financial condition.
In
February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115.” SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected will be recognized
in
earnings at each subsequent reporting date. SFAS No. 159 is effective for our
Company January 1, 2008. The Company is evaluating the impact that the adoption
of SFAS No. 159 will have on our consolidated financial statements.
NOTE
2 - BRANCH AQUISITION
On
March
24, 2006, the Company completed the acquisition of the Port Jervis, New York
branch of NBT Bank. The transaction was recorded as a purchase of a business
and
the $538,000 purchase price was allocated based on the fair value of the assets
acquired and liabilities assumed. The branch purchase added approximately $6.3
million in deposits, $3.4 million in loans, $486 thousand in goodwill and $120
thousand in core deposit intangible. The lease for the branch location was
also
assumed. The core deposit intangible will be amortized over seven years on
an
accelerated basis.
NOTE
3 - SEGMENT REPORTING
Segment
information for 2006, 2005 and 2004 is as follows:
|
Banking
and
|
Insurance
|
|||||||||
|
(Dollars
in thousands)
|
Financial
Services
|
Services
|
Total
|
|||||||
|
Year
Ended December 31, 2006:
|
||||||||||
|
Net
interest income from external sources
|
$
|
11,749
|
$
|
-
|
$
|
11,749
|
||||
|
Other
income from external sources
|
2,668
|
2,576
|
5,244
|
|||||||
|
Depreciation
and amortization
|
856
|
55
|
911
|
|||||||
|
Income
before income taxes
|
3,458
|
154
|
3,612
|
|||||||
|
Income
tax expense
|
1,086
|
62
|
1,148
|
|||||||
|
Total
assets
|
352,920
|
3,377
|
356,297
|
|||||||
|
Year
Ended December 31, 2005:
|
||||||||||
|
Net
interest income from external sources
|
$
|
11,219
|
$
|
-
|
$
|
11,219
|
||||
|
Other
income from external sources
|
2,546
|
2,327
|
4,873
|
|||||||
|
Depreciation
and amortization
|
780
|
165
|
945
|
|||||||
|
Income
before income taxes
|
3,308
|
43
|
3,351
|
|||||||
|
Income
tax expense
|
935
|
17
|
952
|
|||||||
|
Total
assets
|
310,030
|
3,152
|
313,182
|
|||||||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Banking
and
|
Insurance
|
|||||||||
|
(Dollars
in thousands)
|
Financial
Services
|
Services
|
Total
|
|||||||
|
Year
Ended December 31, 2004:
|
||||||||||
|
Net
interest income from external sources
|
$
|
8,977
|
$
|
-
|
$
|
8,977
|
||||
|
Other
income from external sources
|
2,347
|
2,195
|
4,542
|
|||||||
|
Depreciation
and amortization
|
675
|
116
|
791
|
|||||||
|
Income
before income taxes
|
2,097
|
75
|
2,172
|
|||||||
|
Income
tax expense
|
551
|
30
|
581
|
|||||||
|
Total
assets
|
274,996
|
3,279
|
278,275
|
|||||||
NOTE
4 - SECURITIES
The
amortized cost and approximate fair value of securities available for sale
as of
December 31, 2006 and 2005 are summarized as follows:
|
Gross
|
Gross
|
||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
|
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
|
December
31, 2006
|
|||||||||||||
|
U.S.
Government agencies
|
$
|
9,677
|
$
|
1
|
($23
|
)
|
$
|
9,655
|
|||||
|
State
and political subdivisions
|
20,554
|
314
|
(35
|
)
|
20,833
|
||||||||
|
Mortgage-backed
securities
|
23,638
|
27
|
(497
|
)
|
23,168
|
||||||||
|
Equity
securities
|
982
|
5
|
(8
|
)
|
979
|
||||||||
|
$
|
54,851
|
$
|
347
|
$
|
(563
|
)
|
$
|
54,635
|
|||||
|
December
31, 2005
|
|||||||||||||
|
U.S.
Government agencies
|
$
|
10,968
|
$
|
-
|
($117
|
)
|
$
|
10,851
|
|||||
|
State
and political subdivisions
|
23,334
|
430
|
(7
|
)
|
23,757
|
||||||||
|
Mortgage-backed
securities
|
25,599
|
11
|
(670
|
)
|
24,940
|
||||||||
|
Corporate
securities
|
750
|
1
|
-
|
751
|
|||||||||
|
Equity
securities
|
892
|
1
|
(12
|
)
|
881
|
||||||||
|
$
|
61,543
|
$
|
443
|
$
|
(806
|
)
|
$
|
61,180
|
|||||
The
following table shows our investments’ gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2006
and 2005.
|
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, 2006
|
|||||||||||||||||||
|
U.S.
Government agencies
|
$
|
3,949
|
($11
|
)
|
$
|
2,737
|
($12
|
)
|
$
|
6,686
|
($23
|
)
|
|||||||
|
State
and political subdivisions
|
4,016
|
(35
|
)
|
-
|
-
|
4,016
|
(35
|
)
|
|||||||||||
|
Mortgage-backed
securities
|
1,195
|
(3
|
)
|
18,094
|
(494
|
)
|
19,289
|
(497
|
)
|
||||||||||
|
Equity
securities
|
-
|
-
|
842
|
(8
|
)
|
842
|
(8
|
)
|
|||||||||||
|
Total
Temporarily Impaired Securities
|
$
|
9,160
|
($49
|
)
|
$
|
21,673
|
($514
|
)
|
$
|
30,833
|
($563
|
)
|
|||||||
|
December
31, 2005
|
|||||||||||||||||||
|
U.S.
Government agencies
|
$
|
1,483
|
($17
|
)
|
$
|
6,890
|
($100
|
)
|
$
|
8,373
|
($117
|
)
|
|||||||
|
State
and political subdivisions
|
915
|
(3
|
)
|
532
|
(4
|
)
|
1,447
|
(7
|
)
|
||||||||||
|
Mortgage-backed
securities
|
9,534
|
(183
|
)
|
14,295
|
(487
|
)
|
23,829
|
(670
|
)
|
||||||||||
|
Equity
securities
|
-
|
-
|
838
|
(12
|
)
|
838
|
(12
|
)
|
|||||||||||
|
Total
Temporarily Impaired Securities
|
$
|
11,932
|
($203
|
)
|
$
|
22,555
|
($603
|
)
|
$
|
34,487
|
($806
|
)
|
|||||||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the extent
to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) 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.
At
December 31, 2006, the Company has 67 securities in an unrealized loss
position. Unrealized losses detailed above relate primarily to mortgage-backed
securities. The decline in fair value is due only to interest rate fluctuations.
As the Company has the intent and ability to hold such investments until
maturity or market price recovery, no declines are deemed to be
other-than-temporarily impaired. None of the individual unrealized losses are
significant.
The
amortized cost and fair value of securities available for sale at
December 31, 2006 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
|
$
|
6,400
|
$
|
6,374
|
|||
|
Due
after one year through five years
|
4,436
|
4,437
|
|||||
|
Due
after five years through ten years
|
-
|
-
|
|||||
|
Due
after ten years
|
19,395
|
19,677
|
|||||
|
Total
bonds and obligations
|
30,231
|
30,488
|
|||||
|
Mortgage-backed
securities
|
23,638
|
23,168
|
|||||
|
Equity
securities
|
982
|
979
|
|||||
|
Total
debt securities
|
$
|
54,851
|
$
|
54,635
|
|||
Gross
gains on sales of securities were $98,000, $61,000 and $186,000 and gross losses
were $8,000, $26,000 and $170,000 for the years ended December 31, 2006,
2005 and 2004 respectively.
Securities
with a fair value of approximately $23,590,000 and $22,408,000 at
December 31, 2006 and 2005, 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, 2006 and 2005 is as
follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Loans
secured by one to four family residential properties
|
$
|
60,960
|
$
|
47,409
|
|||
|
Loans
secured by nonresidential properties
|
139,428
|
110,391
|
|||||
|
Loans
for construction and land development
|
30,094
|
23,154
|
|||||
|
Loans
secured by farmland
|
11,221
|
11,444
|
|||||
|
Commercial
and industrial loans
|
18,298
|
16,667
|
|||||
|
Consumer
|
1,620
|
1,550
|
|||||
|
Other
loans
|
834
|
874
|
|||||
|
$
|
262,455
|
211,489
|
|||||
|
Unearned
net loan origination (fees) costs
|
(179
|
)
|
(154
|
)
|
|||
|
Allowance
for loan losses
|
(3,340
|
)
|
(2,615
|
)
|
|||
|
Net
Loans Receivable
|
$
|
258,936
|
$
|
208,720
|
|||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage
loans serviced for others are not included in the accompanying balance sheets.
The total amount of loans serviced for the benefit of others was approximately
$2,248,000 and $2,480,000 at December 31, 2006 and 2005,
respectively.
NOTE
6 - ALLOWANCE FOR LOAN LOSSES
The
following table presents changes in the allowance for loan losses for the years
ended December 31, 2006, 2005 and 2004:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Balance,
at beginning of year
|
$
|
2,615
|
$
|
2,274
|
$
|
1,734
|
||||
|
Provision
for loan losses
|
733
|
1,138
|
558
|
|||||||
|
Loans
charged off
|
(94
|
)
|
(1,007
|
)
|
(35
|
)
|
||||
|
Recoveries
|
86
|
210
|
17
|
|||||||
|
Balance,
at end of year
|
$
|
3,340
|
$
|
2,615
|
$
|
2,274
|
||||
Loans
on
which the accrual of interest has been discontinued amounted to approximately
$1,407,000 and $816,000 at December 31, 2006 and 2005, respectively. Loan
balances past due 90 days or more and still accruing interest, but which
management expects will eventually be paid in full, amounted to $746,000 and
$535,000 at December 31, 2006 and 2005, respectively.
The
total
recorded investment in impaired loans was $2,206,000 and $862,000 at
December 31, 2006 and 2005, respectively. Impaired loans not requiring an
allowance for loan losses were $2,058,000 and $862,000 at December 31, 2006
and 2005, respectively. Impaired loans requiring an allowance for loan losses
were $148,000 and $0 at December 31, 2006 and 2005, respectively. At
December 31, 2006 and 2005, the related allowance for loan losses
associated with those loans was $22,000 and $0, respectively. For the years
ended December 31, 2006 and 2005, the average recorded investment in
impaired loans was $1,610,000 and $1,129,000, respectively. Interest income
recognized on such loans during the time each was impaired was $10,000 and
$44,000, 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, 2006 and 2005 are
as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Land
|
$
|
979
|
$
|
827
|
|||
|
Building
and building improvements
|
5,462
|
4,410
|
|||||
|
Leasehold
improvements
|
332
|
332
|
|||||
|
Furniture,
fixtures and equipment
|
5,883
|
5,054
|
|||||
|
Assets
in progress
|
716
|
1,025
|
|||||
|
13,372
|
11,648
|
||||||
|
Accumulated
depreciation
|
(5,578
|
)
|
(5,029
|
)
|
|||
|
Premises
and equipment, net
|
$
|
7,794
|
$
|
6,619
|
|||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the years ended December 31, 2006, 2005 and 2004, depreciation expense
totaled $761,000, $695,000 and $591,000, respectively.
As
of
December 31, 2006, the Company had outstanding commitments of approximately
$68,000 for computer upgrades and $1,180,000 for the development of future
branch sites.
NOTE
8 - DEPOSITS
The
components of deposits at December 31, 2006 and 2005 are as
follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Demand,
non-interest bearing
|
$
|
40,083
|
$
|
42,142
|
|||
|
Savings,
club and interest-bearing demand
|
131,939
|
125,002
|
|||||
|
Time,
other
|
87,993
|
60,633
|
|||||
|
Time,
$100,000 and more
|
35,755
|
29,070
|
|||||
|
Total
deposits
|
$
|
295,770
|
$
|
256,847
|
|||
At
December 31, 2006, the scheduled maturities of time deposits are as follows
(in thousands):
|
2007
|
$
|
117,083
|
||
|
2008
|
4,165
|
|||
|
2009
|
1,513
|
|||
|
2010
|
859
|
|||
|
2011
|
45
|
|||
|
Thereafter
|
83
|
|||
|
$
|
123,748
|
NOTE
9 - BORROWINGS
At
December 31, 2006, the Bank has a line of credit commitment from the
Federal Home Loan Bank of New York for borrowings up to $64,426,000 and a
$4,000,000 line of credit at Atlantic Central Bankers bank. There were no
borrowings under this line of credit at December 31, 2006.
At
December 31, 2006 and 2005, 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
|
2006
|
2005
|
|
March
29, 2006
|
N/A
|
3.82%
|
-
|
1,000
|
|
November
3, 2010
|
N/A
|
5.00%
|
3,251
|
3,300
|
|
December
21, 2010
|
December
21, 2001
|
4.77%
|
3,000
|
3,000
|
|
December
21, 2010
|
December
21, 2002
|
4.90%
|
3,000
|
3,000
|
|
December
21, 2010
|
December
21, 2003
|
5.14%
|
4,000
|
4,000
|
|
March
30, 2015
|
March
30, 2006
|
3.48%
|
-
|
2,000
|
|
December
21, 2016
|
December
7, 2008
|
4.00%
|
5,000
|
-
|
|
$18,251
|
$16,300
|
|||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities
of long-term debt in years subsequent to December 31, 2006 are as follows
(in thousands):
|
2007
|
$51
|
||
|
2008
|
54
|
||
|
2009
|
56
|
||
|
2010
|
13,090
|
||
|
2011
|
-
|
||
|
Thereafter
|
5,000
|
||
|
$18,251
|
The
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, 2006, 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 $30,263,000 of
which the Bank has borrowing capacity of at least 80%.
NOTE
10 - JUNIOR SUBORDINATED DEBENTURES AND MANDATORY REDEEMABLE CAPITAL DEBENTURES
On
July
11, 2002, Sussex Capital Trust I, a Delaware statutory business trust and a
non-consolidated wholly-owned subsidiary of the Company, issued $5 million
of
variable rate capital trust pass-through securities to investors. The variable
interest rate reprices quarterly at the three month LIBOR plus 3.65% and was
9.02% and 7.80% at December 31, 2006 and 2005, respectively. Sussex Capital
Trust I purchased $5.1 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 on or after
October 7, 2007, at par or earlier if the deduction of related interest for
federal income taxes is prohibited, classification as Tier 1 Capital is no
longer allowed, or certain other contingencies arise. The capital securities
must be redeemed upon final maturity of the subordinated debentures on October
7, 2032. Proceeds totaling approximately $4.8 million were contributed to
paid-in capital at Sussex Bank. Financing costs related to the Company's
issuance of mandatory redeemable capital debentures are being amortized over
a
five-year period and such costs are included in other assets.
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 Bank 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):
|
2007
|
$
438
|
||
|
2008
|
404
|
||
|
2009
|
246
|
||
|
2010
|
228
|
||
|
2011
|
227
|
||
|
Thereafter
|
930
|
||
|
$
2,473
|
|||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Rent
expense was $471,000. $368,000 and $297,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
NOTE
12 - EMPLOYEE BENEFIT PLANS
The
Company has a 401(k) Profit Sharing Plan and Trust for its employees. Employees
may contribute an elective deferral percentage of their salary to the Plan
each
year, subject to limitations which are set by law. 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, 2006, 2005 and 2004 was $100,000, $95,000 and $99,000,
respectively.
The
Company also has a nonqualified Supplemental Salary Continuation Plan for two
executive officers. Under the provision of the Plan, the Company has executed
agreements providing the officers a retirement benefit. Life insurance on the
participants was purchased to offset the carrying costs of the Plan. For the
years ended December 31, 2006, 2005 and 2004, $124,000, $93,000 and $100,000,
respectively was charged to expense in connection with the Plan. At December
31,
2006 and 2005, the Bank had an investment in life insurance of $2,993,000 and
$2,895,000, respectively, related to this Plan which is included in other
assets. Earnings on the investment in life insurance, included in other income,
were $98,000, $93,000 and $107,000 for the years ended December 31, 2006, 2005
and 2004, 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. The Company recorded incentive compensation expense
under the Plan of approximately $89,000 and $98,000 for the years ended December
31, 2006 and 2005, respectively. 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. Of the 2006 and 2005 incentive awards accrued,
$47,000 and $52,000, respectively, has been deferred. The remainder was paid
in
cash.
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 the average interest rate earned by the Bank on its investment
portfolio. 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 the
participant’s employment 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.
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 each of the years ended
December 31, 2006, 2005 and 2004 was $30,000, $30,000 and $25,000, respectively.
At December 31, 2006 and 2005, 47,444 and 46,931 shares, respectively, of the
Company's common stock were held in the Plan. In the event a terminated Plan
participant desires to sell his or her shares of the Company's stock, or for
certain employees who elect to diversity their account balances, the Company
may
be required to purchase the shares from the participant at their fair market
value.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2006, 2005 and 2004 are as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Unrealized
gains (losses) on available for sale securities
|
$
|
238
|
($560
|
)
|
($166
|
)
|
||||
|
Less:
reclassification adjustments for gains included in net
income
|
90
|
35
|
16
|
|||||||
|
Net
unrealized gains (losses)
|
148
|
(595
|
)
|
(182
|
)
|
|||||
|
Tax
effect
|
(59
|
)
|
238
|
73
|
||||||
|
Net
tax amount
|
$
|
89
|
($357
|
)
|
($109
|
)
|
||||
NOTE
14 - EARNINGS PER SHARE
The
following table sets forth the computations of basic and diluted earnings per
share, adjusted for the 5% stock dividend in 2005:
|
Income
|
Shares
|
Per
Share
|
||||||||
|
(In
Thousands, Except per Share Amounts)
|
(Numerator)
|
(Denominator)
|
Amount
|
|||||||
|
Year
Ended December 31, 2006:
|
||||||||||
|
Basic
earnings per share:
|
||||||||||
|
Net
income applicable to common stockholders
|
$
|
2,464
|
3,155
|
$
|
0.78
|
|||||
|
Effect
of dilutive securities:
|
||||||||||
|
Stock
options and nonvested stock awards
|
-
|
34
|
||||||||
|
Diluted
earnings per share:
|
||||||||||
|
Net
income applicable to common stockholders
|
||||||||||
|
and
assumed conversions
|
$
|
2,464
|
3,189
|
$
|
0.77
|
|||||
|
Year
Ended December 31, 2005:
|
||||||||||
|
Basic
earnings per share:
|
||||||||||
|
Net
income applicable to common stockholders
|
$
|
2,399
|
3,163
|
$
|
0.76
|
|||||
|
Effect
of dilutive securities:
|
||||||||||
|
Stock
options
|
-
|
38
|
||||||||
|
Diluted
earnings per share:
|
||||||||||
|
Net
income applicable to common stockholders
|
||||||||||
|
and
assumed conversions
|
$
|
2,399
|
3,201
|
$
|
0.75
|
|||||
|
Year
Ended December 31, 2004:
|
||||||||||
|
Basic
earnings per share:
|
||||||||||
|
Net
income applicable to common stockholders
|
$
|
1,591
|
1,966
|
$
|
0.81
|
|||||
|
Effect
of dilutive securities:
|
||||||||||
|
Stock
options
|
-
|
69
|
||||||||
|
Deferred
common stock payments for purchase
|
||||||||||
|
of
insurance agency
|
2
|
12
|
||||||||
|
Diluted
earnings per share:
|
||||||||||
|
Net
income applicable to common stockholders
|
||||||||||
|
and
assumed conversions
|
$
|
1,593
|
2,047
|
$
|
0.78
|
|||||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 - STOCK OPTION PLANS
The
following data have been adjusted to give retroactive effect to stock dividends
declared subsequent to option authorizations, grants and exercises.
During
2001, the stockholders approved the 2001 Stock Option Plan established to
provide equity incentives to selected persons. Options may be granted to
employees, officers and directors of the Company or subsidiary. Options granted
under the Plan may be either incentive stock options or non-qualified stock
options as designated at the time of grant. The shares granted under the Plan
to
directors are non-qualified stock options. As of December 31, 2006, there
were 31,129 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. Under the Plan, there are 200,000 authorized
shares of the Company’s common stock. 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. The shares
granted to officers and other employees are incentive stock options and are
subject to limitations under Section 422 of the Internal Revenue Code. As of
December 31, 2006, 6,025 restricted stock shares had been granted, 3,625 will
vest over five years and 2,400 vest over a two year period. As of December
31,
2006, there were 193,975 shares available for future grants under the Plan.
The
shares granted under the 2001 stock option plan and the 2004 equity incentive
plan to officers and other employees are incentive stock options and are subject
to limitations under Section 422 of the Internal Revenue Code. The option price
under each grant shall not be less than the fair market value on the date of
the
grant. The Company may establish a vesting schedule that must be satisfied
before the options may be exercised, however, 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, but not within six months
after the date of grant. Transactions under all stock option plans are
summarized as follows as adjusted for 5% stock dividends:
|
Weighted
|
||||
|
Average
|
Weighted
|
|||
|
Exercise
|
Average
|
Aggregate
|
||
|
Number
of
|
Price
per
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Share
|
Term
|
Value
|
|
|
Outstanding,
December 31, 2003
|
218,165
|
$9.78
|
||
|
Options
granted
|
87,780
|
15.80
|
||
|
Options
exercised
|
(24,400)
|
8.27
|
||
|
Options
forfeited
|
(3,452)
|
14.15
|
|
|
|
Outstanding,
December 31, 2004
|
278,093
|
11.76
|
||
|
Options
granted
|
47,705
|
14.06
|
||
|
Options
exercised
|
(47,415)
|
7.91
|
||
|
Options
forfeited
|
(6,959)
|
14.33
|
|
|
|
Outstanding,
December 31, 2005
|
271,424
|
12.77
|
||
|
Options
exercised
|
(11,979)
|
9.19
|
||
|
Options
expired
|
(4,669)
|
8.44
|
||
|
Options
forfeited
|
(9,490)
|
13.59
|
|
|
|
Outstanding,
December 31, 2006
|
245,286
|
$12.99
|
6.15
|
$492,419
|
|
Exercisable,
December 31, 2005
|
223,745
|
$12.94
|
|
|
|
Exercisable,
December 31, 2006
|
223,236
|
$12.99
|
7.77
|
$449,369
|
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes information about stock options outstanding at
December 31, 2006 as adjusted for stock dividends:
|
Exercise
|
Number
|
Remaining
|
Number
|
|||
|
Price
|
Outstanding
|
Contractual
Life
|
Exercisable
|
|||
|
7.32
|
1,737
|
3.8
|
1,737
|
|||
|
7.76
|
2,316
|
0.8
|
2,316
|
|||
|
9.22
|
3,474
|
1.8
|
3,474
|
|||
|
9.43
|
29,339
|
6.1
|
29,339
|
|||
|
9.48
|
10,920
|
5.1
|
10,920
|
|||
|
9.57
|
6,612
|
6.8
|
6,612
|
|||
|
9.57
|
10,474
|
6.8
|
10,474
|
|||
|
9.93
|
6,618
|
5.8
|
6,618
|
|||
|
10.12
|
1,737
|
2.8
|
1,737
|
|||
|
13.05
|
55,125
|
16.5
|
33,075
|
|||
|
13.45
|
8,400
|
8.8
|
8,400
|
|||
|
14.26
|
32,566
|
8.1
|
32,566
|
|||
|
15.62
|
68,618
|
6.1
|
68,618
|
|||
|
17.52
|
7,350
|
7.8
|
7,350
|
|||
|
245,286
|
223,236
|
The
total
intrinsic value or fair market price over the exercise price of stock options
exercised during 2006 was $68,000.
Information
regarding the Company's restricted stock grant activity as of December 31,
2006
is as follows:
|
Weighted
|
|||||||
|
Average
|
|||||||
|
Number
of
|
Grant
Date
|
||||||
|
|
Shares
|
Fair
Value
|
|||||
|
Restricted
stock, beginning of year
|
-
|
$
|
-
|
||||
|
Granted
|
6,450
|
14.90
|
|||||
|
Forfeited
|
(425
|
)
|
14.82
|
||||
|
Vested
|
-
|
-
|
|||||
|
Restricted
stock, end of year
|
6,025
|
$
|
14.90
|
||||
Total
stock-based compensation related to stock option awards and restricted stock
awards totaled $120,000 for the year ended December 31, 2006. Tax benefits
recognized related to such stock-based compensation was $12,000. As of December
31, 2006 there was $104,000 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 2.63 years.
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation
for the years ended December 31, 2005 and 2004. Earnings per share has been
adjusted for the 5% stock dividend granted in 2005.
|
(Dollars
in thousands)
|
2005
|
2004
|
|||||
|
Net
income, as reported
|
$
|
2,399
|
$
|
1,591
|
|||
|
Total
stock-based compensation expense determined under fair
value
|
|||||||
|
based
method for all awards, net of related tax effects
|
(348
|
)
|
(135
|
)
|
|||
|
Pro
forma net income
|
$
|
2,051
|
$
|
1,456
|
|||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Basic
earnings per share:
|
|||||||
|
As
reported
|
$
|
0.76
|
$
|
0.81
|
|||
|
Pro
forma
|
$
|
0.65
|
$
|
0.74
|
|||
|
Diluted
earnings per share:
|
|||||||
|
As
reported
|
$
|
0.75
|
$
|
0.78
|
|||
|
Pro
forma
|
$
|
0.64
|
$
|
0.71
|
|||
The
fair
value of options granted is estimated on the date of grant using the
Black-Scholes option pricing model. The following represents the weighted
average fair values and weighted average assumptions used to determine such
fair
values for options granted for the years ended December 31, 2005 and 2004.
There
were no stock option awards granted in 2006.
|
2005
|
2004
|
|||
|
Grant
date fair value
|
$3.43
|
$2.76
|
||
|
Expected
option lives
|
5
years
|
5
years
|
||
|
Dividend
yield
|
1.74%
|
1.49%
|
||
|
Risk-free
interest rate
|
3.78%
|
3.17%
|
||
|
Expected
volatility rate
|
25.67%
|
17.04%
|
||
NOTE
16 - INCOME TAXES
The
components of income tax expense for the years ended December 31, 2006,
2005 and 2004 are as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
1,141
|
$
|
720
|
$
|
469
|
||||
|
State
|
382
|
325
|
158
|
|||||||
|
1,523
|
1,045
|
627
|
||||||||
|
Deferred:
|
||||||||||
|
Federal
|
(307
|
)
|
(33
|
)
|
(79
|
)
|
||||
|
State
|
(68
|
)
|
(60
|
)
|
33
|
|||||
|
(375
|
)
|
(93
|
)
|
(46
|
)
|
|||||
|
$
|
1,148
|
$
|
952
|
$
|
581
|
|||||
The
reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense included in the statements of income for the years ended
December 31, 2006, 2005 and 2004 is as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Federal
income tax at statutory rate
|
$
|
1,228
|
34
|
%
|
$
|
1,139
|
34
|
%
|
$
|
738
|
34
|
%
|
|||||||
|
Tax
exempt interest
|
(303
|
)
|
(9
|
)
|
(362
|
)
|
(11
|
)
|
(279
|
)
|
(13
|
)
|
|||||||
|
State
income tax, net of federal
|
|||||||||||||||||||
|
income
tax effect
|
207
|
6
|
175
|
5
|
126
|
6
|
|||||||||||||
|
Other
|
16
|
1
|
-
|
-
|
(4
|
)
|
-
|
||||||||||||
|
$
|
1,148
|
32
|
%
|
$
|
952
|
28
|
%
|
$
|
581
|
27
|
%
|
||||||||
The
income tax provision includes $36,000, $14,000 and $6,000 in 2006, 2005 and
2004, respectively, of income tax expense related to net gains on sales of
securities.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
components of the net deferred tax asset at December 31, 2006 and 2005 are
as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Allowance
for loan losses
|
$
|
1,334
|
$
|
1,045
|
|||
|
Deferred
compensation
|
286
|
235
|
|||||
|
Unrealized
losses on securities available for sale
|
86
|
145
|
|||||
|
Other
|
166
|
87
|
|||||
|
Total
Deferred Tax Assets
|
1,872
|
1,512
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Bank
premises and equipment
|
(255
|
)
|
(274
|
)
|
|||
|
Prepaid
expenses
|
(178
|
)
|
(115
|
)
|
|||
|
Total
Deferred Tax Liabilities
|
(433
|
)
|
(389
|
)
|
|||
|
Net
Deferred Tax Asset
|
$
|
1,439
|
$
|
1,123
|
|||
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, 2006 is summarized as follows:
|
(Dollars
in thousands)
|
2006
|
|||
|
Balance,
beginning
|
$
|
4,352
|
||
|
Disbursements
|
1,019
|
|||
|
Repayments
|
(1,527
|
)
|
||
|
Balance,
ending
|
$
|
3,844
|
||
Certain
related parties of the Company provided legal, appraisal and real estate
business to the Company. Such services rendered totaled $21,000, $63,000 and
$54,000 during 2006, 2005 and 2004, respectively. The Company paid rent to
related parties for office locations in the amount of $156,000 in 2006, $134,000
in 2005 and $108,000 in 2004.
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, 2006 and
2005 is as follows:
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
(Dollars
in thousands)
|
2006
|
2005
|
|
Commitments
to grant loans
|
$7,420
|
$11,483
|
|
Unfunded
commitments under lines of credit
|
59,384
|
56,219
|
|
Outstanding
standby letters of credit
|
2,690
|
1,123
|
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, 2006 and 2005 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 $1,750,000 at December 31, 2006.
The
Company and the Bank are 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 Company’s and 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
Company and the Bank to maintain minimum amounts and ratios (set forth below)
of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 2006, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As
of
December 31, 2006, 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.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s and the Bank’s actual capital amounts and ratios at December 31,
2006 and 2005 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, 2006
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets):
|
|||||||||||||||||||
|
Company
|
$
|
40,049
|
14.00
|
%
|
$
|
>22,878
|
>8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
|
33,098
|
11.63
|
>22,768
|
>8.00
|
$
|
>28,460
|
>10.00
|
||||||||||||
|
Tier
I capital (to risk-weighted assets):
|
|||||||||||||||||||
|
Company
|
36,709
|
12.84
|
>11,439
|
>4.00
|
N/A
|
N/A
|
|||||||||||||
|
Bank
|
29,758
|
10.46
|
>11,384
|
>4.00
|
>17,076
|
>6.00
|
|||||||||||||
|
Tier
I capital (to average assets):
|
|||||||||||||||||||
|
Company
|
36,709
|
10.48
|
>14,017
|
>4.00
|
N/A
|
N/A
|
|||||||||||||
|
Bank
|
29,758
|
8.54
|
>13,936
|
>4.00
|
>17,420
|
>5.00
|
|||||||||||||
|
As
of December 31, 2005
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets):
|
|||||||||||||||||||
|
Company
|
$
|
38,196
|
16.55
|
%
|
$
|
>18,458
|
>8.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Bank
|
30,933
|
13.55
|
>18,268
|
>8.00
|
$
|
>22,835
|
>10.00
|
||||||||||||
|
Tier
I capital (to risk-weighted assets):
|
|||||||||||||||||||
|
Company
|
35,581
|
15.42
|
>9,229
|
>4.00
|
N/A
|
N/A
|
|||||||||||||
|
Bank
|
28,318
|
12.40
|
>9,134
|
>4.00
|
>13,701
|
>6.00
|
|||||||||||||
|
Tier
I capital (to average assets):
|
|||||||||||||||||||
|
Company
|
35,581
|
11.45
|
>12,429
|
>4.00
|
N/A
|
N/A
|
|||||||||||||
|
Bank
|
28,318
|
9.23
|
>12,272
|
>4.00
|
>15,340
|
>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, 2006, the Bank’s funds available for payment of dividends were
$25,266,000. Accordingly, $7,505,000 of the Company’s equity in the net assets
of the Bank was restricted as of December 31, 2006.
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 sales 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.
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2006 and 2005:
Cash
and Cash Equivalents: The
carrying amounts for cash and cash equivalents approximate fair value.
Time
Deposits with Other Banks: The
fair
value of time deposits with other banks is estimated by discounting future
cash
flows using the current rates available for time deposits with similar remaining
maturities.
Securities
and Federal Home Loan Bank Stock: The
fair
values for securities are based on quoted market prices or dealer prices, if
available. If quoted market prices or dealer’s prices are not available, fair
value is estimated using quoted market prices or dealer prices for similar
securities. The Federal Home Loan Bank stock is restricted; accordingly, its
carrying amount approximates its fair value.
Loans:
The
fair
value of loans is estimated by discounting the future cash flows, using the
current rates at which similar loans with similar remaining maturities would
be
made to borrowers with similar credit ratings.
Deposits:
For
demand, savings and club accounts, fair value is the carrying amount reported
in
the consolidated financial statements. For fixed-maturity certificates of
deposit, fair value is estimated by discounting the future cash flows, using
the
rates currently offered for deposits of similar remaining maturities.
Borrowings
and Junior Subordinated Debentures: The
fair
values of these borrowings and debentures are estimated by discounting future
cash flows, using rates currently available on borrowings with similar remaining
maturities.
Accrued
Interest Receivable and Accrued Interest Payable: The
carrying amounts of accrued interest receivable and payable approximate fair
value.
Off-Balance
Sheet Instruments: The
fair
values of commitments to extend credit and standby letters of credit are
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates
and
the committed rates. The fair value of guarantees and letters of credit is
based
on fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties
at
the reporting date.
The
estimated fair values of the Company’s financial instruments at
December 31, 2006 and 2005 were as follows:
|
2006
|
2005
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
(Dollars
in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
22,165
|
$
|
22,165
|
$
|
24,780
|
$
|
24,780
|
|||||
|
Time
deposits with other banks
|
100
|
100
|
500
|
500
|
|||||||||
|
Securities
available for sale
|
54,635
|
54,635
|
61,180
|
61,180
|
|||||||||
|
Federal
Home Loan Bank stock
|
1,188
|
1,188
|
1,025
|
1,025
|
|||||||||
|
Loans
receivable, net of allowance
|
258,936
|
257,159
|
208,720
|
210,893
|
|||||||||
|
Accrued
interest receivable
|
1,910
|
1,910
|
1,778
|
1,778
|
|||||||||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
2006
|
2005
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
(Dollars
in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Deposits
|
295,770
|
295,842
|
256,847
|
257,076
|
|||||||||
|
Borrowings
|
18,251
|
18,282
|
16,300
|
16,512
|
|||||||||
|
Junior
subordinated debentures
|
5,155
|
5,159
|
5,155
|
5,401
|
|||||||||
|
Accrued
interest payable
|
497
|
497
|
336
|
336
|
|||||||||
|
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
Inc., is as follows:
|
BALANCE
SHEETS
|
|||||||
|
December
31,
|
|||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Assets
|
|||||||
|
Cash
|
$
|
4,428
|
$
|
3,067
|
|||
|
Investment
in subsidiary
|
32,805
|
30,835
|
|||||
|
Securities,
available for sale
|
1,419
|
2,241
|
|||||
|
Loans
|
360
|
1,356
|
|||||
|
Accrued
interest and other assets
|
844
|
673
|
|||||
|
Total
Assets
|
$
|
39,856
|
$
|
38,172
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Other
liabilities
|
$
|
109
|
$
|
93
|
|||
|
Junior
subordinated debentures
|
5,155
|
5,155
|
|||||
|
Stockholders'
Equity
|
34,592
|
32,924
|
|||||
|
Total
Liabilities and Stockholder's Equity
|
$
|
39,856
|
$
|
38,172
|
|||
|
STATEMENTS
OF INCOME
|
||||||||||
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Dividends
from banking subsidiary
|
$
|
841
|
$
|
633
|
$
|
447
|
||||
|
Interest
and fees on loans
|
86
|
38
|
-
|
|||||||
|
Interest
on investments
|
70
|
77
|
-
|
|||||||
|
Interest
expense on debentures
|
(445
|
)
|
(355
|
)
|
(260
|
)
|
||||
|
Other
expenses
|
(118
|
)
|
(105
|
)
|
(87
|
)
|
||||
|
Income
before Income Tax Benefit and Equity in
|
||||||||||
|
Undistributed
Net Income of Banking Subsidiary
|
434
|
288
|
100
|
|||||||
|
Income
tax benefit
|
138
|
118
|
118
|
|||||||
|
Income
before Equity in Undistributed Net
|
||||||||||
|
Income
of Banking Subsidiary
|
572
|
406
|
218
|
|||||||
|
Equity
in undistributed net income of banking subsidiary
|
1,892
|
1,993
|
1,373
|
|||||||
|
Net
Income
|
$
|
2,464
|
$
|
2,399
|
$
|
1,591
|
||||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
STATEMENTS
OF CASH FLOWS
|
||||||||||
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Cash
Flows from Operating Activities:
|
||||||||||
|
Net
Income
|
$
|
2,464
|
$
|
2,399
|
$
|
1,591
|
||||
|
Adjustments
to reconcile net income to net cash provided by
|
||||||||||
|
operating
activities:
|
||||||||||
|
Net
change in other assets and liabilities
|
(24
|
)
|
(90
|
)
|
226
|
|||||
|
Equity
in undistributed net income of banking subsidiary
|
(1,892
|
)
|
(1,993
|
)
|
(1,373
|
)
|
||||
|
Net
Cash Provided by Operating Activities
|
548
|
316
|
444
|
|||||||
|
Cash
Flows Used In Investing Activities:
|
||||||||||
|
Securities
available for sale:
|
||||||||||
|
Purchases
|
(75
|
)
|
(2,455
|
)
|
-
|
|||||
|
Maturities,
calls and principal repayments
|
915
|
180
|
-
|
|||||||
|
Net
(increase) decrease in loans
|
996
|
(1,356
|
)
|
-
|
||||||
|
Capital
contribution to subsidiary
|
-
|
-
|
(8,286
|
)
|
||||||
|
Net
Cash Provided by (Used In) Investing Activities
|
1,836
|
(3,631
|
)
|
(8,286
|
)
|
|||||
|
Cash
Flows from Financing Activities:
|
||||||||||
|
Cash
dividends paid, net of reinvestments
|
(798
|
)
|
(528
|
)
|
(336
|
)
|
||||
|
Proceeds
(expenses) from stock offering
|
-
|
(25
|
)
|
15,068
|
||||||
|
Purchase
of treasury stock
|
(336
|
)
|
(683
|
)
|
(23
|
)
|
||||
|
Proceeds
from exercise of stock options
|
111
|
374
|
202
|
|||||||
|
Net
Cash Provided By (Used In) Financing Activities
|
(1,023
|
)
|
(862
|
)
|
14,911
|
|||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
1,361
|
(4,177
|
)
|
7,069
|
||||||
|
Cash
and Cash Equivalents - Beginning of Year
|
3,067
|
7,244
|
175
|
|||||||
|
Cash
and Cash Equivalents - End of Year
|
$
|
4,428
|
$
|
3,067
|
$
|
7,244
|
||||
NOTE
22 - QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly
results of operations were as follows:
|
2006
|
|||||||||||||
|
(In
Thousands, Except per Share Data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||
|
Interest
income
|
$
|
4,581
|
$
|
4,876
|
$
|
5,123
|
$
|
5,418
|
|||||
|
Interest
expense
|
1,666
|
1,825
|
2,271
|
2,487
|
|||||||||
|
Net
Interest Income
|
2,915
|
3,051
|
2,852
|
2,931
|
|||||||||
|
Provision
for loan losses
|
(216
|
)
|
(229
|
)
|
(117
|
)
|
(171
|
)
|
|||||
|
Other
income
|
1,291
|
1,369
|
1,299
|
1,285
|
|||||||||
|
Other
expenses
|
(3,129
|
)
|
(3,229
|
)
|
(3,190
|
)
|
(3,100
|
)
|
|||||
|
Income
taxes
|
(265
|
)
|
(310
|
)
|
(266
|
)
|
(307
|
)
|
|||||
|
Net
Income
|
$
|
596
|
$
|
652
|
$
|
578
|
$
|
638
|
|||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$
|
0.19
|
$
|
0.21
|
$
|
0.18
|
$
|
0.20
|
|||||
|
Diluted
|
$
|
0.19
|
$
|
0.20
|
$
|
0.18
|
$
|
0.20
|
|||||
SUSSEX
BANCORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
2005
|
|||||||||||||
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||
|
Interest
income
|
$
|
3,423
|
$
|
3,684
|
$
|
4,023
|
$
|
4,417
|
|||||
|
Interest
expense
|
787
|
942
|
1,138
|
1,461
|
|||||||||
|
Net
Interest Income
|
2,636
|
2,742
|
2,885
|
2,956
|
|||||||||
|
Provision
for loan losses
|
(135
|
)
|
(206
|
)
|
(206
|
)
|
(591
|
)
|
|||||
|
Other
income
|
1,101
|
1,324
|
1,267
|
1,181
|
|||||||||
|
Other
expenses
|
(2,903
|
)
|
(2,922
|
)
|
(2,856
|
)
|
(2,922
|
)
|
|||||
|
Income
taxes
|
(179
|
)
|
(272
|
)
|
(338
|
)
|
(163
|
)
|
|||||
|
Net
Income
|
$
|
520
|
$
|
666
|
$
|
752
|
$
|
461
|
|||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$
|
0.16
|
$
|
0.21
|
$
|
0.24
|
$
|
0.15
|
|||||
|
Diluted
|
$
|
0.16
|
$
|
0.21
|
$
|
0.23
|
$
|
0.14
|
|||||
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not
applicable
ITEM
9A. 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
Not
applicable
ITEM
9B. OTHER INFORMATION
Not
applicable
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
required by this item is included in the Definitive Proxy Statement for the
Company's 2007 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,
2007.
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
|
48
|
Executive
Vice President, Loan Administration; Formerly Senior Lending Officer,
Newton Trust Company
|
2004
|
N/A
|
||||
|
George
B. Harper
|
52
|
President,
Tri-State Insurance Agency, Inc.
|
2001
|
N/A
|
||||
|
Candace
Leatham
|
52
|
Executive
Vice President and Treasurer of the Bank
|
1984
|
N/A
|
||||
|
George
Lista
|
47
|
Chief
Operating 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 2007 Annual Meeting
under the captions "COMPENSATION DISCUSSION AND ANALYSIS" and "EXECUTIVE
COMPENSATION". It is expected that such Proxy Statement will be filed with
the
Securities and Exchange Commission no later than April 30, 2007.
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 2007 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, 2007.
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
|
245,286
|
$12.99
|
225,104
|
|
Equity
compensation plans not approved by security holders
|
(1)
|
(1)
|
(1)
|
|
Total
|
245,286(1)
|
$12.99(1)
|
225,104(1)
|
(1) In
connection with the Company's acquisition of Tri-State effective October 1,
2001, the Company entered into employment agreements with each of Messrs George
B. Harper and George Lista. Under these agreements, each of Messrs. Harper
and
Lista is entitled to receive bonuses based upon the net before tax income of
Tri-State for each twelve-month period commencing on the effective date of
the
acquisition. To the extent Tri-State's net before tax income exceeds certain
designated targets contained in each employment agreement, each of Messrs.
Harper and Lista will be entitled to receive a bonus equal to 25% of the amount
by which the net before tax income of Tri State exceeds the target. The bonus
is
to be paid in shares of the Company's common stock. The amount of stock to
be
issued will be determined by dividing the amount of the bonus by the fair market
value of the Company's common stock, determined by taking the average closing
price of the common stock for the fifteen trading days prior to issuance. For
the year ended December 31, 2006, Tri-State exceeded its
targeted
net income before tax and each of Messrs. Harper and Lista received a bonus
of
1,684 shares of the Company’s common stock. The employment agreements with
Messrs. Harper and Lista expired on September 30, 2006 and were extended to
December 31, 2006.
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 2007 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,
2007.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
concerning the fees and services of the Registrant’s principal accountant is
included in the Definitive Proxy Statement for the Company’s 2007 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,
2007.
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
|
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 January 23, 2003
(g)
|
|
10.5
|
Employment
Agreement with Tammy Case dated July 31,2004 (h)
|
|
10.6
|
Employment
Agreement with George Lista dated September 28, 2004
(i)
|
|
10.7
|
Employment
Agreement with George B. Harper dated September 28, 2004
(j)
|
|
10.8
|
Amendment,
dated January 7, 2004, to Salary Continuation Agreement dated March
15,
2002 with Donald L. Kovach (k)
|
|
10.9
|
Salary
Continuation Agreement dated January 8, 2004 with Terry Thompson
(l)
|
|
21
|
Subsidiaries
of Sussex Bancorp (m)
|
|
(a)
|
Incorporated
herein by reference to Exhibit A of the Company's Definitive Proxy
Statement on Form 14-A filed March 31, 1997 and Exhibit 99.4 of
the
Company's form 8-B filed December 13,
1996.
|
|
(b)
|
Incorporated
herein by reference to Exhibit 99.5 of the Company’s Form 8-B filed
December 13, 1996.
|
|
(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 10.2 of the Company’s Form 10-KSB for the
year ended December 31, 2003.
|
|
(h)
|
Incorporated
herein by reference to Exhibit 10.5 of the Company’s Registration
Statement on Form SB-2 filed October 6,
2004.
|
|
(i)
|
Incorporated
herein by reference to Exhibit 10(a) of the Company’s Form 8-K filed
October 4, 2001.
|
|
(j)
|
Incorporated
herein by reference to Exhibit 10(b) of the Company’s Form 8-K filed
October 8, 2001.
|
|
(k)
|
Incorporated
herein by reference to Exhibit 10 of the Company’s Form 10-QSB for the
period ended June 30, 2003.
|
|
(l)
|
Incorporated
herein by reference to Exhibit 10.3 of the Company’s Form 10-KSB for the
year ended December 31, 2003.
|
|
(m)
|
Incorporated
herein by reference to Exhibit 10.10 of the Company's Form 10-KSB
for the
year ended December 31, 2004.
|
|
(n)
|
Incorporated
herein by reference to Exhibit 14 of the Company’s Form 10-KSB for the
year ended December 31, 2003.
|
|
(o)
|
Incorporated
herein by reference to Exhibit 21 of the Company’s Registration Statement
on Form SB-2 filed October 6, 2004.
|
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
|
|
|
Dated:March
19, 2007
|
Chief
Executive Officer
|
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
19, 2007
|
|
/s/
Candace Leatham
Candace
Leatham
|
|
Executive
Vice President (Principal Financial and Accounting
Officer)
|
|
March
19, 2007
|
|
/s/
Irvin Ackerson
Irvin
Ackerson
|
|
Director
|
|
March
19, 2007
|
|
/s/
Patrick Brady
Patrick
Brady
|
|
Director
|
|
March
19, 2007
|
|
/s/
Richard Branca
Richard
Branca
|
|
Director
|
|
March
19, 2007
|
|
/s/
Mark J. Hontz
Mark
J. Hontz
|
|
Director
|
|
March
19, 2007
|
|
/s/
Edward J. Leppert
Edward
J. Leppert
|
|
Director
|
|
March
19, 2007
|
|
/s/
Richard Scott
Richard
Scott
|
|
Director
|
|
March
19, 2007
|
|
/s/
Terry H. Thompson
Terry
H. Thompson
|
|
Director
|
|
March
19, 2007
|
63